Gravity and economics are more complex than we thought

On March 20th, 1915, Albert Einstein published his General Theory of Relativity. Already in 1905 he had proposed the equivalence of mass and energy in his Special Theory of Relativity. Now the General Theory offered a description of gravity as a property of space and time, which had previously been considered to be independent of matter and motion. Spacetime is curved, depending on the energy and momentum of the matter and radiation present.

Many of the General Theory’s predictions have been confirmed experimentally. When light is bent by gravity, for example, it can lead to gravitational lensing, in which multiple images of an object can be seen as its light is bent by massive objects. This has been observed to happen as predicted. And the gravitational waves predicted by the theory have recently been detected.

Gravity in particular, and the universe in general, turn out to be far more complex than had previously been supposed. Quantum Mechanics later showed it to have even greater levels of complexity. That we can achieve this degree of understanding is remarkable, given that humankind has evolved over 3 million years with the skills required to throw spears and rocks, rather than to fathom the complexities of subatomic particles.

We now know that human societies are also far more complex than we once supposed, and that this also applies to their economic systems. Scholars have come a long way from simple assumptions that primitive savages once came together to sign a contract for their greater security. And most scholars no longer suppose that a functioning economy can be reduced to a few basic principles that explain it.

The economy emerges from the way in which people deal with each other. It has the inputs of billions of people and trillions of transactions. These interact with each other to produce its outcomes, but the outcomes are transitory, replaced in a trice as other decisions produce other outcomes to supplant them. Some academics try to simplify things in order to be able to describe it, but in doing so, they often assume away some of its vital elements. ‘Perfect competition’ never happens, nor does ‘perfect information.’ In the real world people do the best they can with the limited amount of information they have access to.

Mathematical models might purport to explain and predict the economy, but they fall short because the economy is not a thing that can be modelled; it is a process, one of unimagined complexity. We can observe generalizations and tendencies about the way most people behave, but we do so in the knowledge that these are about what usually happens. In the world of science the theory has to cover every case that happens. This universal coverage is not to be found in the world of economics, which has the habit of surprising us with unpredicted, and often unpleasant, outcomes.

When the Queen asked the bankers and economists, “Why did none of you see the crisis coming?” they might well have replied, “Because the economy is more complex than the General Theory of Relativity.”