Bertrand M. Roehner, Patterns of Speculation: A Study in Observational Econophysics. Cambridge: Cambridge University Press, 2002. xvii + 230 pp. $50 (hardcover), ISBN: 0-521-80263-6.

Reviewed for EH.NET by Graeme D. Snooks, Institute of Advanced Studies, Australian National University.

Physicists are taking a renewed interest in economics. As is well known, many of the economic pioneers were trained in either science or engineering. Pareto, Walras, Jevons, and Marshall, for example, brought a training in science and mathematics to the study of economics. And general equilibrium theory derives from classical mechanics. Today a growing number of physicists are again investigating economic phenomena and publishing their results in physics journals. Since 1997 this activity has been known as "econophysics."

As in orthodox economics, the practitioners of econophysics fall into either the deductive or empirical camps. Bertrand Roehner, a theoretical physicist based at the University of Paris, is a highly effective pioneer and advocate of the empirical approach that he calls "observational econophysics." He has been publishing on economic issues in physics journals since the mid 1980s, and has even published (jointly with Tony Syme) a fascinating book on comparative history (Pattern and Repertoire in History, Harvard University Press, 2002).

Roehner's objective in Patterns of Speculation is to develop mathematical models based on the "regularities" that can be identified from a systematic observation of the boom-and-bust cycles of speculative activities in both financial and non-financial markets. Unhappy with the large number of "adjustable," or unmeasured, parameters in econometric models, his aim is to "sharpen the picture" by reducing these to a minimum through more accurate statistical tests arising from close observation of reality. This objective has shaped the structure and tone of a book that is highly systematic and precise -- in a word, scientific.

Patterns of Speculation consists of nine chapters organized into four parts. Part I briefly describes the nature and history of econophysics, which will be unknown to most readers. Part II outlines the organization of speculative markets of both a financial and non-financial kind, together with Roehner's view of the collective behavior of decision makers -- characterized as social rather than economic man -- which is highly influenced by sociology. Part III, the main section of the book, attempts to identify "statistical regularities" concerning "speculative peaks" through comparative analysis. This involves the presentation of a series of charts and basic statistical measurements of speculative variables -- such as the prices and volumes of stocks and commodities -- that characterize similar events through space and time. And Part IV presents a "theoretical framework" based on these observations. Here he adopts mathematical models that are capable of replicating the observed regularities. While this is similar to econometric simulation, Roehner persuasively claims that econophysics has the advantage of being able to reduce the number of "adjustable" parameters in the theoretical model through systematic observation. It should be noted that the theoretical models adopted by Roehner are based on pre-existing mathematical forms rather than being derived directly from empirical relationships.

Roehner could have profitably compared the methodology of "observational econophysics" with that of a discipline pursuing similar objectives from within economics. The historical school of economics -- which flourished particularly in Germany but also in Britain, North America, and Australia during the last quarter of the nineteenth century -- also attempted to develop economic theory from the observation of historical patterns. The resulting confrontation between the deductivists and the historicists became known as the methodenstreit -- or the battle of the methods -- which was ultimately won by the newly emerging neoclassical economists trained (ironically) in science and mathematics, largely because the historicists focused myopically on the patterns in history and not the underlying economic processes. In the early twentieth century, the historicists joined the ranks of economic historians and institutionalists, and historical economics collapsed (Snooks, Economics without Time, 1993). Only at the century's end did a more robust form of historical economics emerge, which was able to develop a viable general dynamic theory to explain these historical patterns -- see the reviewer's Laws of History (1998), Longrun Dynamics (1998), and Global Transition (1999). This was something the deductivists were unable to achieve despite their institutional dominance during the intervening century. In omitting the history of historical economics, Roehner appears to overstate the contribution of econophysics when he concludes that "the search for regularities is probably one of its most important innovations" (p.20), and that observational econophysics is unique in constructing theory only once the patterns in reality have been identified (p.xii).

Econophysics is an interesting new development that has been clearly explained and expertly employed by Bertrand Roehner, who is to be congratulated on his pioneering contribution. This new discipline is to be welcomed not only because it provides new insights into economic phenomena, but also because it endorses the attempt by economic historians to systematically examine the patterns of the past. In particular it supports the longstanding attempt by historical economists to employ the inductive approach to build a realist body of economic theory. Over the past decade the reviewer has employed a new historicist technique to develop a general dynamic theory -- the dynamic-strategy theory -- to examine the issues of economic growth and economic development, and, more recently, to explore the dynamics of all living systems (see my The Collapse of Darwinism, Lexington Books, July 2003). For the first time in a century, therefore, deductive economics is under concerted and effective attack by empiricists from within and without the old empire. No doubt it will go the way of all seemingly impregnable empires of the past.