The proposed research introduces a mathematically rigorous solution of value and an explanation of the real estate business cycle to explain the cause and the cure of the recent financial crisis. The proposed research will use the solution of value to evaluate the appropriateness of the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act.
In addition to the above short-term goal, this proposal also outlines the potential long-term impact of the solution of value and an improved understanding of the business cycle. The following list summarizes the topics which are affected:
(1) The qualitative concept of utility could be replaced by the quantitative calculation of value based on the solution of value.
(2) The Taylor Rule for setting the fed funds rate could be replaced with the common sense logic relationship: Rate of Return > Interest Rate > Inflation, where the Rate of Return can only be calculated with the availability of a deterministic valuation system applied to sales data to determine the Return,
(3) A Two-Valuation Reform is proposed based on the equation Bubble = Market Price - Intrinsic Value, where the Market Price is obtained from market comparison to the past sales data, and the Intrinsic Value is calculated based solely on the realistic accounting of future expected cash flows, Cash Return = Sum of Cash Flows + Cash From Resale, completely independent of the Market or Resale Price.
(4) The Fisher Identity or the Quantity Theory of Money PQ = VM, which has been extensively analyzed by Friedman and Bernanke, will be reexamined.
(5) The business cycle will be investigated in connection to the Finite Spreadsheet Instability, where finite, not infinite, consideration of future price and earning appreciation leads, with regular frequency, to over-expectation, resulting in a vicious cycle or instability.
(6) The fundamental question of freedom will be investigated in light of the fact that the solution of value imposes a limitation on our freedom. Freedom can only be exercised within the limit of freedom.
(7) The peer review process could be replaced with the solution of value. When the peer review method is replaced by valuation, only the inputs, not the final decision, are debated.
Also, area-specified and person-specified award and funding processes by funding and award processes, which are not area-or-person-specific and are given after the discovery, for discoveries are unexpected and should not be dictated by money.
(8) The Qualitative Supply and Demand Model is wrong because the Quantity for a given Price in the Supply and Demand Curve cannot be determined. Two-dimensional supply and demand model can be extended to a multi-dimensional supply and demand model to study financial instabilities.
(9) Ethics or good and evil can be reexamined from the viewpoint of the solution of value. Ethics or good and evil could be determined and, thus, replaced by the maximization of value.
In conclusion, the financial crisis creates an historic opportunity to transform our society from the current Age of Science into the coming Age of Social Science. Science deals with the behavior of material objects. Social science deals with human behavior. Material objects are governed solely by laws of nature in science. The fundamental question to be addressed in this research proposal is: Is or should human behavior be constrained solely by non-violable laws of nature in social science? The recently passed financial reform law, H.R. 4173: Dodd-Frank Wall Street Reform and Consumer Protection Act adds a sense of urgency to and supplies a realistic arena for the debate on this central question on freedom.
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