Economics is a science that aims to explain individual choices. Interpreting economic facts, even when they involve large sets of individuals, starts by modeling of economic agentsâ behavior. Abstract assumptions on the typical agent are often the foundations on which microeconomics and macroeconomics are built. Political economy has relied on deductive reasoning right from the start, when first philosophers and then economists provided abstract interpretations of economic issues, supporting them with data and historical reconstructions. Abstractly grounded research has dominated empirical investigations.
Admitting this path does not prevent us from acknowledging that economic history pullulates with phenomena that are not easy to manage in abstract terms and interpret as individual choices. The mainly aggregate dimension of these phenomena (often called âstylized factsâ) induced scholars to search for specific explanatory methods.
A minority of economists tried to anchor economic knowledge to the observation of aggregate phenomena. Careful observation and data collection were often required as a first step in this specific knowledge-developing process, the core element of which involved ascertaining the existence of empirical regularities that can be treated as universal laws.
The search for empirical laws or regularities became the focus that justified strictly empirical research, making abstract analysis ancillary to the whole knowledge-gaining process. But empirical laws are rarely to be found in economics. This book describes attempts to anchor economic knowledge to invariant empirical laws. It also speaks of the fate of empirical researchers who failed to detect any universal laws, and shifted toward either deductive analysis or strict empiricism.
The aggregate nature of the phenomena considered and the empirical method favored the recourse to analytical tools drawn from other disciplines. While deductive economics filters the analogies with classical physics and biology, contextualizing and adapting their use to a well-structured philosophical substrate, empirical research makes unmediated use of instruments and insights coming from the natural sciences.
Econophysics was born in just such a context. There is a general consensus that econophysics made its appearance during the mid-1990s, when the liberalization of the financial markets begun in the 1980s was producing its visible and tangible effects. The resulting financial effervescence could be seen as an aggregate complex phenomenon that attracted scholars not only of economics, but of physics too, who focused on the behavior of financial variables. The physicists moved in to such a degree that they seized the day, catching mainstream economists off guard. But they were not new to this world. Physicists had started exploring financial and economic topics long before, in the 1970s at least, when M.F.M. Osborne (a theoretical physicist) promoted conferences on the application of physics to other fields of science (see Slanina 2014). Contributions also came from some economists: in 1983, E. Farjoun and M. Machover published Laws of Chaos, undoubtedly the first consistent application of statistical mechanics to economic questions. Subsequent changes in the financial markets simply prompted physicists to multiply their efforts to interpret the trends of financial assets using tools drawn from the world of physics. Proof of this came from specific fields, such as the probability distribution of stock price fluctuations, volatility correlations in financial time series, correlations of price fluctuations of different stocks (Stanley et al. 2000, p. 335). These issues became core topics in the field of econophysics, which covered various subareas, including probability distribution of income and wealth, agent-based models, and network analysis.
If econophysics is a broad and complex, collective and global research experience, then it is also worth considering some of the lesser past, empirically based experiences in order to obtain a wider sample to shed light on the circumstance of research on aggregate phenomena. Although these investigations (which all amply preceded econophysics) were not connected to one another, they can legitimately be gathered in a single story because they were all studies on empirical regularities connoting aggregate events.
It is because of the lack of any theoretical connections between them that these past events have been labeled âempirical episodesâ. This term is used precisely to describe not an uninterrupted story, but a series of research experiences on economic phenomena that have some characteristics in common, such as the primacy of empirical analysis, âdata firstâ, and the recourse to mathematical support. Econophysics cannot be seen as a legacy of these episodes, but it can be interpreted, and possibly better understood, in the light of what happened in the past.
These past episodes tell the story of Italian economists who, over a period of several centuries, chose to investigate aggregate phenomena empirically, without anchoring their analysis to any a priori dominant interpretation. This happened with the eighteenth-century manipulation of monetary values, and with the industrial transformation of the nineteenth century. Then the focus on aggregates became evident in twentieth-century analysis, when Vilfredo Pareto definitively tied the interpretation of aggregates to an empirical regularity, Pareto law.
Thinking over Pareto law, Joseph A. Schumpeter wrote: âFew, if any, economists seem to have realized the possibilities that [some] invariants hold out for the future of our science [economics]â; and he added in a footnote: âIn particular, nobody seems to have realized that the hunt for, and the interpretation of, invariants of this type might lay the foundations of an entirely novel type of theoryâ (Schumpeter 1952, p. 133).
It may come as a surprise to find the debate on invariants persist in a new discipline like econophysics that, being built on a hard science, should accept the idea of universal laws as a basis for economic and financial analysis too. Not all econophysicists take such a clear-cut stance, but such a view undeniably casts doubts on the widespread conviction that econophysics moves economics closer to physics.
The five empirical episodes presented here are like pillars supporting a virtual bridge connecting past research with present experiences in the field of econophysics. Most of the sections of the book correspond to a different empirical episode.
The ground that anchors this bridge to the past lies not back in Ancient Greek thought, but in the sixteenth and seventeenth centuries, when monetary thinking gradually came to the fore in an effort to deal with raging inflation in the (then numerous) states that would subsequently be united to form modern-day Italy. Monetary instability was a legacy of the past that made these small states the home of monetary studies and monetarist economists. Most of the scholars involved wrote during the seventeenth and eighteenth centuries, when Galileoâs teachings had just begun to circulate. The combination of geometrical insights, empirical approaches, and simple ideas on the largely monetary issues that nurtured the âscientificâ atmosphere early in Galileoâs time is the topic of the first empirical episode presented in Chap. 2.
Moving on from monetarist economics, it became more obvious that observation, experimentation, and mathematics (the essence of Galileoâs message) took time, and this helps to explain why widespread references to the Tuscan physicist only emerged some decades later. During the nineteenth century, the positivist credo coincided with ample recourse to statistical analyses and surveys. On the one hand, these largely descriptive empirical investigations shaped an idea of observation consistent with the social sciences; on the other, they demanded a more sophisticated use of mathematics to enable more in-depth analyses. Briefly, in the early chapters the project behind the book as a whole takes shape, to demonstrate the existence of a distinctive Galilean thread in Italian economic thought, founded on a commitment to observation, experimentation, and mathematics. This approach can be seen as isomorphous with the methodological premises of modern econophysics.1
The second empirical episode, described in Chap. 3 of this volume, tells the story of scholars involved in the search for a more rigorous and mathematical dimension, who paved the way to an âengineeringâ view of economics, in which all reasoning aimed to serve a concrete purpose. The role of Italian statisticians and economists was emblematic in the effort to place economics somewhere between statistical and mathematical rigor and practical industrial transformations. Angelo Messedaglia was one of the interpreters of the need to raise statistics to a more mathematical dimension, and between 1875 and 1878 the Padua edition of the Giornale degli Economisti (Journal of Economists) well represented the idea of political economy as a discipline free of any ethical or moral imperatives, and intent on dealing with economic problems from a technical and practical (or engineering) perspective, while also outlining what complexity means for economic relationships.
Empiricism became a language that was expressed most beautifully in Pareto law, which is the subject of the third empirical episode. Statistical positivism had just reached its peak when Vilfredo Pareto âobservedâ an empirical law governing the distribution of wealth that seemed to have no rational explanation (Pareto 1896, 1896â1897): income and wealth had the same recurrent distribution irrespective of time and place. The old empirical approach could go no further once this atheoretical new rule arrived on the scene, giving rise to a debate that is still lively today, and making Pareto one of the acknowledged founders of modern econophysics. Pareto law seemed to show that observation could enable us to identify invariant laws in the social as well as in the natural sciences. Paretoâs experience was imitated by his student, Luigi Amoroso, an economist and mathematician who continued to work on the laws of distribution, sk...