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What Economists can learn from physics and finance

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  • McCauley, Joseph L.

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.

Suggested Citation

  • McCauley, Joseph L., 2004. "What Economists can learn from physics and finance," MPRA Paper 2240, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:2240
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    File URL: https://mpra.ub.uni-muenchen.de/2240/1/MPRA_paper_2240.pdf
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    References listed on IDEAS

    as
    1. Mirowski,Philip, 2002. "Machine Dreams," Cambridge Books, Cambridge University Press, number 9780521772839, August.
    2. Mirowski,Philip, 2002. "Machine Dreams," Cambridge Books, Cambridge University Press, number 9780521775267, August.
    3. 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.
    4. Granger,Clive W. J., 1999. "Empirical Modeling in Economics," Cambridge Books, Cambridge University Press, number 9780521662086, August.
    5. 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.
    6. A. Meltzer & Peter Ordeshook & Thomas Romer, 1983. "Introduction," Public Choice, Springer, vol. 41(1), pages 1-5, January.
    7. A. P. Thirlwall, 1983. "Introduction," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 5(3), pages 341-344, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Nonequilibrium; empirically based modelling; stochastic processes; complexity;

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics

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