Learning from econophysics’ mistakes

27 Mar, 2021 at 11:19 | Posted in Economics | 13 Comments

What is Econophysics and what does Econophysicists do?By appealing to statistical mechanics, econophysicists hypothesize that we can explain the workings of the economy from simple first principles. I think that is a mistake.

To see the mistake, I’ll return to Richard Feynman’s famous lecture on atomic theory. Towards the end of the talk, he observes that atomic theory is important because it is the basis for all other branches of science, including biology:

“The most important hypothesis in all of biology, for example, is that everything that animals do, atoms do. In other words, there is nothing that living things do that cannot be understood from the point of view that they are made of atoms acting according to the laws of physics.

Richard Feynman, Lectures on Physics

I like this quote because it is profoundly correct. There is no fundamental difference (we believe) between animate and inanimate matter. It is all just atoms. That is an astonishing piece of knowledge.

It is also, in an important sense, astonishingly useless. Imagine that a behavioral biologist complains to you that baboon behavior is difficult to predict. You console her by saying, “Don’t worry, everything that animals do, atoms do.” You are perfectly correct … and completely unhelpful.

Your acerbic quip illustrates an important asymmetry in science. Reduction does not imply resynthesis. As a particle physicist, Richard Feynman was concerned with reduction — taking animals and reducing them to atoms. But to be useful to our behavioral biologist, this reduction must be reversed. We must take atoms and resynthesize animals.

The problem is that this resynthesis is over our heads … vastly so. We can take atoms and resynthesize large molecules. But the rest (DNA, cells, organs, animals) is out of reach. When large clumps of matter interact for billions of years, weird and unpredictable things happen. That is what physicist Philip Anderson meant when he said ‘more is different’ …

The ultimate goal of science is to understand all of this structure from the bottom up. It is a monumental task. The easy part (which is still difficult) is to reduce the complex to the simple. The harder part is to take the simple parts and resynthesize the system. Often when we resynthesize, we fail spectacularly.

Economics is a good example of this failure. To be sure, the human economy is a difficult thing to understand. So there is no shame when our models fail. Still, there is a philosophical problem that hampers economics. Economists want to reduce the economy to ‘micro-foundations’ — simple principles that describe how individuals behave. Then economists want to use these principles to resynthesize the economy. It is a fool’s errand. The system is far too complex, the interconnections too poorly understood.

I have picked on econophysics because its models have the advantage of being exceptionally clear. Whereas mainstream economists obscure their assumptions in obtuse language, econophysicists are admirably explicit: “we assume humans behave like gas particles”. I admire this boldness, because it makes the pitfalls easier to see.

By throwing away ordered connections between individuals, econophysicists make the mathematics tractable. The problem is that it is these ordered connections — the complex relations between people — that define the economy. Throw them away and what you gain in mathematical traction, you lose in relevance. That’s because you are no longer describing the economy. You are describing an inert gas.

Blair Fix

Interesting blog post. Building an analysis (mostly) on tractability assumptions is a dangerous thing to do. And that goes for both mainstream economics and econophysics. Why would anyone listen to policy proposals that are based on foundations that deliberately misrepresent actual behaviour?

Defenders of microfoundations and its rational expectations equipped representative agent’s intertemporal optimisation frequently argue as if sticking with simple representative agent macroeconomic models doesn’t impart a bias to the analysis. They also often maintain that there are no methodologically coherent alternatives to microfoundations modelling. That allegation is, of course, difficult to evaluate, substantially hinging on how coherence is defined. But one thing I do know, is that the kind of microfoundationalist macroeconomics that New Classical economists and ‘New Keynesian’ economists are pursuing are not methodologically coherent according to the standard coherence definition (see e. g. here). And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductive reasoning is the hallmark of science tout court.


  1. “It can’t be the Fed, since its balance sheet expands.”
    Total non sequitur. Both assets and liabilities expand in equality.
    “A god could hear the full song instantaneously.”
    Yes and it would probably sound like a goose fart. As far as listening to music is concerned give me ordered sequential time any day.

    • The Fed debits no one when it expands its balance sheet. This is not a non-sequitor; it gives the lie to the type of zero-sum view of money that Fix’s blog presents.
      Your preference for time does not mean it exists, just as the epicyclists’ preference for seeing the sun move does not mean it is orbiting the earth.

  2. From the linked blog:
    “When humans exchange money, it is similar to when gas particles exchange energy. One party leaves with more money/energy, the other party leaves with less.”
    This naive view of money ignores how balance sheets expand and remain so indefinitely. When the Fed buys assets that no market agent will bid on, who gets debited?

    • “…who gets debited?”
      The Fed.
      Just as the Great Cosmological Creator, “whose face never perishes”, created equal and opposite charges ex nihilo thereby livening the electric force, the Fed creates equal and opposite assets and liabilities ex nihilo which llvens the monetary force.

    • Henry, the Fed expands its balance sheet, and no one else’s balance sheet shrinks as a result. Again, who gets debited? It can’t be the Fed, since its balance sheet expands.
      Also, a recording’s fluxes all exist at once like the painting referenced by Barbour. Block time is easily compatible with music. All the possible tunes already exist, you could be inventing time as your limited brain crawls across the tune assimilating only bits at a time (so to speak). But a computer could access all parts of the song at once by reading all the bits in an MP3 file simultaneously. A god could hear the full song instantaneously.
      As you slow down your clock ticks, eventually an entire song fits between ticks. Imagine an infinity between ticks. Voilà, block time …

      • I live in a different time zone … equate that.

  3. Leslie: You agree with me, right, loop quantum gravity is the future of physics.
    Leonard: Sorry Leslie, I guess I prefer my space stringy not loopy.
    Leslie: Well, I’m glad I found out the truth about you before this went any further.
    Leonard: Truth, what truth? We’re talking about untested hypotheses, uh, it’s no big deal.
    Leslie: Oh, it isn’t, really? Tell me Leonard, how would we raise the children?

  4. Great quote by Fix. It also reminds me of some of the commentary on here by Bruce Wilder some time back about synthesis in mainstream economics.

  5. Excuse me while I blow up physics.
    Two views of the world clashed at the dawn of thought. In the great debate between the earliest Greek philosophers, Heraclitus argued for perpetual change, but Parmenides maintained there was neither time nor motion. Over the ages, few thinkers have taken Parmenides seriously, but I shall argue that Heraclitan flux, depicted nowhere more dramatically than in Turner’s painting below, may well be nothing but a well-founded illusion. I shall take you to a prospect of the end of time. In fact, you see it in Turner’s painting, which is static and has not changed since he painted it. It is an illusion of flux. Modern physics is beginning to suggest that all the motions of the whole universe are a similar illusion – that in this respect Nature is an even more consummate artist than Turner. This is the story of my book. —Julian Barbour (The End of Time – The Next Revolution in Physics)
    Oliver Crisp summarizes [Jonathan] Edwards’s view: “God creates the world out of nothing, whereupon it momentarily ceases to exist, to be replaced by a facsimile that has incremental differences built into it to account for what appear to be motion and change across time. This, in turn, is annihilated, or ceases to exist, and is replaced by another facsimile world … and so on.”
    “Everything is perishing except His Face.” —Qur’an 28:88
    “Perishing”, not, “will perish at some future point is time.”

    • Ahmed,
      I wonder if you could do me a favour and delay annihilating time for just a few moments while I listen to the soundtrack from Zorba The Greek.
      I would imagine the wonderful melodies and rhythms of the music would be rendered imperceptible without time.

    • Ahmed,


      Time is just a measurement created by humans to gauge the reality around us no more than cubits, feet, or meters, due to our limited senses, but at this level it much more complicated than say what a clock denotes.


      I do understand the conflict between the royal science and the more PIE or Abrahamic applications, due to being a corner stone too so much more. I know of a specific case where an astrophysicist at the University of San Diego used his accreditation to buttress his spiritual beliefs outside his credentials scope. Especially the spreading sky’s aspect in OT Genesis being portrayed as endless, confirming some sort of validity of all else post hoc.


      The problem is that the linguistics does not support that suggestion – argument E.g. spread at the moment of creation and then stopped, in its original pretext, contra the suggestion by the aforementioned keeps spreading to support a predetermined outcome.


      Its a multidisciplinary problem.

  6. Dave, if you read the whole article (https://economicsfromthetopdown.com/2021/03/12/energizing-exchange-learning-from-econophysics-mistakes/), I think you will find that I paint Feynman in a positive light.

  7. https://www.feynmanlectures.caltech.edu/I_01.html puts this unfortunate quote in a context that puts Feynman in a better light.

    I’d be well pleased if I was half as insightful and influential for ‘good’ as ‘friendly’ physicists assure me Feynman has been, and I am still struggling to find any source that hasn’t been widely misinterpreted, misquoted or taken out of context, as Blair Fix does.

    My own ‘fundamental theory’ of economics is that things might go better for us all if we ‘just’ … [I would like to insert a quote here that cannot be misinterpreted]


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