Innovation/Global Crisis Blog

The Economists Have No Clue; Let’s Ask the Physicists

By Shlomo Maital

  (What Einstein Thought of Economists)

     The jubilation over the German Parliament’s approval for another ‘tranche’ of aid for Greece is unwarranted.  Here is why.  Greece is currently paying out over 6 per cent of its GDP in interest (not including principal) on its debt, or over 15 per cent of public spending.  This is unsustainable.  It means that if Greeks work super hard (and they already work more hours per year, along with Spain, than anyone in Europe) and get GDP to grow at 5 per cent yearly, they will still have to give all that growth dividend away, mainly to foreign banks in France and Germany, and then some, nearly forever.  Their future is mortgaged forever, as long as Greece’s current debt remains as it is.  No-one can agree to that.  Germany is applying a modern form of Chinese water torture.  Italy is just as bad; its interest payments are 5.6 per cent of GDP.  And Italy is far far bigger and more worrisome.

    What solutions do economists have?  None.  Monetary policy has not worked, especially where it was applied most radically, in Japan and in the U.S.  Fiscal policy has not worked – enormous budget deficits have created mountains of debt and destabilized capital markets.  Job creation has stalled.  Economists, like politicians, are divided into two warring camps: Spend and create more money (liberals) and spend and create less money (conservatives). 

    Why not ask the physicists for help, if the economists are hopeless and helpless?  Here are a few ideas based on physics, inspired by my students George Crawley, Cyril-Andre Lesage  and Emeric Croguennoc.

       1.  Physics: Momentum = Mass times Velocity.    Economics: Economic Momentum (GDP) = Money times Velocity, where velocity is the rate at which money changes hands.  Pumping money into the system will not change economic momentum if panicky banks and people hang on to the money rather than lend and spend it.   Increase velocity by having political leaders tell people the hard truth and above all, show them a vision and a strategic direction for recovery.

     2.  Physics: Current  =  Voltage/Resistance.  Economics:  “Spending Power” = Stimulus/Resistance.   Monetary and fiscal stimulus do nothing, if ‘resistance’ rises proportionately (i.e. fear about the future, fear of losing one’s job, etc.).  When people do not trust those in charge, when they are not told the full truth, no amount of stimulus will work.

    3.  Physics: E = Mc2 .  Economics:  Energy =  Economic Mass (population) times the speed of light squared.   People without hope, aspirations, vision and ambition are people without economic mass; they are massless neutrinos.  Even a tiny minority of people with ideas, creativity and innovative power can generate enormous national energy.  But they need to have frictionless bureaucracy-free infrastructure to facilitate starting businesses and role models who show it can be done. 

    4. Physics:  Potential Energy  equals Mass times Constant times Height.  Economics:  Economic energy equals GDP times Constant times Height of Aspiration.   “Without vision, the nation perishes”, says the Book of Proverbs.  Nations whose leaders and whose ‘friends’  (like Germany) leave them no hope, have goals with the height of zero, which means their potential energy is zero.  Nations with leaders like John F. Kennedy, who said in 1962, “we will go to the moon!”, have potential energy literally as high as the moon.   Where are those leaders today, when we need them?    

   5.  Physics:   The difference in potential energy =  Mass times Constant times Height, minus the opposing pull  of another body or planet, its Mass times Constant times its Height.   Economics:   America, for instance, has its potential energy sucked away by the enormous pull of imports from China, a huge minus.   Only now is it becoming aware of this. *

    What unites all these five physics equations is this: Energy.  You will never get economic growth unless you create economic energy, driven by hope, aspiration, ambition and creativity.  And in turn, you will never achieve those, until somebody steps up and creates a vision for a better future – a reason for expending more energy.  Almost ANY vision will do.  In the end, economics is hopeless, because our dilemma is not economic, it is physical and psychological.   President Roosevelt understood that.  Today’s leaders do not.   

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* See:  “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, by David H. Autor, David Dorn, and Gordon H. Hanson, MIT August 2011.  “Transfer benefits payments for unemployment, disability, retirement, and healthcare …rise sharply in exposed (to Chinese import competition) labor markets. The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.” 

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