Econophysics Cha-Cha-Chá

“Econophysics” is the term for the fifteen-year-old effort to apply the theories and methods used by physicists—statistical mechanics, complexity theory, information theory, random matrix theory, quantum mechanics, and others, including even seismology—to, ostensibly, study the complexities of processes of economics and to explain economic phenomena. Do the two disciplines gene-splice well? Not really. But they might eventually learn to dance without stepping on each other’s feet while entertaining academicians and garnering the attention of investors. 

Although such urge to merge is not surprising, part of the reason for the awkward performance of the “econophysics cha-cha” thus far is that the theories of physics are flawed while the conceptualizing of economics is “simplistic,” resulting in bruised elbows as well as toes. However, critics of the dance go too far in saying economics lacks the structure to mirror the kind of steps physics demonstrates and that either ecologists or biologists would make better dance partners. Physicists are equally wrong to think portfolio risk or future profits can be reliably anticipated based on statistical analyses. 

Advocates of econophysics, as it stands, point to the failure of economists to predict economic crises; they believe that physicists are better equipped. One geophysicist did correctly predict bubbles in real estate and petroleum markets, whereas some economists had argued that such bubbles were nonexistent and would be unpredictable if they did exist. However the main prediction (in 2005) of a housing bubble to end in 2006 was short-range and also failed to foresee the severity of and prolonged drop in values that continues in mid-2011. We see no convincing evidence here that “complexity theory” played a greater role than logical surmising by a technically trained mind. 

Other physicists have also made correct predictions through using theories common to physics. But do those successes prove the validity of econophysics, or simply offer further evidence of the efficacy of excellent thinkers who happen to be physicists versus some not-as-well-equipped economists steeped in mainstream economic dogma? PluribusOne™ argues that the successes of econophysicists surveyed were more due to well-structured applications of intelligence than to exotic scientific theories and methods. 

Our skeptical opinion is based on the fact that no theory of physics was necessary to predict that something big was going to hit the proverbial fan in 2006, or thereabouts; mainstream economists had tools in their weathered toolbox to make such a prediction many years beforehand, and without a sexy dance partner. Those tools include knowledge of certain long-recognized prominent cycles of Nature that coincide with economic booms and busts. How economists could be so completely blindsided—assuming they were—is a mystery. 

A cha-cha is nothing without the music because rhythmic vibrations establish the patterns for rhythmic motion. That music, un-hearable by untrained ears, is the polyrhythmic beat of Omniverse. Spiral behaviors on cosmic scale are reflected in both physics and economics, which tends to validate the intuition that must have brought these two dance partners together. But based on their awkward efforts so far, it appears unlikely that we will see a dazzling performance any time soon.

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4 Responses to “Econophysics Cha-Cha-Chá”

  1. The Donald Says:

    In paragraph one above, why do you use the word “ostensibly.” Why else would physicists join forces with economists?

  2. PluribusOne™ Says:

    The last two paragraphs below contain your answer, but it will make more sense if we lay some further groundwork first.

    The cycles of Nature are “impelling” forces, not “compelling” forces. Yet, these impelling forces are strong, like a ROM-based computer program. The effects can be utilized or worked around but not entirely negated.

    Of course, taking specific actions to temper the effect of a natural cycle first requires having awareness of its existence, and then knowing its periodicity with respect to whatever calendar you are using. It also requires an awareness of all relevant forces in the (global, national, local, personal) environment. Then, an appropriate strategy must be developed and initiated well in advance of the cycle’s upcoming “seasons.”

    In the example of the 2005 prediction regarding the 2006 bubble, the information would only have been useful to those positioned to act quickly, which would not have included most consumers even if they had been informed of the imminent tsunami. Assuming that the longer-term effects were foreseen, to not predict declining values/selling prices would clearly favor the interests of certain large investors while disadvantaging the average property owner during the period of inescapable decline. Whether the decline is being prolonged to keep that window of opportunity open for the benefit of the favored few is a possibility reasonable to consider.

    I used the term “ostensibly” because I suspect that (witting or unwitting) physicists were brought into the game about halfway down the slope of the last long-wave economic cycle, which peaked about 1979-80, to help prepare certain parties to reap benefits of the inevitable economic “bust” that lay ahead. Recall that the stock market crash of 1987 occurred a third of the way down the slope. Two-thirds of the way, the “Dot-Com Bubble” began inflating, the same point where “econophysics” emerged.

    The primary objective of econophysics is, we believe, to identify new ways to refine the tempering of effects of natural cycles and maximize the capture of opportunities certain to arise. It is doubtful that powers-that-be are concerned about “why” the cycles operate as they do; the question is “how” to maximize yields of all kinds while minimizing losses as Nature’s wheels turn.

  3. The Donald Says:

    Please mention a couple of those tools that you say mainstream economists might have used.

  4. PluribusOne™ Says:

    One is the 54-year rhythm, the fourth low of which, in U.S. history, was due to occur in 2006. This cycle has been known to economists since at least the Hoover administration.

    Another is a 22.28-year rhythm which reached its most recent high point in April, 2005. Others can also be mentioned, such as a major 9-year cycle that hit its low point in 2005, and both an 18-year cycle and a 3.5-year cycle that hit bottom in 2007—altogether making the 2005-2007 period a veritable nexus with the 54-year cycle’s low as epicenter.

    I am not an economist; nor am I a physicist, but when I see the intersection of just those two cycles—the 54-year and 22.28-year cycles—the term “train wreck” comes to mind. Or, to use terminology of econophysics, substitute the image of a huge winged Dragon swooping down and biting into a bloated Black Swan reaching its record altitude.

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