Panagis S. Liossatos

Bio

As a physicist turned economist, I am naturally inclined to explore the possibility of using concepts and methods of theoretical physics in tackling problems of economic analysis. My most recent study concerns the statistical mechanics alternative to the Arrow-Debreu concept of economic equilibrium [along the lines of Duncan K. Foley]. That statistical mechanics constitutes a valid theoretical framework outside the domain of physics is not paradoxical. For after the pioneering work of E. T. Jaynes, one may view statistical physics as an instance of a broader general systems formalism or generalized statistical mechanics, which is independent of physical properties and therefore applicable to a variety of disciplines. It provides a well-founded principle of probability assignment under conditions of incomplete information, known as the maximum statistical entropy principle. The fact that the knowledge of micro-behavior is not sufficient to understand macro-phenomena is attributed to the failure of recognizing the workings of this principle. Loosely speaking, an economy's macro-state has an additional property (degree of disorder or statistical entropy) that is not determined by its micro-state. The statistical mechanical paradigm, therefore, provides a missing inter-level theory for economic analysis — a framework for linking micro-behavior to macro-phenomena, which is more appealing than the representative-agent approach.

Furthermore, this inter-level theory brings forth some exciting new prospects for disequilibrium analysis and economic dynamics. As a preliminary step in this direction, I have demonstrated that the statistical mechanical model of markets gives rise to a phenomenological theory of resource allocation: the allocation of given amounts of resources among a set of trading economies is governed by a constrained optimization principle known as the principle of maximum entropy. The derivation of the latter from first economic principles is expected to provide the foundation for the systematic use of the vast analytical apparatus of equilibrium and non-equilibrium thermodynamics in economic theory. It is the non-equilibrium part that will provide the link to my earlier research on the relation between nonlinear dynamics, evolutionary theory, and economic change; and the impetus for advancing that research to a new plane.

The adoption of generalized statistical mechanics as an inter-level theory in economics raises a host of methodological issues surrounding the meaning of probability, the question of deductive logic versus plausible reasoning, etc. The general question of how probability is to be understood even in the context of statistical physics is still a subject of debate. We need more clarity on this matter in economics as well, especially when one envisions probability at the foundation of economic theory. This is yet another area of investigation that I intend to pursue.