While financial pundits fear that the global economy is headed down the drain, a team of physicists and economists has found new evidence that the world economy behaves like a fluid. Like fluids, economies are too complex to track in fine detail. But by applying equations called scaling laws, the researchers can measure the swings of fortune of countries, companies, and molecules. The finding, reported in this week's issue of Physical Review Letters, may help economists describe how large, interconnected economies grow--and sometimes fail.
Statistical physicists describe fluids with scaling laws, equations that describe how the physical properties of a fluid change near a so-called critical point. This is a temperature and pressure threshold where the fluid--which can no longer be considered either liquid or gas--becomes extremely sensitive to disturbances. This sensitivity leads to remarkable self-organizing properties: Tiny molecular vibrations become amplified into large-scale unison movements (like a stock sale by a small group of investors turning into a large-scale panic). The change is visible: at its critical point, any normally transparent liquid, such as water, becomes milky, as light waves scatter off the suddenly organized molecules.
Critical points may also be lurking in the world economy, says Youngki Lee, a physicist at Boston University. "If you have a perturbation at one point, say a bankruptcy in Boston, it can have an effect all over the world." According to team member Luis Amaral of MIT, economists believe that instant communications might heat an economy toward a critical point. Lee, along with economist David Canning of Harvard University, calculated the variability of the growth rates of 152 countries since 1952 and used them to estimate the scaling laws that describe how fast little changes turn into big ones. The larger economies obeyed the scaling laws of a fluid near a critical point, and not the laws of a more random liquid or gas.
The work has brought a "fresh perspective" to analyzing complex economies, according to economist Michael Salinger of Boston University, although he does not expect it to become orthodoxy any time soon. Conventional economic theory, based on maximizing profits or utility, does not predict anything like the scaling laws. To account for them, Salinger says that economists might have to reexamine the mostly neglected ideas of Nobel prize winner Herbert Simon, who argued that people and companies often follow simpler "rules of thumb" instead of maximizing profits.