Pursuit of Truthiness

my gut tells me I know economics

Rules of Attraction

leave a comment »

Physics vs. Economics: Gravity edition

Newton discovered his gravity equation by empirical investigation.  He did not derive it from theory, and in fact even once he had observed the relation he offered no hypothesis as to why it worked.  Newton’s gravity implied that objects exerted force instantly by action at a distance, and many believed this could not be true.  The modern explanations of gravity do not in fact use instantaneous action-at-a-distance, rather they posit the curvature of space-time and particles called gravitons which cause the movement observed.

Similarly, economists have used a gravity equation to explain trade between countries.  Trade increases with the income of each country (like the mass of the objects), and decreases with distance.  As an empircal relation it works reasonably well, though not as well as Newton’s gravity equation.  But as stated the economic gravity equation is not derived from theory and it posits the same sort of action-at-a-distance.  After all, countries do not decide to trade a certain amount because they know they have certain incomes and are a certain distance apart.  It is individuals and firms who decide how much they will buy from foreign individuals and firms, and they base their decisions on how much they want specific goods and on how much those goods cost relative to their personal income.

After decades of using the gravity equation in economics, a theoretical backing is being developed to relate the observed action at a distance to individual decision makers – the “gravitons” who are the true proximate cause of trade.  Economists always want to be like physicists and it seems that with regard to gravity the parellel is close.

-Inspired by presenting “A Theoretical Foundation for the Gravity Equation” at Temple’s graduate trade seminar (though the paper is dense and does not get very far in the quest for a foundation).

Advertisements

Written by James Bailey

April 21, 2010 at 12:17 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: