Lee Smolin: Physics Envy and Economic Theory

TL;DR

Physicist turned economist critiques the shortcomings of neoclassical economic models, highlighting flawed assumptions and the impact on the broader economy.

Transcript

So I got pulled into economics in 2007 because of the 2008 economic crisis. Mike Brown who had been the first CFO of Microsoft, Chief Financial Officer of Microsoft and treasurer of Microsoft, he came to Toronto in 2007 and took my wife and I out to dinner and said he was trying to put together a research group to work on economics and he would lik... Read More

Key Insights

• ❓ Physicist entered economics post-2008 crisis, critiquing neoclassical models and advocating for path dependence theories.
• 🙈 Neoclassical economics assumes single equilibrium, ignoring multiple equilibria determined by history and external factors.
• 🥺 Physics envy led to erroneous beliefs in timeless equilibrium and resistance to regulation in economic models.
• ❓ Market forces and the concept of arbitrage challenge the neoclassical equilibrium notion.
• 🏋️ False comfort in timeless equilibrium contributed to lifting market regulations and economic crises.
• ⚾ Physics provides a different notion of equilibrium than economics, based on system history.
• ❓ Path-dependent and complex systems theories offer alternative economic models.

Questions & Answers

Q: What motivated the physicist to get interested in economics?

The physicist got involved in economics due to the 2008 crisis, meeting with Mike Brown to understand and potentially save the situation. This motivated a public service interest in economics despite initial lack of knowledge.

Q: What flaw does the neoclassical model of economics exhibit?

The neoclassical model assumes a single equilibrium where market forces maximize consumer happiness and firm profits. However, economists have known since the 1970s that there are many equilibria affected by history, regulation, politics, and preferences.

Q: Why is the notion of equilibrium in economics problematic?

Equilibrium in economics is not a fixed point due to the existence of multiple equilibria and path dependent factors. The idea of timeless equilibrium, driven by physics envy, misled economists to believe markets do not need regulation.

Q: How did the flawed economic models impact market regulations?

Erroneous beliefs in timeless equilibrium led to the lifting of market regulations, contributing to economic instability and crises. The false comfort provided by flawed economic models misled policymakers and perpetuated dangerous market practices.

Summary & Key Takeaways

• Physicist delves into economics due to 2008 crisis, highlighting flaws in neoclassical model.

• Neoclassical economics assumes equilibrium without acknowledging multiple equilibria.

• Critiques physics envy and false comfort of timeless equilibrium in economic models.