
Statistical mechanics of money (2000) - hairytrog
https://arxiv.org/abs/cond-mat/0001432
======
zwaps
While interesting, this sort of approach starts with wrong premises, such as
the simple existence of a singular quantity of "money" at any given time, or
that people spend money sufficiently randomly.

If any of these things - and these things being what distinguishes social
interactions and human behavior from particles - were the case, we'd have
"solved" our economic modeling issues long ago.

From my perspective (economist with prior math background), what makes the
economic interaction of humans interesting and hard, is precisely that these
interactions can not be aggregated (in a well-defined manner) to simple
statistical or behavioral laws - be it distributions or representations, even
if certain outcome distributions are observable.

To my knowledge, econophysics - despite the strong marketing effort - has yet
to produce new insights into the actual economy (and it has been going on
since the at least twenty years).

I think this is not surprising. The economics research effort does not lack in
mathematical sophistication, even if physicists like to believe that. In fact,
in terms of strategic interaction, behavioral patterns and epistemology, I
think the economic models are well ahead of physics models for describing
behavior. But - no one is really all that close if the level of aggregation is
high. That means, macroeconomics and matters of money supply.

~~~
qubex
As an economist with a background in mathematics and physics I very much
appreciated ‘econophysics’ and associated efforts, but a short while into my
foray I began to realize that economics is afflicted with a dearth of
conserved quantities. Physics has plenty of these (sometimes absolute,
sometimes approximate) laws of conservation (conservation of energy,
conservation of mass-energy, conservation of linear/angular momentum, _et
cetera_ ) and these laws of conservation are critically important in
constraining the dynamics a system can adhere to and thus constitute a kind of
‘shortcut’ that allows apparently intractable problems to be deftly solved by
putting these constraints to masterful use. Economics has none of this. Even
the apparently solid concept of ‘wealth’ (even in its weaker relative form)
upon closer inspection has no fundamental basis: transactions between two
parties can affect the market value of an asset and therefore increase or
decrease the wealth of all of those who own (or owe) such assets.

The field therefore rapidly decayed into a form of “computational economics”.
This might appear similar to “computational physics” and its use of finite
element models and massively parallel simulations of particle systems to solve
fluid dynamics problems. Trouble is, those systems are built up from elements
that respond to the net of extant forces acting upon them, whereas in
economics agents can and do act on the basis of what they _expect_ those
forces might be in the future. Self-fulfilling prophecies are “very much a
thing” in economic and financial phenomenology: bubbles, crashes, recessions,
booms, the whole business cycle itself...

Add to that that some actors, even very significant ones, in those markets
might have really weird utility functions — for example, central banks seek
not to maximise their utility — and that some agents are not rational at all
(noise-traders, entrepreneurs misreading trends, _& cetera_) and you have
another big flaw in the framework.

~~~
physics137
Total number of bitcoins (at t = infinity) is a conserved quantity. Do you
think this sort of analysis applies to cryptocurrencies?

~~~
malaya_zemlya
at t -> infinity, the total amount of bitcoins in circulation tends to 0
because there is always a positive probability to lose any private key.

~~~
qubex
Good point.

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febeling
To me reads like the first premise is already wrong: "In a closed economic
system, money is conserved."

The opposite is true. Debt and the loan asset (if that's correct English
usage) are created from nothing, for the debtor and the creditor respectively;
the loan is converted to money intermittently by the central bank. On maturity
of the loan contract both liability and asset side disappear when the loan is
being repaid.*

The central bank creates the money in the instant it interacts with the
creditor, and when the contract ends, the money is erased.

Do I missread this in some way?

* If you disregard the interest, which is extremely simplifying obviously; still taking it into account wouldn't make the first statement more true

~~~
captainmuon
I would still say money is conserved, in the same sense that charge is
conserved in physics. Sure, you can create electrons by pair production, but
you always create positrons with them. See also the Dirac Sea.

With money, you always create debt and loan together. And yes, both can "move
around" like a currency, just like electrons and holes (missing electrons) can
move around in a solid, or electrons and positrons can move around in free
space.

"Primary" money - I don't know if there is an economic term - is strictly
conserved. It's almost sacrosanct in our society, nobody would ever just
create money. Even when they talk about printing money, it's always through
loans (ultimately from the central banks), and never by actually throwing on
the press. Also, destruction of money is extremely rare - mostly it is
devaluation of assets, but rarely somebody burning cash etc..

~~~
qubex
Wealth is most definitely not a conserved quantity.

Think of the equity of a typical household. It includes some equity in their
flat, which has a current market value. Down the street a developer buys a
whole building block at a slight premium to rid itself of extant tenants and
in so doing drives up the estimated value of local real-estate, including our
household's equity. They've just gotten richer. They could even remortgage
their house and monetise that increase in wealth. They could sell it and buy a
bigger flat in another part of town.

So no: wealth is not conserved. Quantified (maybe), but definitely not
conserved.

~~~
SiempreViernes
Well, the material basis of wealth is part of the physical world so how does
this non-conservation work out?

Is wealth coupled with some "valuation potential" that offsets the wealth down
to some "inherent" material value, or is value just entirely fictional?

~~~
xyzzy123
Suppose you find an old painting in the basement.

You put it out in your garage sale. A stranger comes along and offers $20 for
it. Another person arrives and tells you it’s actually a valuable piece and
would pay $200 for it.

A third person comes along and explains that it was made by their great
grandmother and it was the last piece she made and she will pay $2000 for it.
For sentimental reasons.

This third person has made a powerful enemy who then comes along and offers
$20000 for the item, just to spite them. They intend to set the painting on
fire.

How much “wealth” was stored in the painting?

Art is silly but really all value is subjective and situational. Crayfish can
be cheap poor people food or a delicacy of the rich, depending on culture. You
could die in a desert, weighed down with “valuable” gold because the traveller
you met would not trade it for their last canteen of water.

~~~
SiempreViernes
This is a nice example showing how people don't really know what is going on,
wealth seems to behave in very mysterious ways.

But, in each step you are clearly adding more and more context along with the
physical item itself, context that must itself have some physical encoding.

My point is mainly that I insist that physical reality is _all there is_ , and
if some events are hard to assign to any one physical thing that just means we
are looking for subtle correlations.

~~~
AnimalMuppet
I'm pretty sure that in economics, physical reality is _not_ all there is.
Economics is about people assigning value to things. The things, by
themselves, have no economic value.

~~~
dragonwriter
> I'm pretty sure that in economics, physical reality is not all there is.

Yes, it is.

> Economics is about people assigning value to things.

People are not outside of physical reality, nor is their experience of
utility.

~~~
AnimalMuppet
Well, if you go for the position that people are just machines made of atoms,
then, yes, physical reality is all there is, even in economics. But no, I do
not want to start with atomic physics, and from there try to derive human
utility, and from _that_ try to derive economics. That's... not a feasible
research program. It's not going to provide any insight into economics, ever.

So even if you accept the materialist position, for purposes of doing
economics, you kind of have to regard humans as something different. (Or so it
seems to me, a non-economist.)

~~~
dragonwriter
Economics (like most things that aren't physicsf even lots of subfields of
physics) doesn't model everything (or much of anything) it addresses in the
physical universe from the base up, but it doesn't require treating anything
as special and non-physical either.

------
Confusion
The Black-Scholes equation is literally the basic heat diffusion equation [1].

[1]
[https://quant.stackexchange.com/questions/84/transformation-...](https://quant.stackexchange.com/questions/84/transformation-
from-the-black-scholes-differential-equation-to-the-diffusion-equ)

------
ferros
ELI5?

~~~
drjesusphd
To elaborate on "interesting things", at least as I understood it from a
seminar by one of the authors...

\- The distribution of wealth naturally forms an exponential distribution. It
takes effort/energy/negentropy to depart from this situation where there will
always be many more poor people than rich.

\- Unlike particle energy, wealth can be negative. When this is accounted for
(allow for debt), the rich inherently get richer. This is not even accounting
for interest being paid by the debtors to the (presumably rich) debtees.

\- At a certain point, money begets more money. This results in a power law
tail and identifies the "upper class".

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aszantu
Is it possible that the poorer factions in a society learn skillsets that are
keeping them poor? Their skillsets help them through poor life but are prolly
useless when getting more money?

