We're no competition for ideology when it's disguised as science
Economic theory can often be a convenient tool for wealthy elites to keep themselves in power
No other social science suffers more from "physics envy" than economics. That's one reason it has become such a highly mathematical discipline. The great physicist Max Planck said in the early years of the last century that it would take him less than a week to master all the maths he needed to learn economics. Today, a prominent physicist has said it would take him a couple of months.
Why should we, the non-economists and non-physicists, care? Surely it's good for a discipline that has so much relevance to our daily life to be as scientific - and hence as mathematically rigorous - as possible?
In a recent book, Lee Smolin, a leading theoretical physicist, offers a trenchant criticism of this way of thinking. He argues that at a fundamental level, physics not only doesn't get something right about the physical world, its own blind spot has contaminated the highly mathematical framework of neo-liberal economics that has been the dominant school in most post-war economics departments at Western universities.
Smolin isn't the first to make this argument, but he does so in a unique way by resting his criticism on deep philosophical ground: the nature of time.
Time Reborn is really a book on physics. His argument is that seen from the way in which Einstein's theory of relativity and contemporary string theory - sometimes called the theory of everything - abstract away time as a real physical entity, they are not radical breaks from Newton's classical mechanics but its heirs. We need to embrace time, he argues as a physical reality, and that means reinterpreting its fundamental equations. All this is highly abstract. But towards the end of the book, Somlin comes down from Mount Olympus.
"Probably the greatest harm done by the metaphysical view that reality is timeless is through its influence on economics," he wrote.
This is the basic assumption made by many economists in their models that a market is a system with a single equilibrium state. This means prices are adjusted so that the supply of each good exactly matches the demand for it. There are several ways of formulating it, one of which is the efficient market hypothesis (EMH), which earned one of its founders a Nobel economics prize in 2013.
If there is only one equilibrium state, and a market would automatically adjust to it, the natural thing to do is to leave it alone. Regulators and politicians who try to mess with it would only make it worse.
Another way of talking about this is to use what physicists call path-(in)dependence. A system is path-dependent if it matters how it evolves from one state to another, for example, if our current situation depends on how we got here from a previous state.
A neo-liberal or efficient-market model is path-independent because its current state doesn't depend on its past state. A path-independent market is either already in a stable equilibrium or fluctuating around it, so its past paths are of little or no interest. In such a perfect "timeless" system, there are no profit-making - or arbitrage - opportunities just by trading without producing goods or services of value.
But since the 1970s, renegade economists, mathematicians and physicists have found that in real complex markets, there are not one but many equilibrium points, not all of which are stable. Which or what equilibriums to favour depend on each society's preferences, values, regulatory frameworks and political systems. Vested interests - those who have power and influence - can also impose their own preferences on the rest of the population. Instabilities and inefficiencies further create arbitrage opportunities.
Smolin is charitable and argues that the pristine neo-liberal vision is mesmerised by its physics-inspired timeless models. But it can't be denied that it offers a powerful ideology which disguises itself as science. The financial elites, especially those in the United States, have found in it a convenient tool to fight off regulators and silence their critics. "Free market" may be an ideology. But when it is expressed through advanced maths, most of us are browbeaten into silence.