The Econ in Econophysics

The Econ in Econophysics
Anwar Shaikh
New School for Social Research, Department of Economics, 2019
Level: advanced
Perspectives: Complexity Economics, Evolutionary Economics, Other
Topic: Innovation, network economics
Format: Working paper/Journal article
Link: https://ideas.repec.org/p/new/wpaper/1913.html

Photo by John Barkiple on Unsplash

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The Econ in Econophysics

Anwar Shaikh | 2019

 


Abstract: Modern authors have identified a variety of striking economic patterns, most importantly those involving the distribution of incomes and profit rates. In recent times, the econophysics literature has demonstrated that bottom incomes follow an exponential distribution, top incomes follow a Pareto, profit rates display a tent-shaped distribution. This paper is concerned with the theory underlying various explanations of these phenomena. Traditional econophysics relies on energy-conserving “particle collision” models in which simulation is often used to derive a stationary distribution. Those in the Jaynesian tradition rely on entropy maximization, subject to certain constraints, to infer the final distribution. This paper argues that economic phenomena should be derived as results of explicit economic processes. For instance, the entry and exit process motivated by supply decisions of firms underlies the drift-diffusion form of wage, interest and profit rates arbitrage. These processes give rise to stationary distributions that turn out to be also entropy maximizing. In arbitrage approach, entropy maximization is a result. In the Jaynesian approaches, entropy maximization is the means.

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