I was inspired by Lee
Smolin's TED talk on “How Science is like Democracy” to apply his
thoughts to the world of economics. In brief, he follows political
thought and its connection to physics theories of the same era –
which suggests that common philosophy influences all fields during an
era. There are many interesting parallels, and in this post I'm going
to flesh out some more – as it relates to economics.
The Liberal Era
Physics at this time was Newtonian which assumes a fixed structure of space and time. The equations correspond accordingly, and even today most engineering still uses this form of physics because of its applicability to most situations.
Economics of this era was similar and assumed similar constants. The beginning thoughts of the laws of supply and demand were established during this era, and indeed they were better than anything yet postulated at that point.
The Relational Era
During this era, Einstein introduced the novel concept of relativity where space and time are not fixed but in fact intricately weaved together to form an elastic aether of the space-time continuum. At very high speeds and for very high masses, his theories add insights that Newton's are unable to rival. This is used in many extreme engineering applications, though still not for most common problems to the extent Newton's are.
A few years later, Keynes introduced his theories into the world which said the economy was not the engine we thought it was, and that under certain circumstances there were times when markets would fail. He then offered solutions for these extreme economic circumstances that are widely employed today.
The Micro Era
The largest developments in physics today are all based on the micro-world. You can see this in the biggest upset since Einstein: quantum theory. This theory helps explain phenomena that happen on the subatomic level to a high degree. You can see other additional theories on the same path such as string theory, super symmetry, etc. - they're all micro-sized.
Similarly, behavioral economics is the latest pursuit of economists (until perhaps this crash, when macro started to look more interesting). It aims to explain the economics of very low level systems such as how one group of people react to certain economic stimuli. They can do this with pretty good accuracy as well.
Possible Applications & Parallels
I've found that sometimes physics and economics are actually directly linked. Economies after all are based on people and firms that are all ruled by physics. Accepting this simple assumption, let me paint a picture of how it works.
Take energy prices, physics and engineering have allowed us to convert energy between forms such as using solar energy to produce steam which can then produce electricity in a turbine and be piped into your house where you convert it back to light. These conversions are widely understood, and always result in energy losses along the way – and possible gains in utility.
Economics, on the other hand, can explain the prices of each raw material (coal, uranium, sun, etc.) and harnessing them for energy (boilers, reactors, solar cells, etc.). It also allows the market to set the price for each form of energy in its end state depending on how consumers use the energy in its final form.
Consumers choose each form
of energy based on the different attributes each form – which are
directly based on physics. Coal can't easily power your cellphone due
to the physics of boiler technology, coal combustion, etc.
Interestingly, you could view energy transformation (coal power plants) as a form of arbitrage. Take coal, which is difficult to use in an end-user environment and turn it into electricity, and you've got energy arbitrage. It is was hydrogen, it could actually work both ways.
Knowing the physical properties of each fuel, as well as the supply curve for the materials and demand curve of end-user products, we can accurately model which forms of power are economically feasible for a given product, market, etc. Say that we take this model, and apply Kurzweil's technology prediction curves to the data, we should be able to make good guesses as to which technologies will be used in which products in the future during a period of time.
Also, this means that
research can be directed at issues of energy arbitrage illiquidity.
If we have a lot of surplus sun, we should harness it, however the
issue is the panel cost. If you want to promote solar, invest in cheap solar to
electricity conversion technologies – don't artificially give them
tax incentives for something physically inefficient. ::cough:: corn
ethanol ::cough::
Reconciliation
There is a common problem in both fields about the applications of the various theories. For instance, in physics relativity can explain gravity very well, however it falls apart at the subatomic level – where quantum theory shines. The same is true of behavioral economics at the large scale and Keynesianism on the small scale – they just don't work.
In physics and economics, the practitioners draw from each school. In physics, for everyday things Newton's laws work great. In economics, classic liberal economics work very well most of the time. However, in both cases there comes a point where special case theories must be put to work to solve a problem. I don't think being a member one school in economics makes any more sense than being in any one school of physics. It seems like this modern world has to find a way to reconcile these paradoxes to truly make new progress.
In the mean time, it seems like we can employ a sort of hierarchy of ideas. First, the fundamentals - then the special cases. In economics, default: classic liberalism, depression: Keynesianism, policy execution: behavioral. It's similar to federalism, first the person, then the local, the the state, then the nation.
Is there a unified economic theory coming?
What philosophy will the next era bring?
PS – Tommy Friedman, it's not the Energy-Climate Era – douche.
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