ECONOMICS AND PHYSICS: A FORGOTTEN DISCUSSION
ECONOMÍA Y FÍSICA: UNA DISCUSIÓN OLVIDADA
Camilo Andrés Mayorquín
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Nº 98Julio 2016
Econografos
Econografos Escuela de Economía Nº 98
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ECONOMICS AND PHYSICS: A FORGOTTEN DISCUSSION
Camilo Andrés Mayorquín1
Abstract
This paper has the objective of reviewing some of the key aspects that involve the
association between physics and economics. It also invites to considerate the history behind
the neoclassical model and how its physical origin is not well known. It is curious to see the
close relation between these two sciences, but it is also curious how this could lead to
misinterpretations and beliefs of economics being dependent on physics, which clearly is
not the case.
Keywords: Economics, physics, history, neoclassical, misinterpretation.
JEL Classification: B16, B23, B49
1 Sixth semester student of Economics at the Universidad Nacional de Colombia.
* The author expresses thanks to Paula Gabriela Vallejo Matíz, an intern at the Laboratory of Academic
Writing at the Faculty of Economic Sciences, who thanks to her advice, patience and support made this work
possible.
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ECONOMÍA Y FÍSICA: UNA DISCUSIÓN OLVIDADA
Resumen
Este artículo tiene el objetivo de revisar algunos de los elementos clave que involucran la
asociación entre la física y la economía. También invita a reflexionar sobre la historia del
modelo neoclásico y cómo su origen físico es poco conocido. Es curioso ver lo muy
relacionadas que están estas ciencias, pero también ver cómo esto se puede malinterpretar y
creer que la economía es dependiente de la física, cuando claramente no lo es.
Palabras clave: Economía, física, historia, neoclásico, malinterpretar.
Clasificación JEL: B16, B23, B49
Vicerector GeneralJorge Iván Bula Escobar
RectorIgnacio Mantilla Prada
Facultad de Ciencias Económicas
DecanoJosé Guillermo García Isaza
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Centro de Investigaciones paraEl Desarrollo CID
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Escuela de Economía
DirectorÁlvaro Martín Moreno Rivas
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FACULTAD DE CIENCIAS ECONÓMICAS
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Este documento puede ser reproducido citando la fuente. El contenido y la forma del presente
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Table of Contents
1. Introduction ..................................................................................................................... 6
2. About Laws and Obstacles .............................................................................................. 7
2.1 Mirowski Thesis ...................................................................................................... 8
2.2 The Contributions .................................................................................................... 8
3 More Heat than Light .................................................................................................... 10
4 About Being a Scientific Theory ................................................................................... 11
5 The Role of Mathematics .............................................................................................. 11
6 Econophysics ................................................................................................................. 12
7 Concluding notes ........................................................................................................... 14
References ............................................................................................................................ 15
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1. Introduction
It is curious how Economic Theory is taught today. Apparently not many students of the
social science know about the deep relationship between economics and physics. We learn
today that the neoclassical model is one of the biggest mathematical achievements our
science has made, but what if that credit corresponds to another science? That is indeed a
complex matter, not only because the title economic „science‟ has been a topic of
controversy since the early twentieth century, but also because we need to comprehend
some of the vital aspects of physics.
This link between the two sciences goes beyond simple similar equations, they show
parallel progress till some point. One can ask if this is really important to read in the
academic world; the answer could not be more specific. History is a considerably important
part in economics, it has shown in many ways what complex mathematical and statistical
models were missed along the years, a learning process. It is determinant for any
respectable economist (and someone who is interested in this subject) to know the history
behind what he is studying, so he can fulfill his knowledge and of course, not to commit
mistakes due to ignorance. In a similar measure, physics has come through a large process
of transformations that puts it way ahead of economics in terms of new discoveries. Today
we can hear of „new physics‟ as referring to quantum mechanics, but that does not mean
physicists are going to leave classical physics aside.
The purpose of this short paper is to illustrate how a natural and a „hard‟ social
science can coexist and relate not only thanks to the great tool that is mathematics, but also
to the learning from each other. To accomplish such task, it was necessary to review
various articles and books to understand the impact of physics in the „mainstream‟ model.
The final results are satisfactory. It is rather clear what it was done and what has to be done,
but that last sentence is related to a totally different concern.
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2. About Laws and Obstacles
In economics the use of advanced statistical methods is not just highly popular, it leads to a
whole filed called econometrics. In this field the objective is to analyze hypothetical
economies; therefore, deductive analyses are especially significant. On the other hand,
physics explains certain phenomena through general laws, which guides to more specific
laws. Both have the same general goal: to predict and be practically meaningful. But in
physics we need to have something in mind: the phenomenological laws are confirmed
independently of the specific fundamental theory (Lind, 1993).
Reach phenomenological laws in economics is barely possible, the variables change
over time, and the situations of care change and because of that it is very hard to seclude a
single circumstance. And more importantly, classical physics possess a greatly handy tool
to confirm its theoretical statements, an observer. That figure does not exist in economics,
but when we talk about quantum mechanics things get complicated. In quantum mechanics
the presence of an observer perturbs the experiment and we cannot longer know what is
happening. Thus, physics confront some problems too in its fundamental theory. In any
case, this previous statement is something that will be discussed further in the text.
Economics handles this obstacle with grace, and it is very well known among non-
economists. We „suppose‟ different situations with diverse hypothesis which lead to
controversial results. The empirical results conflict with these suppositions thanks to the
sensitiveness of the phenomenological laws caused by different ideologies. Econometrics
gives us an approximation of correct predictions since there is a known margin of error. In
contrast, physics predictions are remarkably accurate without giving much importance to
the philosophy the scientist believes in. Is this a common law between these two sciences?
That one of them for attending social problems is condemned to these experimental and
theoretical problems may not be possible. Economics has earned the „hard‟ science
recognition for its different contributions to the human knowledge and its rigorous
mathematical models (Barbancho, 1962).
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2.1 Mirowski Thesis
Philip Mirowski is an historian and philosopher of science from the University of Notre
Dame. He is not just known for his attacks on neoliberal and neoclassical economic theory,
he tries to take down the whole neoclassical paradigm with his thesis. The mainstream
model is wrong because economics „borrowed‟ a misunderstood model of nineteenth
century physics, which was never corrected (Ganley, 1995).
Economics, since its first foundations in the mercantilism, has tried to approach
natural sciences through various mechanisms. Those mechanisms unify economics with
psychology, biology, quantum mechanics and classical physics. Physics is the one that has
taken the major participation. As a result, the neoclassical model shows immediate
development from the natural science. The social science has adopted the language of
energy to become a rigorous discipline; therefore, in order to understand economics is
necessary to understand the relation with the „outdated‟ physics.
Mirowski acclaims the great progress physics has made in the fields of special and
general relativity, quantum mechanics, and the subatomic particles world. Those advances
were accomplished during the first quarter of the twentieth century, when physics split into
classical and „new‟. The main reason Mirowski does not agree with neoclassical economics
is that if this model is so related to classical physics, it should follow its laws. Most
importantly, it should change with physics. But time has passed, and now is more than one
hundred and seventy years from the time that neoclassical model was born and is still being
essentially the same model. The quantum enigma forced physics to rethink deep aspects
like the fundamental laws and reality itself. Knowing this, economics should modify the
model and make it adequate for the new paradigm in physics.
2.2 The Contributions
Schumpeter, a famous economist who wrote the book History of Economic Analysis was
very concerned regarding the diverse group of economic theory, but he was aware of the
existence of a general agreement around the marginal analysis.
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2.1.1 Léon Walras
He is considered the most prominent economic theorist, his general equilibrium is
equivalent to nineteenth century physics. He tried to convince the academic world that
economics deserved a scientific approach with his book Economics and Mechanics, but it
was too pretentious and was rejected by the economist William Baumol (Ganley, 1995).
Figure 1: Equilibrium in physics Figure 2: Equilibrium in economics
Taken from Department of Physics web page Taken from MIT web page
2.1.2 Alfred Marshall
Marshall did the opposite of Walras. Instead of mechanics of physics, he took a fully
mathematical approach. However, the model stated from Walras was still in his book called
The Principles (Isaac Newton‟s book was called Principia). It was hidden. It contained the
same static basic equations.
2.1.3 Vilfredo Pareto
As the successor to Walras, he connected the mathematical models with the classical
physics, but this time, he discarded all the unnecessary comparisons between satisfaction,
energy, equilibrium and celestial bodies. Yet, the problem of stability and non-uniqueness
of the general equilibrium model was still present.
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2.1.4 Irving Fisher
Fisher draws pictures and diagrams of hydraulic systems with the sole purpose of
reproducing the equations of mechanics. But, of course, those efforts failed in front of the
overwhelming critics.
Figure 3: Fisher price machine
Taken from NewSchool web page
3 More Heat than Light
Mirowski published his book in 1991, where he criticized the „borrowing‟ of the energetics
framework and its mathematical representation, specifically the Lagrangian and
Hamiltonian functions (Walker, 1991). The neoclassical model implemented the
conservation on energy principle, where commodities containing a homogeneous value
substance increased by production, and was decreased by consumption (Mirowski, 1991).
Nonetheless, this principle was soon to be found ambiguous when quantum mechanics
emerged. In a subatomic level it seems that classical laws do not work.
Chaos theory and general relativity also ruined the deterministic concept of the
universe; thus, economic theory should abandon this idea too. But this is something it
already has done, because this chaotic and random behavior can be found in finances.
Mirowski wrote an excellent book, but he keeps contradicting himself talking about
economics using or not energy metaphors. Another mistake he commits relates to a very
old critic of the neoclassical model. He does not recognize that economics focus on the
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investigation of purely abstract and hypothetical economies (Walker, 1991). Another fact is
the denial of most economists believing in energetics metaphors; from 1930 to 1940 there
was a vast pessimism regarding this field.
In Mirowki‟s book it is explained that there was a short movement of physicists and
engineers who used the metaphors meticulously, but he does not explain why that
movement disappeared. He also declares that neoclassical economists were mediocre in
their knowledges of physics, although they had pretty good education in the natural
sciences. The truth is that physics theories are irrelevant for the everyday life (Walker,
1991), they have been an influence, but not everything comes from physics. A final critic is
the lack of institutions, but ironically to the model objectives (the model tries to represent
an ideal economy without institutions) it has, and they explain price formation and
exchange between centralized agents. Unfortunately, today is hard to find theorists in these
subjects.
4 About Being a Scientific Theory
Economic science possesses important empirical knowledge, but according to the deceased
professor Lionel Robbins this science knows no way of predicting. Any good theory needs
to be capable of predicting, having empirical data is just the first step. If we take a look to
Newton‟s mechanics, they can provide us with the information of a specific state for any
given future time (Northrop, 1941).
Physics confirms its postulates along with experiments, which has been done since
Galileo founded the experimental method and the Aristotelian philosophy was left behind
(Rosenblum and Kuttner, 2011). Maybe economics could do the same one day; it is
definitely possible, but is one of the hardest problems this science has faced.
5 The Role of Mathematics
The physicist Eugene Wigner published a paper called The Unreasonable Effectiveness of
Mathematics in the Natural Sciences, where he states that natural sciences are composed by
immutable laws. This is not the case in economics. In the social science we can find
prominent levels of unpredictability and very reasonable forecasts. That leads to the
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publication of The Reasonable Effectiveness of Mathematics in Economics by Sergio
Focardi and Frank Fabozzi, a contribution to Wigner‟s work.
Physics is indisputably axiomatic. It focuses on discovering new fundamental laws,
while economics discovers laws that applies only to very specific spheres. The main
difference between these two methods lies in the learning process. We are going to assume
individuals as economic atoms, but they are really complex and unstable seeing that the
system changes with the knowledge accumulated (Focardi and Fabozzi, 2010). During the
1930‟s, there was doubt about the possibility of applying probability to economics. Thanks
to Trygve Haavelmo econometrics was born, since he demonstrated that these applications
did not need empirical samples to be independent. And because of that we find residuals in
the equations.
The 1970‟s was the birth of mathematics of derivatives, which added difficulty to
modelling. This difficulty is represented in the form of risk in contracts and speculation in
the stock market. We cannot predict how these systems will change. The statistician and
risk analyst Nassim Taleb invented the word „black swans‟ for these situations. These
difficulties can be overcome by learning, not by fundamental laws. Learning is the key to
make a simpler framework. The use of mathematics is reasonable because we can put all
those elements in theoretical mathematical context (Focardi and Fabozzi, 2010).
6 Econophysics
The name is due to a physicist from Boston University, Eugene Stanley, who coined that
name back in the mid-90s. Econophysics shows itself as a heterodox alternative to solve
problems in economics, problems which economists could not respond to. Stanley, who is
an expert in the behavior of particles and molecules, ratify that this background is perfect to
approach the diverse obstacles of the social science.
Heterodox economics is not composed of one theory. Many alternatives to the
dominant model exist today. Such theories are for example: Sraffians, Marxians, Post-
Keynesians, among others. Even so, in the academic world, it is the Neoclassical Theory
the one which is dominating. Back in 1960, all these theories made economists reach a
decision, “top economic practitioners used to invite scientists from other disciplines to
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engage in conversation, in order to learn from them about economics” (Salazar, 2016,
p.639). Therefore, that is how the first meeting sessions occurred which motivated joint
collaborations. Among the most prominent guests were the mathematician Benoit
Mandelbrot who worked in Pareto‟s income distribution law. Even though the first papers
were published in physics journals, the effort of the economists increased and this literature
is now common to appear in economics journals. (Santa-Clara and Sornette, 2001).
What is the method that this field follows? This interdisciplinary field helps itself
with statistical tools and non-lineal dynamic models (as the economy has characteristics of
chaotic behavior) with the purpose of figure out difficulties in finances, for instance, market
bubbles, failures of huge firms, among others (Siegfried, 2011). Not only does it do that,
but also has the objective of “explaining economics to the point which politics diversity it‟s
not even a problem anymore” (Siegfried, 2011, p.2). As it was mentioned, Eugene Stanley
already presented to us an idea of how physicist relate the stock market with the nucleus of
an atom, for example, or how they can rely on quantum mechanics and string theory, two
subdivisions of physics.
But there are two dark clouds in physics: quantum physics and relativity, as referred
by Lord Kelvin (Rosenblum and Kuttner, 2011). The problem of the double slit experiment
(wave-particle duality), the quantum entanglement and the singularity inside a black hole
are just a few examples of unsolved mysteries. Consequently, the statement of Tom
Siegfried in his article Perhaps physics can also solve economics puzzles, cannot be true at
all. To explain these phenomena psychology and philosophy have participated (even though
the math is indisputable).
The main critic to econophysics is maybe its lack of realism, which is the same for
the Neoclassical model in economics. Those who have taken a course in political
economics would already know that this critic leads to a misinterpretation. The origin of the
„mainstream‟ model dates back to a question made by Adam Smith about the existence of a
pure hypothetical economy and necessarily abstract (Cataño, 2004). Econophysics cannot
take the same escape route. Yes, maybe some models indeed describe reality (sudden drops
in stock market explained with equations of tectonic plates), but to be placed so high as this
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field wants to be, more years of investigation will be necessary.
According to the book Econophysics & Economics of Games, Social Choices and
Quantitative Techniques, there could be an exception concerning the contributions of
physicists to economists, and that is Game Theory. First of all, it would be convenient to
know that Game Theory is a field of math which shows strategic behavior within
individuals and their possible cooperation (Lozano and Salamanca, 2016). Mathematicians
such as John von Neumann and John Forbes Nash have played big roles as well as the
economist Oskar Morgenstern. In second place the book states the following: “Recently,
Game Theory has been applied to scenarios involving the manipulation of quantum
information” (Basu, Chakrabarti, Chakravarty and Gangopadhyay, 2010, p.47), information
which can be applied to economic scenarios. Still, we have to remember that Game Theory
is not purely economic related, it is mathematical specially, and has applications in human
and natural sciences. Thus, it is just a part of economics that made a contribution to
physics.
7 Concluding notes
This paper has been an attempt to introduce the reader in the history of the neoclassical
model and what physics has done for our whole science. Physics was a huge influence, but
as we have seen along the chapters, economics itself do not depend merely on physics. The
use of mathematics and statistics gave it enough sturdiness to separate and set its own
theories without the concept of energy. We cannot forget also, that theorists such as Piero
Sraffa comes back to the classical thinking, reminding us that is not dead yet. It is hard to
think of economics becoming a fully mathematized science, even without physics or not,
that is something not many would want to see.
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References
Barbancho, A. (1962). Fundamentos y posibilidades de la econometría. Barcelona:
Ediciones Ariel.
Basu, B. et al. (2010). Econophysics & Economics of Games, Social Choices and
Quantitative Techniques. Kolkata: Springer.
Cataño, J.F. (2004). La teoría neoclásica del equilibrio general: Apuntes críticos.
Cuadernos de economía, 23(40), 175-204.
Focardi, S. F. (2010). The Reasonable Effectiveness of Mathematics in Economics. The
American Economist, 55(1), 19-30.
Ganley, W. (1995). Institutional Economics and Neoclassicism in the Early Twentieth
Century: The Role of Physics. Journal of Economic Issues, 29(2), 397-406.
Lind, H. (1993). A Note on Fundamental Theory and Idealizations in Economics and
Physics. The British Journal for the Philosophy of Science, 44(3), 493-503.
Lozano, F., & Salamanca, A. (2016). Notas de clase de microeconomía 3. Bogotá:
Universidad Nacional de Colombia.
Mirowski, P. (1991). More Heat than Light. Indiana: University of Notre Dame.
Northrop, F. (1941). The Impossibility of a Theoretical Science of Economic Dynamics.
The Quarterly Journal of Economics, 56(1), 1-17.
Rosenblum, B., & Kuttner, F. (2011). Quantum Enigma (Segunda ed.). Oxford: Oxford
University.
Salazar, B. (2016). MandelBrot, Fama and The Emergence of Econophysics. Cuadernos de
economía, 35(69), 637-662.
Santa-Clara, P. & Didier, S. (2001). The Dynamics of the Forward Interest Rate Curve with
Stochastic String Shocks. The Review of Financial Studies, 14(1), 149-185.
Siegfried, T. (2011). Perhaps Physcis Can Also Solve Economics Puzzles. Science News,
180(10), 1-2.
Walker, D. (1991). Economics as Social Physics. The Economic Journal, 101(406), 615-
631.
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