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My Opinion About Economics

·3 mins
Musings Economics Physics Law Model Human-Behavior
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Warning! This article is one among many salvaged from my previous blog! It is not on par with my demands of quality but I didn’t feel like abandoning it. Please don’t disappoint me by becoming fond of this.

I recently completed my Engineering Economics course. Here are my opinions about what Economics is all about:

“Physicists can explain 99% of all observable physical phenomena using Newton’s three Laws of Motion. Economists probably have 99 Laws that explain 3% of all economic behavior.” -Andrew Lo – Professor of Finance at the MIT Sloan School of Management

The above is a famously referenced quote by Andrew. There is another variant of the same.

We all wish that we had these three laws that explain 99% of all behavior. In fact, economists have 99 laws that explain maybe 3% of economic behavior. -Andrew Lo – Professor of Finance at the MIT Sloan School of Management

He wishes that the Economics should have been like physics with less laws which would explain most of the behavior. Is it even possible? Let us see.

Physics deals with matter. Economics deals with people’s behavior. Now when it comes to people’s behavior, they all have individuality and free will to choose a course of action. There is also destiny factor involved in determining the choices an individual makes. But matter doesn’t have all these components.

So, it is easy for physicists to explain how matter behaves in a situation. Economics is a reductionist approach of looking at how things change and flow in an economy. Economics is primarily a study of how to achieve our unlimited needs(greed) optimally and effectively with limited resources available to us(like time, money etc).

Let’s take a quick detour #

Let’s say we drop a ball from top of Eiffel Tower. It will hit the ground exactly in 7.74 seconds. It follows \( s = (\frac{1}{2}) gt^2 \) law of kinematics.

OK. But what if we drop a person from top of Eiffel tower? This time, Newton’s law breaks. The man will try to pull your leg, or hang around the bars in Eiffel Tower and will try any other possibility of not falling down. So, what’s happening here?

kṣetra-kṣetrajña-saṁyogāt -BG 13.27

Which loosely means “whatever you see in existence, both the moving and the nonmoving, is only a combination of the field of activities and the knower of the field“. So, the whole world is comprised of the matter and spirit. And whatever we observe is the work of combination of both. So, physics took an easy path by analyzing the matter individually.

But Economics is in the tough end of trying to explain how spirit chooses to act, which in principle cannot be generalized for everyone. The behavior of people can be generalized only to a confined group. So, this explains why economics have those 99 laws to explain 3% of behavior. It is not the incompetence of Economists compared to Physicists. It is how the world is designed.

So, it is nearly impossible to perfectly model even a confined group of people using stochastic, probability, statistics, monte-carlo and random walk algorithms. What to speak of the whole Economy? Does it go in Vain if people try to? Is it worth the effort to proceed in this direction? Does it really solve the problems of life? Does Economic development monitored in terms of GDP will really help people out there who suffer?