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What Economists can learn from physics and finance

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  • McCauley, Joseph L.
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    Abstract

    Some economists (Mirowski, 2002) have asserted that the neoclassical economic model was motivated by Newtonian mechanics. This viewpoint encourages confusion. Theoretical mechanics is firmly grounded in reproducible empirical observations and experiments, and provides a very accurate description of macroscopic motions to within high decimal precision. In stark contrast, neo-classical economics, or ‘rational expectations’ (ratex), is a merely postulated model that cannot be used to describe any real market or economy, even to zeroth order in perturbation theory. In mechanics we study both chaotic and complex dynamics whereas ratex restricts itself to equilibrium. Wigner (1967) has isolated the reasons for what he called ‘the unreasonable effectiveness of mathematics in physics’. In this article we isolate the reason for what Velupillai (2005), who was motivated by Wigner (1960), has called the ineffectiveness of mathematics in economics. I propose a remedy, namely, that economic theory should strive for the same degree of empirical success in modeling markets and economies as is exhibited by finance theory.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2240.

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    Date of creation: Oct 2004
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    Handle: RePEc:pra:mprapa:2240

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    Keywords: Nonequilibrium; empirically based modelling; stochastic processes; complexity;

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    1. A. Meltzer & Peter Ordeshook & Thomas Romer, 1983. "Introduction," Public Choice, Springer, Springer, vol. 41(1), pages 1-5, January.
    2. Gemunu H. Gunaratne & Joseph L. McCauley, 2002. "A theory for Fluctuations in Stock Prices and Valuation of their Options," Papers cond-mat/0209475, arXiv.org.
    3. A. P. Thirlwall, 1983. "Introduction," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 5(3), pages 341-344, April.
    4. A. L. Alejandro-Quinones & K. E. Bassler & M. Field & J. L. McCauley & M. Nicol & I. Timofeyef & A. Torok & G. H. Gunaratne, 2004. "A Theory of Fluctuations in Stock Prices," Papers cond-mat/0409375, arXiv.org, revised Sep 2004.
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