Why Physics tells us more about Economics than Economics

by Dr. Ed Berry

Theoretical physicists learn unique, powerful, and accurate ways to think about our world. Their method or thinking applies to almost everything.

Jim Rickards, an economist, wrote this in Agora Financial’s Daily Reckoning of September 17, 2015:

I have lectured at two of the leading physics laboratories in the world: the Los Alamos National Laboratory, near Santa Fe, New Mexico, and the Applied Physics Laboratory, near Washington, D.C.

I have always been impressed with the fact that theoretical physicists are much more open-minded about how to understand risk in capital markets than the typical Ph.D. in economics.

The economics professors are stuck with their obsolete equilibrium models, while physicists are eager to use their theoretical tool kits to solve cutting-edge problems of risk management.

When investors use phrases like “market meltdown,” it is more than just a metaphor. The mathematics and dynamics of a stock market meltdown are identical to the real meltdown of the core of a nuclear reactor.

This is one reason economists never see market collapses coming: Because in their models, declining prices attract buyers, which restores market equilibrium. In the real world, declining prices start panics, which feed on themselves to the point that buyers run for the hills and sellers dump everything. That’s what a meltdown looks like.

One borrowing from theoretical physics I have been using a lot lately is the idea of a probability cloud (which has nothing to do with “cloud computing,” by the way). This is the perfect way to analyze Janet Yellen’s decision on interest rates today.

Theoretical physicists easily think in terms of probability clouds. But this method of thinking is foreign to non-physicists. This is why theoretical physicists can make accurate predictions and draw conclusions that seem impossible to non-physicists.

This is also why theoretical physicists understand why our carbon dioxide emissions do not cause significant climate change. Yet many non-physicists continue to promote the climate change myth.

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