Physical economics

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Physical economics is a school of thought and area of research in economics that aims to study the economy along the lines of natural sciences (in particular, physics) with the use of mathematical modeling. Physical economics puts aside the financial and monetary aspects of the economy, and treats the economy of the world, a nation, or region as en entity analogous to a living organism, or, in other words, a single, integrated, self-reproducing physical process. Since the fall of the Soviet Union, the Lebedev Physical Institute at the Russian Academy of Sciences has emerged as the world's leading center of research in physical economics, thanks in large part to the studies of Dmitrii S. Chernavskiy, Nikolai I. Starkov, and Andrei V. Shcherbakov.

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[edit] History

The term "physical economics" was first proposed by Lyndon LaRouche, drawing on the work of the Russian mineralogist and geochemist Vladimir Ivanovich Vernadsky. These economists asserted that Vernadsky's concept that the three elements of the biosphere (the abiotic, the biotic, and the social) are closely interconnected, and differ in how they function on the biosphere also offers a promising explanatory model of the economy.

The approach has gained popularity in the former Soviet Union and Eastern Europe following the fall of Communism, which gave researchers a chance to move away from Marxism and explore new approaches in economics. The Lebedev Physics Institute has now become a leading center for research in physical economics in much the same way that the University of Chicago led the way in the development of monetarism. With their background in physics, Chernavskiy, Starkov, and Shcherbakov, along with other researchers at the Russian Academy of Sciences, got interested in economics in response to events since the early 1990s across the world that appeared to be unexpected for neoclassical economists. These events included the sharp rise in poverty and inequality and the severe contraction of GDP throughout much of Eastern Europe following the collapse of the Soviet Union and the implementation of neoliberal free market reforms.

[edit] Tenets of physical economics

Physical economists argue that the avenues of research developed in classical and neoclassical economics (expressed in traditions as diverse as classical liberalism, Marxism, Keynesianism, and monetarism) are well equipped mathematically, and constitute a closed system, with its own conceptual tools, axioms, and methodology. However, they see this area of research as standing separate from the natural sciences, including physics. They argue that natural sciences have more experience in constructing and studying models of evolving, dynamic systems, to which human society belongs. In an era of integration of sciences and the development of allied sciences, they see the self-isolation of classical and neoclassical economy theory as especially evident today in hindering the development of economics, thus explaining why neoclassical economists have failed to predict or explain the development of real-world economy over the last few decades.

[edit] Modeling and research

[edit] Measuring real or physical economic performance

Unlike classical and neoclassical economics, physical economics does not measure the performance of an economy by considering its financial and monetary aspects. Instead, physical economics measures the performance of the real or "physical" economy of machinery, infrastructure, agricultural land, and the natural resource base (analogous to the three "factors of production" of classical economics).

Physical economists calculate the "real performance" of an economy, in physical terms, by comparing three parameters. These parameters include what they term the "total physical output of the economy," or agricultural and industrial output (T). The second includes what they term the "physical cost" of sustaining the human population, or including the direct and indirect consumption of households and necessary capital investments into housing, educational, and health services (V). The third parameter is what they term the "physical cost" of sustaining existing levels of production and consumption into the future, or cost of maintaining capital investments in machinery, infrastructure, agricultural land, and the natural resource base (C). Physical economists approximate the measure of the "real physical productivity" of an economy by determining the ratio of the total physical output of the economy, to the sum of the physical cost of maintaining the population's living standards plus the physical cost of maintaining production (the ratio of total output T, to the sum V+C of the two physical costs). Growing, increasingly prosperous economies are characterized by a sustained rate of increase in the ratio T/(V+C), correlating with a rising "potential relative population density," a concept developed by the late Russian physical economist Pobisk Kuznetsov to indicate an economy's ability to sustain the well-being of the human population overall. In contrast, collapsing, increasingly improvised economies are characterized by a sustained rate of decrease in the ratio T/(V+C), correlating with a falling "potential relative population density" of the system.

The definition and estimation of C and V pose some fundamental questions in physical economics, closely connected with the work of Vernadsky, in particular the notion that enters into the determination of the cost "C." Vernadsky asserted that humans constantly and irreversibly transform the biosphere, and that process of transformation and intensification of the biosphere through human activity, continues the process of biosphere evolution in a new mode. Therefore, maintaining the cost "C" would not mean restoring the biosphere to an earlier state of equilibrium. Instead, just like the preceding biological evolution of the biosphere, the system evolves farther and farther away from previous equilibria, when societies introduce more advanced technology. In this sense, many physical economists have challenged assertions by scholars of sustainable development and environmentalists, arguing that sustainablity of societies does not mean restoring a particular balance or equilibrium of humans with nature.

The determination of the cost "C" also leads physical economics to deal with a number of topical questions of market economics; specifically, whether the market equilibrium is unique, whether transitions between stationary states are possible, and, if so, how these transitions proceed. By analogy with physics, the apparatus of mathematical modeling is widely used in answering these questions.

[edit] Research in practice

Chernavskiy, Starkov, and Shcherbakov have found that under given external conditions, a self-sufficient country can be in two stationary, stable states either in a high-productivity or in a low-productivity state. Transitions between them appear to be either an "economic crisis" or an "economic miracle."

In applying their dynamic model to Russia, they have concluded that the while Russia's economic crisis of the 1990s is over, the country remains in a stable low-productivity state, characterized by uneven distribution of wealth, with the coexistence of the poor and a very small number of very wealthy Russians with virtually no middle layer in between them. These findings have led to an impetus for further research focusing on possible transitions to a high-productivity state.

[edit] See also

[edit] References

  • Dmitrii S Chernavskiĭ, Nikolai I Starkov, and Andrei V Shcherbakov, "On some problems of physical economics," Phys. Usp Volume 45 (2002) Number 9, pp. 977-997. [1] (P.N. Lebedev Physics Institute, Russian Academy of Sciences)
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