There are many theories that try to explain observed economic phenomenons, but this I posit is a more accurate one.
Intro: There’s many theories about how to improve the economy. But to improve something it must be defined first. If I want more of something, I need to know what it is I must produce. To improve health we define health, to improve color we define color, to improve something we define what is an improvement. Here I will define what economy is and subsequently begin the path of discussing how to improve it.
Economy is needs being met. In a good economy the value of needs being met per capita is high. To better economy more value worth of needs per capita needs to be met. Needs are defined as that which a person is willing to give needs to receive. For example, a wheat farmer does not need wheat himself, but is willing to give wheat, which are needs to others, in order to have his own needs fulfilled. Needs change hands from A to B, AND simultaneously B to A, in all transactions except theft and slavery. Even when A donate money to B, B provides A with a need, otherwise A would not hand over need-currency to B. I’ll let psychologists discuss what need B provides to A, but we can be sure there is a need B provides to A. How many needs a person can have has an upper limit, for those wishing to calculate this new definition. It is limited due to limited hours in every life. But the number of needs a person can have has a lower limit, because certain needs must be met to keep the person physically and psychologically healthy. Time must be a part of the calculation, an economy can not just be defined as good based on the best millisecond that year. So the unit of economy will be the value of needs met on average per capita per day. Additional needs have value in inverse proportion to how many needs are met. You meet the most important needs first, so by definition those after that are less important and less valuable. One can argue about where in value the line to “luxuries” lay. Need number one will have 1/1 value, need number two will have 1/2 value, need number three has 1/3 value need number four will have 1/4 value, together the value of these needs met will be 1/1+1/2+1/3+1/4 = 25/12 (2.083333…). Work out Value of Needs Met (VNM) by the rule 1/n. Though different ones can exist, like 10/n or similar ones which treats the first few needs as essential to life. This value of needs explains much behavior very accurately. But more additions to the equation can be made to increase accuracy and model more situations. The total value of needs met per capita is abbreviated as VNM per capita (Value of Needs Met).
The problems in today’s financial crisis has arisen from a collapse in high-value NM (Needs Met) while low-value needs are still being met. The financial stimulus packages have largely only been intended to increase the amount of low-value needs being met (not low value in the sense of GDP).
The healthy economies in the world are always the ones that have the highest value of needs being met, and due to the value of the first few needs it is a practical impossibility to have a high VNM without the first few needs being consistently met for more or less all of the inhabitants.
There is a phenomenon in economics. If you need something, and do not have the means to make it, the easiest way to get it is to offer need-currency to get it. If you need low unemployment you only have to offer need-currency and those that can start businesses and hire people will take your need-currency and turn it into what they need. I need to live as long as possible through rejuvenation biotechnology, since I do not have the skill or wealth to make that happen myself I need only offer need-currency, and others will make it happen for me. They will do this because they need something else, and to get what they need they need need-currency. For me to get need-currency to buy my needs I must make things others need. I could try to make people need what I need by arguing they need it also, and make them produce what I need that way, but that’s more difficult and frankly like starting in the wrong end.
The value of needs is more or less inversely proportional to their GDP value (High-value needs are small portions of GDP, low-value needs have large portions of GDP).
Therefore government should be the main supplier of the highest value needs because the high-value needs have so low GDP-value, and such a high value to the health of the economy. Without the high-value needs that only make up a few percents of GDP, the rest of the GDP no longer happens. An unchanging predictable cost of high-value needs from state owned monopolies is less risky than privatized supply of these high-value needs. To prevent times of surplus production in financial decline these high-value needs should be paid through taxes by ability, and given to everyone who needs them. For example healthcare, dental care, pension, roads, indoor plumbing (water and sewage), electricity (enough to heat food and home and cool food in refrigerators, and some lights, entertainment (TV/computer)), information (library, TV, radio, internet), education, food, clothes, a home (apartment with paint on the walls, air-tight windows and doors, some furniture, no mold or water damage or pests etc). Each in moderation of course, not lobsters for food or a walk-in closet of tailored suits. In times of declining GDP the taxes must go up in order to continue the delivery of high-value needs without going into debt, simple arithmetic say the least VNM is lost by taxing the rich more than the poor. Debt works as a tool to get the needs of tomorrow met today, and provide a negative sum benefit for the loan taker, but the short lifetime of the individual loan taker must be taken into account in accurate modelling efforts, because people take loans as if getting something now and paying more later is better than saving now, getting interest on interest, and getting the thing later without loans. This behavior should never be reflected by governments, governments should act better than individuals would. The government and its people is timeless, and thus do not benefit from loans, but instead benefit from saving up and then buying it.
PS: Needs are not defined as physical objects. Needs can be anything people are willing to give needs to get. Be that words of praise from someone, or a car.
PPS: I will probably fill in more details later. For now I think its important to put this bit out there, as it holds the main concept. Note that I do not suggest rationality has anything to do with economy. If the fifth need a human meets is a car and the sixth is a boat then that was what was fifth and sixth most valuable needs to that brain at that time due to genes, experiences and circumstances. It does not mean a car is always a more rational need to meet than a boat, or that a car is a more rational need than a boat in such a circumstance, with such genes, and with such experiences. Rationality can not be the basis of an economic theory to explain observed economic behavior, because rationality has yet to be observed in any species (we call this and that rational, but if we were irrational, we would call lots of things rational, the two possibilities, rational and irrational, is indistinguishable from each other, until we define rationality so well we have it as a feature in our laptops (same as with free will, before we define free will so well we have it as a feature in our laptops, free will has yet to be observed)).
PPPS: This theory reflects the well-recognized fact that an economy with 99% employment is likely to be more healthy than an economy with 98% employment. Because the first is likely to have a better VNM (total average per capita Value of needs met). And it shows us how to improve the economy directly with a better effect than interest rate adjustments and tax cuts. The way to improve the VNM is simply by taxing low-value high cost products and services (luxury cars, airplanes, liquor, tobacco, etc), and use the money to hire people and equipment to produce high value low cost products and services (healthcare, education, public buildings, bureaucrats, research, waste disposal, recycling, laws and regulations to protect the people and wildlife and enforcement agents to enforce those laws and regulations, etc).
Bureaucrats are under-estimated in terms of value for money. When you have enough bureaucrats its difficult to cheat the government out of tax dollars by for example putting road projects across your own land or to award the contract to a friend’s construction company. And with enough bureaucrats its difficult to build things that aren’t needed, like new highways that end up being empty, new airports that have to close down a few years after opening, and some nations upgrade military bases that are closed down after few years. All because not enough people had to sign off on it, and not enough questions had to be answered well, and not enough forms had to be filled out.