Article by – Srinidhi Boray
The Adam Smith’s Theory needs Sledge Hammer treatment
Econophysics – Interdisciplinary Approach to Study Behavioral Economics
All system display behavior those are dynamic in nature. The study of the system dynamics finds many of the classical models inadequate. In the world of physics, Newtonian classical models progressed into Einstein relativity and then into quantum dynamics. While the subject progressed, the inadequacies in the discipline surfaced and newer and newer mechanisms were sought to represent and study the subject more accurately. Many challenges remain in studying the system as a whole by reconciling macroscopic aspects that with the microscopic behaviors. To further the cause in the realm of physics, ‘Unified Theory’ is being attempted that brings together the different aspects of the macro and the micro. One of the stark features of any system is that it is deterministic in a probabilistic way, but remains in-deterministic when processes around individual events are followed. Also, the physical nature at the macrocosm completely alters when studied at the microscopic level. At one level it is a particle and in another it is quanta (or a wave). The probabilistic studies are attempted by applying Monte Carlo computational approach, which iteratively incorporates various coefficients in its attempts to discover the probable behavior. The random occurrences are studied applying stochastic methods.
Lot of similarities are being discovered between the systems dynamic studies that applied in Physics and Economics. Especially when the equilibrium studies are conducted in a system characterized by heterogeneous agents. It is argued by many that the neoclassical economics relies on principles that worked well in a system based on the Adam Smith’s simple axioms in which the heterogeneous agent complexities do not exist. Adam Smith’s principle sates that the individual greed plays a vital part on the overall economics for the better good of the whole society and then invisible hand works to correct the course when in-equilibrium occurs. This notion is now being contested to be an incorrect assumption. For, in modern economics era, the unpredictability of the market is in the lack of understanding the complex agent behaviors, that exists more like a flux, which is difficult to be discerned. This adds to the conundrum when predicting the random events in a market that is inherently unstable. Furthermore, the flux state defies the Cartesian system, based on which the present computations are derived. Almost all the applied agent behavior incorporates coefficients that encapsulate the supply demand behavior triggered by the one or more variables as observed within the Cartesian coordinate system.
One among many other behaviors observed in the neoclassical economics model is that the wealth creation has displayed exponential distribution. These distributions are considered harmful as it allows for the wealth localization. For, reasons such as these, econophysics is sought to accurately understand and study the complex economic system dynamics.
In the recent times, few universities have begun to conduct formal research in the econophysics area. One of the goals is to rewrite the economics theory by reconsidering the dynamics that relies on the realities of the unstable behavior.
Recent Article on Economic Disparities owing to Gaussian Distribution
Concentration of wealth in hands of rich greatest on record
The wealthiest 10 percent of Americans now have a larger share of total income than they ever have in records going back nearly a century — an even larger amount than during the Roaring Twenties, the last time the US saw such similar disparities in wealth.
But an updated study (PDF) from University of California-Berkeley economist Emanuel Saez shows that, in 2007, the wealth disparity grew to its highest number on record, based on US tax data going back to 1917.
According to Saez’s study, which Nobel prize-winning economist Paul Krugman drew attention to at his New York Times blog, the top 10 percent of earners in America now receive nearly 50 percent of all the income earned in the United States, a higher percentage than they did during the 1920s.
“After decades of stability in the post-war period, the top decile share has increased dramatically over the last twenty-five years and has now regained its pre-war level,” Saez writes. “Indeed, the top decile share in 2007 is equal to 49.7 percent, a level higher than any other year since [records began in] 1917 and even surpasses 1928, the peak of stock market bubble in the ‘roaring’ 1920s.”
The contrast is even starker for the super-rich. The top 0.01 percent of earners in the US are now taking home six percent of all the income, higher than the 1920s peak of five percent, and a whopping six-fold increase since the start of the Reagan administration, when the top 0.01 percent earned one percent of all the income.
There is no consensus among economists on whether large disparities in income lead to economic disruption, but it is hard to ignore the correlation between rising income inequality and the onset of economic crisis. The last time the US saw similar differences in income was in 1928 and 1929, just before the start of the Great Depression.
Saez also broke the numbers down by administration, and found that while the wealthiest few saw their incomes rise as quickly during the Bush years as they did during the Clinton years, the same was not true for the rest of the population.
Saez suggests that the economic growth seen on paper during the Bush years was little more than an illusion for the vast majority of Americans, who saw their income grow much more slowly in the 2002-2007 period than they did during the Clinton years.
During both expansions, the incomes of the top 1 percent grew extremely quickly at an annual rate over 10.3 and 10.1 percent respectively. However, while the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993–2000, these incomes grew only 1.3 percent per year from 2002–2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth.
Those results may help explain the disconnect between the economic experiences of the public and the solid macroeconomic growth posted by the US economy since 2002. Those results may also help explain why the dramatic growth in top incomes during the Clinton administration did not generate much public outcry while there has been an extraordinary level of attention to top incomes in the press and in the public debate over the last two years.
Saez, who this spring won the prestigious John Bates Clark Medal for economists under 40, links this disparity to the Bush tax cuts, noting that “top income tax rates went up in 1993 during the Clinton administration (and hence a larger share of the gains made by top incomes was redistributed) while top income tax rates went down in 2001 during the Bush administration.”
The economic crisis that has taken hold over the past year isn’t over, and the world could in fact see two more recessions before the crisis is finally over, says the chief economist of Germany’s influential Deutsche Bank.
Norbert Walter told CNBC that investors are worried about the health of the US dollar, and many countries are facing difficult financial problems because of overspending by governments on bailouts and stimulus. Those things combined could push the world economy downwards not once but two more times in the near future, he said.
“I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”