Econophysics: Can Economics be Treated as a Physical System?

It seems that it lacks some fundamental aspects that are present in the sciences, such as the ability to predict, reproducibility.

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From time to time the debate arises about whether the economy is a science or not. While it is undeniable that the modern economy arises in the same revolution that we have called scientific, it seems that it lacks some fundamental aspects that are present in the sciences, such as the ability to predict, reproducibility. The supporters do not end up saying that it does not gather, nor by approximation, the defining characteristics of a science such as physics. However, access to huge amounts of data and the ability to analyze them may end up turning the economy into one of the physical sciences: econophysics.

A typical example of the lack of ability to predict the economy is the evolution of markets, especially the panics and euphoria. A physicist could study it using a model originally developed to treat many particles that interact giving rise to phenomena such as magnetism, something that for an economist might sound like Chinese. After all, both physical and economic phenomena could have universal characteristics that could be revealed using the tools of physics, as they are revealed in the study of so-called complex systems. The main difference between physics and economics is introduced by humans (and it is the one that makes technical analysis invalid as a useful tool in the stock market): in financial markets, and in economic systems in general, today’s actions are influenced by the perception of future events.

This may seem very theoretical and far away. But the debate on the viability of econophysics is on the table. So much so that the European Physical Journal ST has dedicated a monographic issue.

Econophysics has focused mainly on elucidating the properties of financial markets, complex economic networks, income/wealth distribution and strategic decision making, with the idea in mind to develop a theory of economic systems such as those described by critical phenomena in physical systems. A theory that can explain its operation in the vicinity of a critical point independently of the specific characteristics at the micro level.

One of the conclusions that seem to emerge from the articles of this special issue is that the idea of ​​universality may be the exception rather than the rule in economic and social systems. Another, not less important, is that so far the models of econophysics have been simplistic rather than simple, so much so that no economic model has proven to be superior to a standard economic model.

Does this mean that econophysics does not make sense? Absolutely. The access to gigantic amounts of data and the greater availability of computational computing capacity makes now that econophysics makes more sense than ever.

There are already the first success stories of econophysics. Among them the law of the inverse of the cube for the distribution of the fluctuations of stock prices and stock indices and the analysis of economic networks based on the physical analyzes of large complex networks.

Perhaps with time and the appropriate models, econophysics has the same predictive capacity as other physical branches that study complex systems, such as meteorology.