Economyths

1900, even before Einstein’s explanation of Brownian motion, the French economist Louis Bachelier came up with a similar theory for the economy. In his Ph.D. thesis, he proposed that financial markets are always close to equilibrium, but are buffeted around by the actions of individual investors as they respond in different ways to news or just the market’s current state. Any change in price is therefore essentially random. As with a piece of pollen undergoing Brownian motion, the market might look like it’s alive and has a sense of purpose, but that’s just an illusion.

Bachelier’s work initially made little impact, perhaps because it appeared to say that forecasting was a waste of time (never popular with forecasters).

Economics is a mathematical representation of human behaviour, and like any mathematical model it is based on certain assumptions.

Economics gains its credibility from its association with hard sciences like physics and mathematics. But is it really possible to describe the economy in terms of mathematical laws, as economists including Larry Summers – former economics advisor to President Obama – claim? Isaac Newton didn’t think so. As he noted in 1721, after losing most of his fortune in the collapse of the South Sea bubble: ‘I can calculate the motions of heavenly bodies, but not the madness of people.’