Econophysics: A New Paradigm

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Adam Smith was deeply influenced by the principles of Newtonian and classical physics and firmly believed that this system was a model for all social and economic phenomena. The principles of classical physics depicted the inner workings of the natural world so eloquently and were, after all, so widely believed. Newtonian physics described the world as deterministic, mechanistic, absolute and certain. The universe was often portrayed by the familiar metaphor of a clock, which could be analyzed by simply explaining its parts and how they move. According to Smith, similarly objective laws could describe human behavior – particularly economic behavior. His most familiar example is the invisible hand.

The classical economists envisioned the free market as a completely self-regulating system controlled by the laws of the universe with no need for human interference. People appear to be free, but they are, in fact, controlled by market mechanisms and natural and objective laws. Just as planets and particles move in accordance with the laws of motion in Newtonian physics, people act in accordance with the laws of the market, such as supply and demand.

Classical economics has undergone several revisions over the past several hundred years that have left it dry, stale and devoid of any human values, but the basic principles are the same and they still cling to the assumptions of Newtonian physics. The principles of classical physics lent themselves nicely to classical economics, but neoclassical economics – the grandchild of Smith’s original science – still adheres to classical physics.

Neoclassical economics differs in several important ways from Smith’s classical economics. One prominent contrast is the complete removal of all values from economic thought. Neoclassical economics is also marked by a significant belief in human rationality, in humans’ ability to describe their world. This rational agent, the main player in the economic game, is known as homo economicus. The quintessential rational agent acting in an objective economic model is much like the Newtonian particle moving along paths well defined by the laws of motion. And just like the particle moving completely unaware of the laws guiding it, people are caught up in a completely depersonalized system – unaware of its guiding and organizing principles. Neoclassical economists talk of the “perfect market” – one that exhibits “perfect competition” between businesses and “perfect information” between businesses and consumers. The “perfect market” will tend, so the theory goes, to a level of supply and demand that is socially optimal. Perfect competition implies perfect information, which exists when every individual is rational and has complete knowledge of 1) the method of pricing and 2) all methods and techniques of production. The consumer has perfect information when she knows everything about how a product was made and priced. The consumer will therefore be able to make the best possible decision when purchasing a product. Of course, the market is not perfect. Imperfections abound. Consider the seemingly innocuous act of purchasing a pair of jeans. Often the buyer does not have any information about where, when and under what conditions the jeans were made, yet she is regarded as completely rational and as acting in accordance with the laws of the market. This view that people can be treated mathematically is ultimately demoralizing and depersonalizing.

So it seems we are stuck with a valueless and deterministic economic model based on a valueless and deterministic physics; we cannot change the physics and we cannot change the economics. But the same science that ultimately led to this economic catastrophe can save it. Not under the guise of classical physics but under the new paradigm of modern physics – inaugurated by Einstein, Schrödinger and many others. Although it is still relatively young, modern physics has shown us that the world is not structured the way Newton and his contemporaries thought. Rather, it is indeterministic, random, relative, holistic, subjective and uncertain. It has shown us that humans are not merely observers but also participators. Built into the very fabric of the world is a small space for us to help shape it. Modern physics has done something classical physics missed: made room for human values. The old neoclassical economists need to catch up with our current physical worldview. One avenue they might take is to revise the orginal assumptions of neoclassical economics to coincide with the implications of modern physics.

The neoclassical economic zeitgeist has turned out to be a catastrophe. Rampant consumerism, the ever-widening gap between rich and poor, demoralization, depersonalization and environmental neglect are just a few of the problems of modern capitalism. Given this state of affairs, we must ask these critical questions: How did it get to be this way? What can we do to escape or amend these problems? The deep-seated answer to these questions lies in the foundations of physics.

In his book Small is Beautiful: Economics as if People Mattered, the late economist E.F. Shumacher addressed the fact that the current economic paradigm functions not only without incorporating the sustainability of the natural environment but also without recognition of the very people it so clearly depends on. Now that people matter again in physics, and since economics endeavors to be modeled after physics, we ought to matter again in economics as well.

Michael Mannino has his masters in philosophy and recently began his career as a college professor, teaching philosophy and critical thinking. He welcomes your feedback: write him at [email protected].