Science Explains Economics

When the theoretical physicist Lee Smolin was asked to join a research group to work on economics his first response was "I don't know anything about economics." That's okay, said Mike Brown, the former CFO of Microsoft, "because nobody does and the whole system is about to collapse." 

That was 2007, and the rest is history. And yet, according to Smolin, he found that it is very easy for a physicist to understand economics "because it’s very mathematical." Moreover, it was actually "physics envy" that got us in trouble in the first place. 

Smolin, the author of Time Reborn: From the Crisis in Physics to the Future of the Universe, believes that economists were seduced by physics because it made their arguments for deregulation seem scientific. They believed, for instance, that an equilibrium was possible. In other words, an equilibrium was supposed to make it impossible "to profit from trading around a circle of goods or a circle of currencies without actually producing anything." Of course, that is possible, and that did happen, and that's because, as Smolin tells us, "you’re never really at equilibrium." 

Economic Equilibrium

A condition or state in which economic forces are balanced. These economic variables will be unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point where supply equals demand for a product – the equilibrium price is where the hypothetical supply and demand curves intersect.

The term 'economic equilibrium' can also be applied to any number of variables, such as the interest rate that allows for the greatest growth of the banking and non-financial sector.

Economic equilibrium can be static or dynamic and may exist in a single market or multiple markets. It can be disrupted by exogenous factors, such as a change in consumer preferences, which can lead to a drop in demand and consequently a condition of oversupply in the market. In this case, a temporary state of disequilibrium will prevail until a new equilibrium price or level is established, at which point the market will revert back to economic equilibrium.