Tuesday, March 25, 2014

Newton and Economics: Discussing about a link that existed, but seldom talked about

As Alan Kirman(2010) says, entire neo-classical economics paradigm could be reduced into a constrained optimization problem where one maximizes a concave function in a convex set. To be more precise, at one end we have got producers who maximizes their profit w.r.t the resources they have in hand. At the other end we have consumers maximizing their utility subjected to their budget constraints.  
This mode of analysis has been questioned time and again by many, due to the methodological inconsistencies as well as due to the stark difference between the observed reality and the theoretical constructs.  According to Mirowski (1991), the neo-classical model’s theoretical foundations could be traced back to pre-1867 Physics, or to be precise, Newtonian mechanics. He draws many a parallels between the n-dimensional commodity space (Euclidean Space) used in General equilibrium analysis and the force field analogy used in Newtonian mechanics.
I had mentioned the year 1867 in the previous paragraph. This year is relevant to Physical sciences as Second Law of Thermodynamics was invented then. The law states that “Entropy of the universe is always increasing”.  This is totally opposed to the world view as per Newtonian analysis. In that framework, if one knows the exact initial conditions of a process, one can easily go back to the past as well as to the future. However, with the second law coming to the picture, it was proven that the time is irreversible. With these developments, physical sciences took a different route. However, here we are more concerned with another issue.
There are many pertinent questions left unanswered concerned with the rationale behind taking a mathematical construct and applying it indiscriminately to a social science discipline. Let us first take the difference between laws of physical sciences and social sciences. Physical Science, irrespective of numerous paradigm shifts, deals with immutable laws related to the domain of analysis. Best example is the law of gravity.  It is something that remained constant across space (different regions in earth) as well as time (it was there even before sir Isaac Newton formulated it, and still continues to be there). Can the  same be said about economic “laws”? The economic “laws”, at best, are context specific.  i. e.  specific to the space and time when they are formulated/used for analysis.
 Here, one could question the indiscriminate application of economic laws throughout space and time based on the above criticism. A theory formulated based on the behavior of a particular society may be unsuitable for explaining the similar phenomenon in another society, or even with the same society after sometime. Because, unlike physical sciences where the property named “immutability of matter” holds sway, collective human behavior can be different across different groups.  Even if we are considering one group within a specific locality, the combination of group will change over time.  Their customs, preferences, behavior etc. are not time independent.  Or simply said, people change over time.
To conclude, the methodological inconsistencies pertaining to neo-classical mode of analysis cannot be covered in one post.  The representative agent based modeling in the Euclidean space rise many a questions that will take much (typing) space and time in answering, and some of them could be explained in the coming posts.
1.       Alan Kirman(2010) Complex Economics: Individual and Collective Rationality (The Graz Schumpeter Lectures)
2.       Philip Mirowski(1991) More Heat than Light: Economics as Social Physics, Physics as Nature's Economics (Historical Perspectives on Modern Economics)