economics a dismal science Few people rely solely

economics a dismal science?

Few people rely solely on any social science for their pleasures, and attaining a suitable level of ecstasy involves work. … It is a nuisance, but God has chosen to give the easy problems to the physicists. Lave and March (1995)

what is economics? • economics is what economists do • study of economic interactions of human beings • core concept is exchange • integral to all life (“second nature”)

what is economics? (cont’d) social sciences biology chemistry economics social sciences physics economic imperialism biology chemistry physics the real world (? )

the origins of economics • developed out of moral philosophy • adam smith: “an inquiry into the nature and causes of the wealth of nations”, 1776 → “positive” v. “normative” science • leon walras, gerard debreu: “the theory of value”, 1959 → neo-classical school of economics → “macro” model with microfoundations

core concepts • general equilibrium – homo oeconomicus – invisible hand/walrasian auctioneer • game and contract theory – rationality – common knowledge

current trends • • • evolutionary economics behavioral economics experimental economics cross-disciplinary research econophysics (the good, the bad, the ugly)

the future: is econ becoming a science? • questions asked • scientific methods – measurement problem – modeling problem (e. g. , path dependence) – methodological v. institutional individualism (“situational analysis”)

differences between physics and econ • • • open v. closed systems recurrence stationarity coupling heterogeneity of “actors” principal observer problem

some observations and candidate explanations • small world networks in trading • price taking v. price making • volatility clustering and long-memory effects • crashes

continuous double auction orders size quantity dynamics order book depth granularity spread transactions price volatility

liability networks • exchange results in connection between buyer and seller → complex network of assets and liabilities → entanglement → path dependence

the principal observer problem • social sciences deal with behavior → information ─ knowledge ─ action • behavior is a process • time runs from the future into the present and then back into the future again • “price taker” v. “price maker” or: • principal is observer is principal … → are we all coupled? → a “meta feedback”?