Those wacky econophysicists

Warning geekiness ahead:

Physicists are pretty much at the extreme end of science. Call them the uber-scientists. They're more theoretical, more technical, more pie-in-the-sky, wacky, too brilliant to figure out how to tie their own shoes weird. I'm told that part of being a scientist is being able to read another's research and tell whether or not it is good science...and I agree: except for physicists. The line between genius and batshit-crazy is just too thin there to call.

That having been said...physicists tend to be pretty smart (even the crazy ones) and it looks like some have made very cool inroads into economics. The field is called econophysics and the theory goes something like this. The economic universe, just like the physical universe is built on the countless smaller interactions that follow general rules. Tracking a dollar bill throughout the country might not make any more sense than tracking a water molecule around the Earth, but given enough monetary transactions or molecular collisions you start to see bulk behaviors that follow another set of rules.

One of those higher order rules is the oft-cited "rich get richer" rule. Explained here. It's a good read. Follow up with Victor Yakovenko if you've taken statistical mechanics, or read on if you prefer my lopsided interpretation.

Here's the deal. The income profile for the majority of people (>97% of us) marvelously resembles a mathematical equation that pops up in science: the Boltzmann equation. This equation is primarily used to describe how energy is divided up amongst gas molecules. Gas molecules are like the break at a pool table, some are moving fast, some slow, some spinning, (some less spinning) - except they don't slow down and stop. Their equilibrium state is to keep colliding and bouncing and zooming around as gas molecules. While the speed of individual molecules changes all the time, predictions can be made for the collection of molecules. For example sorry-ass graduate students are routinely forced to caluculate what fraction of air molecules are moving at roughly 500 ft/second and what fraction are moving at 300....whatever. The point is that economic bulk properties are curiously similar to physical bulk properties. Since the Boltzmann equation is the statistical result of a known set of events perhaps economics has the same underlying events. (Ogres are like onions!)

Yakovenko goes on to explain that the daily economic transactions most people make are similar to collisions between molecules, yadda yadda yadda... I won't repeat it, cause I don't buy it myself. (Energy it neither created nor destroyed, money is created/destroyed all the time.) However there are two important things that can be learned without delving too far into the theory.

First is it's good to be rich. If you're still reading you're probably pretty geeky. Geeky enough to have already perused the chart at the top of this post and noticed that there are two different lines on the curve. The top ~1% of earners in the country don't follow gas behavior. They are "super-thermal", earning at higher rates than would be expected from the very even distribution of the rest of the populace. (Shades of John Kerry! It's like 2 Americas!!) The income profiles of the wealthy follow Pareto's Law and they're raking it in faster than the suckers in the lower and middle class could dream of. Yakovenko doesn't really get into why that is, but what we see is a distinct economic breakpoint between two classes of people. I'm going to guess it's the beginnings of the investor class, but I don't know. I do know that when physical phenomenon shift from one defined dynamic to another, it's because different parameters have become critical or different governing laws are important.

Second bit of info: it's good to know is where Boltzmann ends and Pareto begins. (John Kerry could tell you again) It's at 200k/yr. Make it there and it's easy money all the way.

So three points 1: Mathematically, there is a break point at 200k/year: that makes it a good reference for defining upper-class. 2: Folks above that don't operate on the same governing economic principles that most do. (Bastards.) 3: Physicists are geeky and weird...and so are you for reading this to completion.

Via con Dios,
-LB