Relationship between economics and physics

Similarities and di erences between physics and economics - Semantic Scholar

relationship between economics and physics

A Brief Course in Physics for Students of Home Economics. Lester T. Earls · Jane H. Hall, Reviewer. Los Alamos Scientific Laboratory. PDF. As I started thinking about this charge, I realized that there are indeed quite a few parallels between economics and physics. Let me explore. Rather than “correlation,” I would call it a relationship, and the core of that relationship is in the method of analysis. Although the classical economists like Smith.

Obviously, there was some spillover between physics and economics, but I was concerned with the conscious attempt to emulate physics. I think it is Streissler who coined the term "proto-neoclassical" for this bunch, although Wilhelm Roscher is widely viewed as the founder of the German Historical School. The most interesting and important of the three was Karl Heinrich Rau, born inwhose famous book was first published inbut went through many revisions up toand contained many standard ideas of neoclassical economics in a "primitive" form.

The edition contains the first figure showing supply and demand curves with price on the vertical axis and quantity on the horizontal axis as it was done by Jenkins and Marshall in the English language tradition, in contrast with the French tradition of Cournot and Walras, who put them the other way. Streissler shows fairly convincingly that Marshall read Rau and was influenced by these guys, without ever citing them. BTW, this puts a completely different light on Carl Menger. Rather than an inventor of marginal utility, which had been around since Rau and Gossens for decades in the German literature, he can be seen as the culmination of this proto-neoclassical school that then got into the Methodenstreit with the German Historical School in the s.

Much of this was political, with the earlier school being scattered about in the independent German city-states, with all of that being suppressed after the unification of Germany inand the Historical School then exercising a dominant and centralizing tendency based in Berlin, with the older view surviving in still independent Vienna as the Austrian School, a label originally applied by Schmoller as a derisive term to indicate the supposedly inferior Viennese who were not part of Germany.

They were clearly a group that viewed the economy as based on physical reality and nature, with their essentially land theory of value. So, much of this is more from biology than physics, although clearly involving some inputs from it and chemistry as well.

Comte is the viewed by many as the father of both "positivism" and also sociology.

relationship between economics and physics

Clearly there was a rationalistic tradition in France, dating from Descartes, if not all the way from Thomas Aquinas, and including Saint-Simon as well as Cournot and so on, that took a strong "social science" perspective of fitting economics and society into a scientific mold. With the benefit of hindsight and by wide agreement, it now seems that by far the most egregious fault of economics, one that led it astray, has been to project it like an exact science.

Is Economics like Physics?

relationship between economics and physics

As I started thinking about this charge, I realized that there are indeed quite a few parallels between economics and physics.

Let me explore these parallels briefly. The theory of rational expectations says that wages and prices adjust instantaneously to new conditions because of perfect information just as Newtonian physics says that the gravitational configuration of the universe will change instantaneously in response to any infinitesimal change in the system, an inference that Einstein found troubling because it conflicted with his special theory of relativity.

Look at the parallel in physics. In economics, the analogy would be Depression Economics. There is currently a fierce debate, especially in the US, about the quantum of fiscal stimulus and the timing of its withdrawal. Being a student of IIT, he would know these similarities better.

Economics and its relation to other sciences by Lean Mari on Prezi

He then points to differences: Striking as these comparisons are, I am sure, you have noticed an obvious flaw in this line of thinking. Similarity in a few laws does not mean similarity in the basic nature of the academic discipline. The fundamental difference between physics and economics is that physics deals with the physical universe which is governed by immutable laws, beyond the pale of human behaviour.

Economics, in contrast, is a social science whose laws are influenced by human behaviour. Simply put, I cannot change the mass of an electron no matter how I behave but I can change the price of a derivative by my behaviour.

Why I left physics for economics

The laws of physics are universal in space and time. The laws of economics are very much a function of the context. Going back to the earlier example, the mass of an electron does not change whether we are in the world of Newton or of Einstein.

But in the world of economics, how firms, households and governments behave is altered by the reigning economic ideology of the time. To give another example, there is nothing absolute, for example, about savings being equal to investment or supply equaling demand as maintained by classical economics but there is something absolute about energy lost being equal to energy gained as enunciated by classical physics.

In natural sciences, progress is a two way street. It can run from empirical findings to theory or the other way round. The famous Michelson-Morley experiment that found that the velocity of light is constant led to the theory of relativity — an example of progression from practice to theory.

Comparing economics with physics… physics is a science and economics isn’t | Mostly Economics

In the reverse direction, the ferocious search now under way for the Higgs Boson — the God particle — which has been predicted by quantum theory is an example of traversing from theory to practice. In economics, on the other hand, where the human dimension is paramount, the progression has necessarily to be one way, from empirical finding to theory.

There is a joke that if something works in practice, economists run to see if it works in theory. Karl Popper, by far the most influential philosopher of science of the twentieth century, propounded that a good theory is one that gives rise to falsifiable hypotheses.

Economics on the other hand cannot stand the scrutiny of the falsifiable hypothesis test since empirical results in economics are a function of the context. The short point is that economics cannot lay claim to the immutability, universality, precision and exactitude of physics. Economics is a social science and its predictive power is at a fundamental level influenced by human behaviour and actions.

Indeed, with the benefit of hindsight, it is now possible to see that one of the basic causes of the crisis was that the models used by central banks, such as even the sophisticated Dynamic Stochastic General Equilibrium DSGE models, remained confined to the real sectors of the economy and did not capture the complexities of the financial markets.