The term “physics envy” conjures an amusing image of an economist lying on a reclining lounge, talking his heart out to everyone’s favourite psychoanalyst. Physics has sneaked its way into Economics and Finance from the Brownian Motion assumption for the Black-Scholes Option Pricing Model to the Gravity Model of International Trade in International Economics. Economics has always been struggling to find its place in the Sciences, (even being proposed to replace Engineering as the ‘E’ in STEM). Too mathematical with its complex statistical and econometric tools, yet not as succinct as the models in Physics. The dilemma is unsurprising.
Yet, as ambitious as modern economics tends to be, it often forgets the humble origins of Adam Smith’s seminal work, to be in moral philosophy. Economics was proposed as an ethical and social exercise. It sat on the shelves with the likes of Machiavelli, Moore and Locke. There is little cause for astonishment in that, either – philosophical musings birthed the art of statecraft and policy. Macroeconomics developed as an offshoot of the same (perhaps, you can call it the second cousin you occasionally chit-chat with at parties). The idea seems counter-intuitive as most Econ 101 classes begin with the microeconomic fundamentals and how these concepts are further applied to explain macroeconomic phenomena. That has a lot to do with the state of modern economic education.
Alfred Marshall, the architect of the Marginalist Revolution, which shaped modern economics, was greatly responsible for the mathematicisation of economics. As the name suggests, this school of thought focused on the marginal productivity, marginal cost and marginal utility for devising precise points of equilibrium in the goods as well as labour markets.
Thomas Kuhn’s model on ‘Paradigm’ in science, can perhaps, shed better light on the evolution of modern economics. Kuhn mentions four stages of development in a Science: Pre-Science, Normal Science, Crisis and Revolution. In terms of economics, the moral philosophy stage can be seen as the Pre-Scientific stage, where the discipline was in disarray. Smith’s ‘Wealth of Nations’ onwards, economics saw a structure, prominently with the works of David Ricardo. It could be called a Normal Science, but its focus was still more on the theoretical aspects of political theory and moral philosophy. Since multiple schools of thought have co-existed in the economic discipline, there is little to say which crisis in particular deserves the qualification. Marshall’s Marginalist Revolution, is indeed the fourth stage which caused the ‘Paradigm shift’ to neo-classical economics.
The Neo-classical school of thought took Marshall’s theories further, stating that equilibrium can be achieved by the laws of supply and demand, with the underlying assumption of free markets and rational market players who maximizes their individual utility on the basis of their utility functions. Together with Keynesian economics, it forms the Neo-classical synthesis, the most widely known (and taught) system of economics globally.
There are some obvious lacunae in this system: neither individuals nor firms can adequately sand unbiasedly condense their needs into a simple, differentiable utility function. They may not always be consistent, utility-maximising, rational individuals – also known as the mythical Homo Economicus. On an economy-wide level, markets are seldom free, with zero government intervention and perfect competition cannot possibly exist. Here, the standard response from neo-classical defenders is a mimicry of physics. Quite like the latter, the idea is to begin with an ideal scenario (or no attrition, in physical terms) and then relax the assumptions steadily to come up with a realistic model. Yet, it’s easier to mathematically account for friction or air resistance on a frictionless surface than to check for the interaction of policy variables in an imperfect market. Objects in physics exist in vacuum, the economy does not.
In the 1930s at the height of the neo-classical frenzy, the British Economist, Lionel Robbins claimed that the basic tenets of economics were based on ‘deduction from simple assumptions reflecting very elementary facts of general experience’, and as were ‘as universal as the laws of mathematics or mechanics, and as little capable of “suspension”’. Although its popularity died down post the second world war, with the rise of Keynesianism, the 1970s heralded a resurgence (owing to failed Keynesian policies in the US stagflation). Nobel laureate Wassily Leontief used the term “physics envy” for the growing economic scientism that grew in the following decades. Oblivious of its consequences, economists and political theorists alike placed their bets on the mathematical neo-classical models in the 1990s. Even academic institutions like the American Journal of Political Science refused to review submissions that lacked tested theoretical models. Yet, did it do any good?
Bill Clinton’s prized welfare reform act, aimed at “ending poverty as we know it” only increased the number of those in deep poverty. Alan Greenspan’s confidence in the neo-classical system only contributed to the gigantic housing price bubble which eventually burst in 2008. The list goes on.
On a more fundamental level, the most common critique of modern economics is due to heavy capitalist influence. While maximising at the margin, the system does not account for the unpredictability and the sentiments of the individuals it is based upon. In a battle between equity and efficiency, equity sees itself on the losing side, for the fear of unwelcome ‘market distortions’. A common example is the case against universal basic income: by mandating a wage floor, the system becomes inefficient, creating further unemployment in the economy. This is precisely why Marxists call modern economics “vulgar”, and without sounding too radical, there is certainly, some merit to it.
As Cambridge’s political economist John Rapley quips in his Aeon piece, more people are likely to have an opinion (and a strong one at that) on the income inequality between athletes and laypeople than the relevance of string theory, much to the annoyance of economists. Yet, it is only indicative of the impact the discipline has on everyone’s lives. Despite previous attempts being made in the past to delink economics from law, political science, sociology and even psychology, its elementary human factor prevents it from existing in isolation – in vacuum.
Paradoxically, in its pursuit of precision, modern economics became too perfectly flawed.
It is up to the policymakers to decide which flaws to overlook and which ones to correct, in their age-old battle of equity versus efficiency.
Clarke, K., & Primo, D. (2020). Opinion | Overcoming ‘Physics Envy’. Retrieved 11 July 2020, from https://www.nytimes.com/2012/04/01/opinion/sunday/the-social-sciences-physics-envy.html
Definitive proof that economists suffer from ‘physics envy’. (2020). Retrieved 11 July 2020, from https://www.businessinsider.com/economists-suffer-from-physics-envy-2016-3?IR=T
Mcleod, S. (2020). Thomas Kuhn Paradigm Shift | Simply Psychology. Retrieved 11 July 2020, from https://www.simplypsychology.org/Kuhn-Paradigm.html
Neoclassical economics and the failure of predictions. (2020). Retrieved 11 July 2020, from https://francescosyloslabini.info/2016/06/01/neoclassical-economics-and-the-failure-of-predictions/
Rapley, J. (2020). Few things are as dangerous as economists with physics envy – John Rapley | Aeon Ideas. Retrieved 11 July 2020, from https://aeon.co/ideas/few-things-are-as-dangerous-as-economists-with-physics-envy
Vernengo, M. (2020). A Note on the Concept of Vulgar Economics. Retrieved 11 July 2020, from http://nakedkeynesianism.blogspot.com/2012/01/note-on-concept-of-vulgar-economics.html