V. Gontis: Econophysics - brand new outlook into social sciences

Econophysics is not a very well known interdisciplinary field of research in Lithuania. There are very few Lithuania based scientists who are related to this very young and rapidly developing branch of Physics. Therefore we, being ones of the few, feel an obligation to introduce Econophysics to the other scientists, businessmen and the whole broader society. In this text we will discuss the basic ideas, current trends and the most common problems relevant to the field of Econophysics.

The name of Econophysics implies the application of physics, mostly the methods taken from Statistical Physics, to the Economics. Though until recently most of the econophysicists used to focus on the financial markets. Currently the field is expanding very rapidly and now concerns something more than just regular Economics or Finance - many physicists now attempt to tackle problems in the other social sciences. For these broader approaches there are other overlapping terms including Sociophysics, Physics of Risk, Physics of Socio-Economic Systems and other.

At this point we would like to stop the discussion on the use of the terminology. Recall that the aim of this text is somewhat different from that. We aim to familiarize you with the Econophysics!

Economics need a scientific revolution

Most of the growing interest in Econophysics lies in the dissatisfaction with Economics and Finance. Those fields were unable to deal with the crisis. In this context the interest in the alternative approaches is growing. And the Econophysics is a very interesting and promising alternative. Some of the most well known econophysicists have published many papers analyzing what is wrong with Economics, Finance and how the application of Physics could improve the scientific understanding of socio-economic systems.

The first one to do so was J. P. Bouchaud. In Nature (very prestigious journal for scientists in the natural sciences) he published a claim that "Economics need a scientific revolution" [1]. This paper is one of the most well written and well cited recently published papers on the topic. His main point was that Economics is based on wrong assumptions. These assumptions were usually made to obtain mathematical simplicity, while neglecting the true nature of the ongoing process. The history of Economics serves as an excellent proof for this claim. Most economists, throughout the history, shun what physicists like to rely on - the experiment. This bad habit can be easily explained by the fact doing experiment in the socio-economic system is a very daunting and in the most cases impossible task, but it is not an excuse to completely reject the shortcomings of the Economic theory. This rejection leads to the ideological warfares between different scientists in the same field and the complete neglection of the aim to understand observed phenomena. Physics and physicists, having a lot of experience with the complex natural systems, could help at least partly deal with these complex problems.

J. P. Bouchaud has further developed his ideas on the complexity of socio-economic systems in his paper published a year later in Physics World, another prominent journal, [2]. To keep article short we will move on to the work by another econophysicist, thus if you would like to follow the thoughts by J. P. Bouchaud visit our references section for the link.

B. M. Roehner's review

Another interesting work we would like to consider is a review of "worries, hopes and prospects" in Econophysics [3]. We found it especially interesting, because of its broadness and consistency - the work considers most of the current applications of Physics to socio-economic systems and also a scenarios for the future research in the field. Some utmostly important topics are discussed in the paper:

• Can applications of the ideas from Physics and Chemistry provide valid and successful approaches to the socio-economic systems?
• Why the communication between the econophysicists and economist has not improved in the last 15 years?
• How well the physicists are applying their traditional approaches to the new field, for them, of social sciences?
• Why the rapidly developing research of complex systems rejects almost any possibility to simplify the system?

B. M. Roehner considers the first publications by physicists on Economics and other social systems to be the start of Econophysical research. In such case one can say that Econophysics was born in XIX century. Though, according to Roehner, the modern developments Econophysics should be primarily related to the talk given by H. Eugene Stanley in Statistical Physics conference in Kalkuta in the 1995. At the time H. E. Stanley has also made numerous attempts to setup regular meetings of the econophysicists in Boston. Alongside Boston school numerous other centers and groups were formed, each of them having their own views, ideas, concepts and methods. This pluralism of ideas was encouraged and nurtured - different theoretical and experimental approaches were made and developed. Eventually the research has started to consider many varying socio-economic topics - Econophysics is now not only limited to the financial markets.

Next B. M. Roehner delves into the problem of intercommunication between physicists and economists. He claims that some neoliberal societies (the most prominent of them is Mont Pelerin Society) are more concerned with propaganda of neoliberal ideas rather than doing science. These organizations tend to have more ideological goals than scientific interests. Therefore the current situation in Economics might be even compared to religious traditions (these ideas are more broadly developed in [4]). In our opinion this might explain the economists' conservative attitude, though the physicists should not see it as the main reason for the miscommunication.

In our opinion...

It would be more appropriate to acknowledge that socio-economic complexity is overwhelming even for an accomplished physicist. Even for them it is no such trivial task to discover unique quantitative principles underlying the socio-economic behavior. Physicists approaching social systems tend to neglect the wonderful experience of the greatest scientific achievements. They tend to solve most problems using growing computational power and neglect the excellence of human mind. While in order to achieve true understanding social systems should be reduced to the multi-agent systems.

In our opinion, the mechanistic understanding of social reality, namely then the complex social system is being replaced with unnatural mechanically interacting agent-based systems, will not yield sufficient results. Growing computational power might enable solution of the extremely complex problems and thus enable modeling of complex mechanically interacting system, but it would be naive to expect that such model would sufficiently reproduce empirical data. We believe that social agents interact in non-deterministic ways - their interaction is random and thus governed by the statistical laws. Therefore in order to understand social complex systems one should aim to discover its' macroscopic laws and then attempt to dissect the system into subsystems interacting on statistical basis, which ought to be based on the empirical evidence or (if not possible) on the theoretical assumptions. These ideas are also found in the work by economists [5], in which they attempt to reformulate Macroeconomic theory in terms of Statistical Physics.

It is important to note that such ideas might be applicable not only towards Macroeconomics, but also towards the financial markets, population and opinion dynamics, marketing theory and etc. Our own works (brief review is given in [6]) are based on the macroscopic description of the complex social systems using the non-linear stochastic differential equations, while also including agent-based models with random jump-like interaction. Only time will show if made a wise decision, but at the moment we are happy to follow similar path as some of the economists.

References

• J. P. Bouchaud. Economics needs a scientific revolution. Nature 455: 1181 (2008). doi: 10.1038/4551181a. arXiv: 0810.5306 [q-fin.GN].
• J. P. Bouchaud. The (unfortunate) complexity of the economy. Physics World, April 2009: 28-32. arXiv: 0904.0805 [q-fin.GN].
• B. M. Roehner. Fifteen years of econophysics: worries, hopes and prospects. Science and culture 76: 305-314 (2010). arXiv: 1004.3229 [physics.soc-ph].
• R. H. Nelson. Economics as Religion: From Samuelson to Chicago and Beyond. University Park: Pennsylvania State University Press, 2001.
• M. Aoki, H. Yoshikawa. Reconstructing Macroeconomics: A Perspektive from Statistical Physics and Combinatorial Stochastic Processes. Cambridge University Press, 2007.
• A. Kononovicius, V. Gontis, V. Daniunas. Agent-based Versus Macroscopic Modeling of Competition and Business Processes in Economics and Finance. International Journal On Advances in Intelligent Systems 5 (1-2), 2012: 111-126. thinkmind: intsys_v5_n12_2012_9. arXiv: 1202.3533 [q-fin.GN].