There’s a new book causing a stir in the physics community, Lee Smolin’s [amazon_link id=”1846142997″ target=”_blank” ]Time Reborn: From the Crisis in Physics to the Future of the Universe[/amazon_link]. It was reviewed at the weekend by, among others, Gillian Tett in the FT. She writes: “Smolin, who has worked for several decades at the cutting edge of cosmology, conducting research into areas such as quantum gravity and string theory, argues that it is a mistake to view scientific laws as universal. Rather, they are “path-dependent”, or a function of what occurred before.” As she points out, mid-20th century economics drew on physics, attracted by the scientific rigour of its discoveries. How wonderful it would be to derive precise ‘laws of economics’. Economists are notoriously charged with ‘physics envy’.
[amazon_image id=”1846142997″ link=”true” target=”_blank” size=”medium” ]Time Reborn: From the Crisis of Physics to the Future of the Universe[/amazon_image]
However, it would be physics envy to conclude that economics now needs historical context and path dependency just because a top physicist has written a book discovering the contingency, the historical specificity of events. In her review, Tett concludes: “Economies do not have a “natural balance”; nor do they operate according to timeless “rules”.” But many economists have been there for a while. Some – like the redoubtable Paul Ormerod in books like [amazon_link id=”0571220134″ target=”_blank” ]Why Most Things Fail[/amazon_link] – never stopped arguing that economics is an intrinsically disequilibrium subject, putting dynamic behaviour over time in specific contexts right at centre stage. Older works like Malinvaud’s [amazon_link id=”0470268832″ target=”_blank” ]Theory of Unemployment Reconsidered[/amazon_link], or, famously, Minsky’s [amazon_link id=”0071592997″ target=”_blank” ]Stablizing an Unstable Economy[/amazon_link] were disequilibrium theories. Evolutionary economics, albeit always a minority sport, is inherently about dynamics.
I don’t think the concept of equilibrium should be wholly discarded; it can be a useful analytical tool to understand the dynamics of the economy. But on the whole, I don’t think economics needs another phase of physics envy. The subject is already well on the way to rediscovering the importance of time and place.
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I coulndn’t agree more about the need to recognise path dependency and for economics to rid itself of physics envy. One small point: “equilibrium… can be a useful analytical tool to understand the dynamics of the economy”. Oxymoronic, no?
Certainly too cryptic. What I should have said was that thinking about what an equilibrium would look like – were it ever to exist in real life – can help analyse the dynamics of the system. Which direction will the variables tend to move? For example, the Nash equilibrium tells you what outcome would be stable & is a good reference point for understanding observed instabilities, as used by ecologists to analyse population dynamics.
Thanks. Understood. I was probably being a bit nit-picky for your short blog post. I do sometimes wonder, though, whether a fictional construct like equilibrium in social science can ever be a useful reference point for reality; dynamic and non-ergodic as it is? Supply and demand curves, for example, don’t necessarily do what the textbooks say they do: they’re broken, incomplete, don’t slope in the right direction and sometimes don’t even exist. Adopting as a first principle that supply and demand equilibriate, even if only as an imaginary starting point, does affect subsequent analysis.
Yours, in similar hope that economics is indeed well on the way to rediscovering the importance of time and place.
I like the way Noah Smith put it: “one model’s equilibrium is always another model’s disequilibrium dynamics. The question of “Should we model the disequilibrium dynamics?” is therefore not well-posed…. You have to just make an assumption about the stability of the stuff that happens quicker than the stuff in your model – you have to either assume it’s stable or assume it’s unstable (in which case you are still assuming that the stochastic process that governs it is, on some level, stable).” http://noahpinionblog.blogspot.co.uk/2013/04/what-is-economic-equilibrium.html
Thanks very much for this link to an excellent post.
Yes, thanks. Very good.
as promised! Look under General.
My guess I will be publicising your articles pretty regulary
Thank you!