Abstract
Modern authors have identified a variety of striking economic patterns, most importantly those involving the distribution of incomes and profit rates. In recent times, the econophysics literature has demonstrated that bottom incomes follow an exponential distribution, top incomes follow a Pareto, and profit rates display a tent-shaped distribution. This paper is concerned with the theory underlying various explanations of these phenomena Traditional econophysics relies on energy-conserving “particle collision” models in which simulation is often used to derive a stationary distribution Those in the Jaynesian tradition rely on entropy maximization, subject to certain constraints, to infer the final distribution. This paper argues that economic phenomena should be derived as results of explicit economic processes For instance, the entry and exit process motivated by supply decisions of firms underlies the drift-diffusion form of wage, interest and profit rates arbitrage. These processes give rise to stationary distributions that turn out to be also entropy maximizing. In the arbitrage approach, entropy maximization is a result. In the Jaynesian approach, entropy maximization is the means.
Similar content being viewed by others
References
S.M. Alfarano, A. Irle Milaković, J. Kauschke, J. Econ. Dyn. Control 36, 136 (2012)
J.C. Cox, J.E. Ingersoll, S.A. Ross, Econometrica 53, 385 (1985)
A.A. Dragulescu, V.M. Yakovenko, Eur. Phys. J. B 17, 723 (2000)
A.A. Dragulescu, V.M. Yakovenko, Eur. Phys. J. B 20, 585 (2001)
A. Dragulescu, V. Yakovenko, Quant. Finance Res. Paper 2 443 (2002)
X. Gabaix, Annu. Rev. Econ. 1, 255 (2009)
X. Gabaix, J. Econ. Perspect. 30, 185 (2016)
J.D.A. Islas-Garca, A.R. Villagomez-Manrique, M. Castillo-Mussot, P.G. Soriano-Hernandez, Rev. Mex. Fis. E 65, 1 (2019)
E.T. Jaynes, Proc. IEEE 70, 939 (1982)
S. Kotz, K. Tomasz, P. Krzysztof, The Laplace Distribution and Generalizations: A Revisit with Applications to Communications, Economics, Engineering, and Finance (Springer Science & Business, 2001)
C.G. Lamoureux, H. Douglas Witte, J. Finance 57, 1479 (2002)
M. Mitzenmacher, Internet Math. 1, 226 (2003)
A. Ragab, New School Soc. Res., unpublished Ph.D Dissertation, 2013
H. Risken, F. Till, The Fokker-Planck Equation: Methods of Solution and Applications (Springer Science & Business Media, 1996)
W.E.G. Salter, Productivity and Technical Change (Cambridge University Press, Cambridge, 1969)
E. Scharfenaker, F. Duncan, Maximum Entropy Estimation of Statistical Equilibrium in Economic Quantal Response Models, New School for Social Research, Department of Economics, Working Papers 1710, 2017
E. Scharfenaker, G. Semieniuk, A Statistical Equilibrium Approach to the Distribution of Profit Rates, in The New School for Social Research, Working Paper Series (2015)
A. Shaikh, Capitalism: Competition, Conflict, Crises (Oxford University Press, New York, 2016)
A. Shaikh, J.E. Jacobo, Economic Arbitrage and the Econophysics of Income Inequality, New School Economic Papers, 1902
A. Shaikh, N. Papanikolaou, N. Weiner, Physica A 415, 54 (2014)
C.A. Silva, V.M. Yakovenko, Europhys. Lett. 3, 1 (2004)
V. Venkatsubramanian, How Much Inequality is Fair? Mathematical Principles of a Moral, Optimal, and Stable Capitalist Society (Columbia University Press, New York, 2017)
V.M. Yakovenko, Research in Econophysics, in The Photon, online newspaper (Department of Physics, University of Maryland, Maryland, 2003), p. 1
V.M. Yakovenko, https://arXiv:0709.3662 (2007)
V.M. Yakovenko, J. Barkley Rosser, Rev. Mod. Phys. 81, 1703 (2009)
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher’s Note
The EPJ Publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Shaikh, A. The econ in econophysics. Eur. Phys. J. Spec. Top. 229, 1675–1684 (2020). https://doi.org/10.1140/epjst/e2020-900204-5
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1140/epjst/e2020-900204-5