Published by EH.NET (February 2003)
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.