Response to “Worrying Trends in Econophysics”

Abstract

This article is a response to the recent "Worrying Trends in Econophysics" critique written by four respected theoretical economists [1]. Two of the four have written books and papers that provide very useful critical analyses of the shortcomings of the standard textbook economic model, neo-classical economic theory [2,3] and have even endorsed my book [4]. Largely, their new paper reflects criticism that I have long made [4,5,6,7,] and that our group as a whole has more recently made [8]. But I differ with the authors on some of their criticism, and partly with their proposed remedy.

Duality of knowledge, singularity of method

“…Although some authors (McCauley, 2006;Schinckus, 2010a;Gingras and Schinckus, 2012) wrote that econophysics and economics are different fields, we claim in this paper that the methodology developed by the first is more embedded in the latter than econophycisits claim it. Indeed, whatever they pretend, econophysicists deal with notions that have already been studied in economics.…”

“…A less technical example can easily be found in arguments such as "stock market volatility made investors nervous" which conveys the impression that the higher level entity (the volatility of the market) partly determines how individual agents behave (McCauley, 2006). In other words, all fluctuations of this macroscopic volatility will determine the behavior of lower level actors in a system within micro-components are said to be determined by macro properties as Rickles (2008, p. …”

Applications of Statistical Physics in Finance and Economics

“…Where it had become known, exaggerated claims of the superiority of econophysics and the uselessness of traditional economic thought (McCauley, 2006) together with a sometimes amateurish use of terminology and concepts from economics have inhibited fruitful communication. Economists also often found the empirical analyses in the log-log style to represent substandard methodology compared to the rened methodology developed in econometrics.…”

Modelling Inequality

“…Not surprisingly, not all mainstream economists agree with such a dismal view of their science. In particular, Gallegati et al ([2006]) criticise econophysics on the grounds that econophysicists are: i) redoing work which has been done within mainstream economics; ii) ignoring rigorous and robust statistical methodology; iii) assuming universal empirical regularities where there are none; and iv) using modelling techniques that are in certain senses inherently problematic or illegitimate (see also McCauley [2006]). The final line of criticism is the main focus of this paper, and we will consider in particular the 'kinetic exchange' models for income distributions within populations that are the subject of most ire within Gallegati et al ([2006]).…”

“…With regard to the timestep timescale idealisation and money conservation, there are some grounds to be skeptical. McCauley ([2006]) argues that money is created and destroyed rapidly, 'with the tap of a computer key', via credit, and that, on these grounds, 'conservation of money is a silly assumption'. But are such considerations enough to invalidate the collision models built upon conservation of money?…”