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Pruntseva Gelena
Ph.D in Economics
PO “Institutional
reforms”, Kyiv, Ukraine
The need to apply the physical
economy for
evaluating
the economic system
The need for a new assessment methodology for evaluating the functioning of the economic system is
due to existing shortcomings in the current assessment of economic processes. Existing problems in assessing economic processes is due to the lack of a
universal model of the effective functioning of the economic system. Professor N. Gregory Mankiw of Harvard
University notes that the fact that modern macroeconomic research is not
widely used in practical policymaking is prima facie evidence that it is of
little use for this purpose [1, p. 19]. Nobel prize winner Wassily Leontief drew the attention to the lack of a practical utility of the existing
results of research. The prominent
scientist Wassily Leontief told the meeting participants of the American Economic Association that the
troubles [in economics] are caused not by the irrelevance of the practical
problems to which present-day economists address their efforts, but rather by the palpable
inadequacy of the scientific means with which
they try to solve them. Uncritical enthusiasm for mathematical formulation often tends
to conceal the ephemeral substantive content of the argument behind the
formidable front of algebraic signs [2, p. 20]. The existing methodology for assessing economic processes
does not allow to build a universal model of the effective functioning of the
economic system. This is due to the fact that the existing results of the
evaluation of economic processes with the help of mathematical tools can be
used in forecasting or modeling the state of the economic system only in the case of the influence of the same factors that
influenced the economic system in the past analyzed periods. If there will be
other factors affecting the economic system, the results of analysis of the
economic processes of the past periods may not be useful, because we may not
know the degree of influence of economic shocks on certain elements of the
economic system.
Anatoliy Vodolazskiy also adheres to the position of the need to improve the
existing methodology of economic processes. A. Vodolazskiy underlines that the theoretical understanding of the essence of the economic law does not mean that its action in each particular case manifests itself in exact accordance with its definition. This is because of the fact that the non-economic factors
(moral, legal, national, religious, etc.) that act as independent forces prompt
a person to act contrary to economic laws. These non-economic factors are
influenced by the specific economic reality in each particular case [3]. A significant contribution to solving this problem was made by a prominent scientist
Richard H. Thaler. Nobel prize winner Richard
H. Thaler has
incorporated psychologically realistic assumptions into analyses of economic
decision-making. By exploring the consequences of limited rationality, social
preferences, and lack of self-control, he has shown how these human traits
systematically affect individual decisions as well as market outcomes [4]. Richard H. Thaler achieved his
important research results through the synthesis of psychological and economic
science. Lyndon H. LaRouche focuses on
the need to synthesize physical and economic sciences. The prominent scientist L. H. LaRouche notes that it
is necessary to stop measuring the relative effectiveness of the economies of
different countries by monetary indicators and instead measure it by real
output and consumption of physical volumes of products by households, farms and
enterprises. He emphasizes that the existing statistical practice of the national
income account by government and other agencies that compile reports reject any
attempts to make a rational distinction between
the physically unnecessary expansion of nominal income and useful production, consumption [5]. J. Tennenbaum
notes that experience shows that monetary valuations of
commodities or services – i.e. their market prices – often diverge greatly from
the degree of their actual importance to the physical process upon which the
existence of a nation, its population and its economic activity depend. Since
GDP is calculated on the basis of monetary valuations of the goods and services
produced and consumed, it inherits the tendency to diverge from reality in this
respect. Thus GDP growth can go hand-in-hand with gigantic speculative bubbles
and unsustainable investment booms, with widespread technological obsolescence
and waste, a falling educational and cultural level of the general population
etc [6]. The prominent
economist Bent Sorensen also focuses on factors that indirectly affect the
state of the economy and which can not be estimated in monetary terms. Bent
Sorensen identifies such important term as “indirect
economics”. This term may be taken to relate to those social values (costs or
benefits of energy
sources) which are not or cannot be evaluated in monetary units [7]. The
physical economy instruments makes it possible to measure the efficiency of the
country's economy based on real output, which based on physical volumes of
production and consumption of products (and not on monetary indicators).
The first person to synthesize physics and
economics was prominent scientist Gottfried Wilhelm Leibniz. The approach he proposed has
become a separate branch of science called the physical economy. The essence of
this direction is that it suggests moving to the physical parameters of
assessing the economic processes and allows using the methodology of physics as
a tool for economic research. Nobel prize winner
Maurice F. H. Allais noted that an in-depth analysis of economic phenomena
makes it possible to show the existence of equally striking regularities as in
the physical sciences. This is precisely the reason why the subject of the
economy is a science and by virtue of which the given science obeys the same
principles and the same methods as the physical sciences. Maurice F. H. Allais tried
to prove that true laws of physics are also true for economics. Namely, using
the basis of the equivalence theorem, he noted that at the
limit, a situation of equilibrium in an economy of markets is a situation of maximum
efficiency, and vice versa [8].
The need to apply the methodology of physical
science in assessing economic processes was also stressed by prominent Austrian
economist Eugen Bohm-Bawerk. Eugen Bohm-Bawerk
noted that no analysis of economic phenomena can be considered as completed
which does not include a consideration from the point of view of physical
science or of the matter and energy consumed or liberated in the interaction
between man and the physical environment [9]. Eugen Bohm-Bawerk emphasizes the relationship
between matter and energy consumed or released in the
interaction of man and the physical environment. The interconnection of matter
and energy is manifested in the transformation of the economic
input-material-energy flows of natural and productive resources into output
streams of consumer goods. The existence of energy interaction between man and
the environment was emphasized by the prominent Ukrainian economist Sergei Podolinsky. In 1880, the fundamental work of Sergei Podolinsky "Human labor and its relation to energy
distribution" was published. Sergey Podolinsky
focused on the energy differences of organic and inorganic nature. He
highlighted the relationship of human labor with the distribution of energy.
Sergey Podolinsky noted that the distribution of
energy is influenced by human labor, which causes the accumulation of energy that
is at the disposal of mankind [10]. Podolinsky’s biophysical analysis led him to
conclude that ultimate limits to economic growth
lay not in
the shackles of the relations
of production, but in physical
and ecological laws [11]. For
example, the volume of country's food production must be calculated and
accounted for using physical indicators and not only monetary indicators. Because only a sufficient volume of food production can meet people’s
nutritional requirements that satisfy the needs for a healthy and active
lifestyle.
Thus, we can conclude, that the improvement of existing economic analysis should be carried out by introducing new analysis objects (for example, one mutual energy in animate and inanimate nature) and improving methodological approaches to their assessment, which should be based on the methodology of the physical economy, that is based on
analogies between processes occurring in inanimate nature and studied by physics,
and processes occurring in the human society and studied by the economy. The physical
economy makes it possible
to use physical laws as a basis for assessing the economic process.
References
2. Leontyev
V. (1990). Economic Essay. Theories, Studies, Facts and Policy, M: Politizdat, p. 405 [in Russian].
3.
Vodolazskiy A. (2012). Econophysics and the
laws of a healthy economy. Essays on labor productivity and economic
modernization., Novocherkassk:
NOK, p. 86 [in Russian].
5. LaRouche
L. (1997). The
Science of Physical Economy as the Platonic Epistemological Basis for All
Branches of Human Knowledge, M: Schiller Institute for Science and Culture [in
Russian].
6. Tennenbaum J. (2016) Online Book "Physical Economy of National
Development" (2017, October 9), Retrieved from http://www.physicaleconomy.com/node/1
[in English].
7. Sorensen B. (2011).
Life-cycle analysis of energy systems: from methodology to applications, UK:
RSC Publishing, p. 336 [in English].
8. Allais M. (1995). Economics
as a Science, M: SPC “Science for society”, RSGU, p. 168 [in English].
9. Branford Victor B.
(1901). On the Calculation of National Resources, Journal of the Royal
Statistical Society, 64, 380-414 [in English].
10. Podolinsky S. (1991). Human
work and its relation to the distribution of energy, M: CO “Noosphere”, p. 159 [in Russian].