# ECONOPHYSICS

AN UNCONVENTIONAL APPROACH TO COMMUNITY DEVELOPMENT

Econophysics was, from the very beginning, the application of the principles of physics to the study of financial markets, under the hypothesis that the economic world behaves like a collection of electrons or a group of water molecules that interact with each other, and it has always been considered that the econophysicists, with new tools of statistical physics and the recent breakthroughs in understanding chaotic systems, are making a controversial start at tearing up some perplexing economics and reducing them to a few elegant general principles with the help of some serious mathematics borrowed from the study of disordered materials.

## UNDERSTANDING SOME OF THE BASICS

PHYSICS: NATURAL SCIENCE   |   ECONOMICS: SOCIAL SCIENCE

Physics is a natural science that involves the study of matter and its motion through space and time, along with related concepts such as energy and force. More broadly, it is the study of nature in an attempt to
understand how the universe behaves. Economics is a social science concerned with the production,
distribution, and consumption of goods and services. It studies how individuals, businesses,
governments, and nations make choices about how to allocate resources.

## AND MOTION

KINETIC ENERGY     |     POTENTIAL ENERGY

In physics, the kinetic energy of an object is the energy that it possesses due to its motion. It is defined as the work needed to accelerate a body of a given mass from rest to its stated velocity. Having gained this energy during its acceleration, the body maintains this kinetic energy unless its speed changes.

Conservation of Momentum

Newton's cradle is a device that demonstrates the conservation of momentum and the conservation of energy with swinging spheres. When one sphere at the end is lifted and released, it strikes the stationary spheres, transmitting a force through the stationary spheres that pushes the last sphere upward. The last sphere swings back and strikes the nearly stationary spheres, repeating the effect in the opposite direction. The device is named after 17th-century English scientist Sir Isaac Newton.

## TWO OF EQUAL WEIGHT

Newton's cradle with two balls of equal weight and perfectly efficient elasticity. The left ball is pulled away and let go. Neglecting the energy losses, the left ball strikes the right ball, transferring all the velocity to the right ball. Because they are the same weight, the same velocity indicates all the momentum and energy are also transferred. The kinetic energy, as determined by the velocity, is converted to potential energy as it reaches the same height as the initial ball and the cycle repeats.

## NO ENERGY LOSS

An idealized Newton's cradle with five balls when there are no energy losses and there is always a small separation between the balls, except for when a pair is colliding

## “IF I HAVE SEEN FURTHER IT IS BY STANDING ON THE SHOULDERS OF GIANTS.”-ISAAC NEWTON

Conservation of momentum, general law of physics according to which the quantity called momentum that characterizes motion never changes in an isolated collection of objects; that is, the total momentum of a system remains constant.

## ECONOMICS

COST   /   BENEFIT   /   SUPPLY   /   DEMAND

Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.

Economics focuses on the actions of human beings, based on assumptions that humans act with rational behavior,

seeking the most optimal level of benefit or utility. The building blocks of economics are the studies of labor and trade. Since there are many possible applications of human labor and many different ways to acquire resources, it is the

task of economics to determine which methods yield the best results.

Economics can generally be broken down into macroeconomics, which concentrates on the behavior of the economy as a whole, and microeconomics, which focuses on individual people and businesses.

## TYPES OF ECONOMICS

MICRO     |     MACRO

Micro- and Macro- economics are intertwined. Aggregate macroeconomic phenomena are obviously and literally just the sum total of microeconomic phenomena. However, these two branches of economics use very different theories, models, and research methods, which sometimes appear to conflict with each other. Integrating the microeconomics foundations into macroeconomic theory and research is a major area of study in itself for many economists.

### MICRO ECONOMICS

Microeconomics focuses on how individual consumers and firms make decisions; these individual decision making units can be a single person, a household, a business/organization, or a government agency.

Analyzing certain aspects of human behavior, microeconomics tries to explain how they respond to changes in price and why they demand what they do at particular price levels. Microeconomics tries to explain how and why different goods are valued differently, how individuals make financial decisions, and how individuals best trade, coordinate, and cooperate with one another.

Microeconomics' topics range from the dynamics of supply and demand to the efficiency and costs associated with producing goods and services; they also include how labor is divided and allocated; how business firms are organized and function; and how people approach uncertainty, risk, and strategic game theory.

### MACRO ECONOMICS

Macroeconomics studies an overall economy on both a national and international level, using highly aggregated economic data and variables to model the economy.

Its focus can include a distinct geographical region, a country, a continent, or even the whole world. Its primary areas of study are recurrent economic cycles and broad economic growth and development.

Topics studied include foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation

and interest rates. The growth of total production output

as reflected by changes in the Gross Domestic

Product (GDP), and business cycles that result in

expansions, booms, recessions,

and depressions.

## ECONOMIC THEORY

EFFECTIVE THEORY

As explained by Harvard physicist Lisa Randall

Economic theory is based on the assumption that investors and consumers are rational and very “efficient machines,” namely, that they make the best choices for themselves. Laboratory tests reveal that investors' behavior is much more complicated relative to the behavior

assumed in most economic theories.

In 1980, following a decade of high inflation and unemployment — a combination that economists had previously thought to be impossible over extended periods — The Public Interest ran a special issue titled "The Crisis in Economic Theory."

Today, there is little talk of a crisis in economic theory. But in the past decade, we have experienced a financial crisis and subsequent decline in employment that also followed a path economists had previously thought to be impossible. Economists seem more confident

than they did in 1980, but are they more deserving of confidence? If anything, some of the questions confronting

economics should run deeper now than then.

### NEWTON'S LAWS

Effective theory is a valuable concept when we ask how scientific theories advance, and what we mean when we say something is right or wrong.

Newton's laws work extremely well. They are sufficient to devise the path by which we can send a satellite to the far reaches of the Solar System and to construct a bridge that won't collapse.

Yet we know quantum mechanics and relativity are the deeper underlying theories. Effective theory consists of verifiable knowledge. To be verifiable, a finding must be arrived at by methods that are generally viewed as robust.

### VERIFIABLE KNOWLEDGE

Economists are not without knowledge

Effective theory consists of verifiable knowledge. To be verifiable, a finding must be arrived at by methods that are generally viewed as robust. Any researcher who tries to replicate a finding using appropriate methods should be able to confirm it.

The strongest confirmation of the effectiveness of a theory comes from prediction and control. Lisa Randall's example of sending a spacecraft to the far reaches of the solar system illustrates such confirmation.

### STANDARDS

We know that restrictions on trade tend to help narrow interests at the expense of broader prosperity. We know that market prices are important for coordinating specialization and division of labor in a complex economy.

We know that the profit incentive promotes the introduction of improved products and processes, and that our high level of well-being results from the cumulative effect of such improvements. We know that government control over prices and production, as in communist countries, leads to inefficiency and corruption.

We know that the laws of supply and demand tend to frustrate efforts to make goods more "affordable" by subsidizing them or to lower "costs" by fixing prices.

### FISCAL STIMULUS

Economic Stimulus

Policymakers have goals that go far beyond or run counter to such basic principles. They want to steer the economy using fiscal stimulus. They want to shape complex and important markets, including those of health insurance and home mortgages. It is doubtful that the effectiveness of economic theory is