I was helping one of my daughters with her physics homework the other day (subject: pressure, she's in junior high) and my thoughts wandered to how little we really understand the economy. The immediate reason was that her teacher insisted on a verbatim definition of pressure, exactly as it appeared in her textbook, and loped off 50% of her grade in a a recent test because she answered in her own words.
I was mad as hell and even contemplated pulling rank on him (I had a couple of rather famous physics professors in college), but better sense prevailed. I am old enough to know that an old dog can't change his bark and all I could accomplish would be to put my kid on the spot. The guy probably thinks that Newtonian physics is current science, anyway...
Which brings me to the post's subject: given that quantum physics describes our world in terms of multiverses, probability functions and uncertainty, why do dismal economists still insist on "classical" theories from the time of Adam Smith, the near contemporary of said Sir Isaac Newton - who lost a fortune speculating in the South Seas Bubble and was then honest enough to admit that “I can calculate the motions of heavenly bodies, but not the madness of people”.
(Note: If you haven't already read it, I strongly recommend Extraordinary Popular Delusions and The Madness of Crowds, Charles Mackay's classic first published in 1841 and continuously re-printed ever since.)
Our "modern" economic theory even predates thermodynamics! How can we possibly still use Adam Smith as our economic foundation, without first integrating real science into markets and money so that they are at least compatible with the First and Second Laws of Thermodynamics? After all, isn't the real economy all about the transformation of matter and energy? Or have we focused so much on money, finance and intangible assets that we have come to think of them as the economy?
And when I say "real science" I certainly don't mean the thin veneer of financial engineering that was applied onto the rotten surface of structured finance (CDO-cubed?!), but something entirely different. For example, why don't we start by including into our econometric models those pesky "externalities" (pollution, environmental degradation, resource depletion...) that Adam Smith left out? Maybe he (and so many others after him) was right in ignoring them, living as he did in an 18th century world that seemed boundless. But can we ignore them today?
Isn't what we are going through today another manifestation of living under boundary conditions? Or, to use a parallel from physics: hasn't our world "shrunk" to the point where Newtonian physics no longer applies and we have to start using quantum economics?