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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

Julio 2016

Universidad Nacional de Colombia Sede Bogotá - Facultad de Ciencias Económicas

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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.

([email protected])

* 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.

mailto:[email protected]



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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

VicedecanoRafael Suárez

Centro de Investigaciones paraEl Desarrollo CID

DirectorManuel José Antonio Muñoz Conde

Escuela de Economía

DirectorÁlvaro Martín Moreno Rivas

Coordinador Programa Curricular de EconomíaGermán Prieto Delgado

SubdirectoraVilma Narváez

FACULTAD DE CIENCIAS ECONÓMICAS

CENTRO DE INVESTIGACIONES PARA EL DESARROLLO - CID Escuela de Economía

La Colección Econografos considera para publicación manuscritos originales

de estudiantes de pregrado de la Facultad de Ciencias Económicas de la

Universidad Nacional de Colombia, que hayan sido propuestos, programados,

producidos y evaluados en una asignatura, en un grupo de estudio o en otra

instancia académica.

Econografos Escuela de EconomíaISSN 2011-6292

Econografos FCE puede ser consultada en el portal virtual:

http://www.fce.unal.edu.co/publicaciones/

Director Centro Editorial-FCE

Álvaro Zerda Sarmiento

Equipo Centro Editorial-FCE

Nadeyda Suárez Morales

Pilar Ducuara López

Yuly Rocío Orjuela Rozo

Contacto: Centro Editorial FCE-CID

Correo electrónico: [email protected]

Este documento puede ser reproducido citando la fuente. El contenido y la forma del presente

material es responsabilidad exclusiva de sus autores y no compromete de ninguna manera a la

Escuela de Economía, ni a la Facultad de Ciencias Económicas, ni a la

Universidad Nacional de Colombia.

FCE Econografos



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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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