Quantum Economics : An Interview with David Orrell — Writer and Mathematician
By: Rishabh Chaddha
Tags: Economics, Money, Finance, Books, Quantum Computing

David : To start with the last part, it is certainly fair to say (and many have) that the foundations of economics are in poor shape. Adam Smith and later the neoclassical economists thought they were following a Newtonian approach, but I think a better comparison is to Aristotelian physics. The main assumption of mainstream economics is that the system is driven to equilibrium, and nothing moves unless it is pushed by some external force (e.g. “exogenous shocks”). The same idea is seen with efficient market theory in finance, or the general stochastic dynamic equilibrium (DSGE) models used in macroeconomics. Change is assumed to happen instantaneously, though DSGE models include various “frictions”. However there is no real concept of forces or masses, as in Newtonian physics. So economics is stuck in a very primitive modelling framework. There is a definite need for a new paradigm, and I think the way to get to it is by focusing on the topic of money, which has been largely neglected, in part because it doesn’t fit with the mainstream approach.

Q3) Could we predict crises with quantum theories fuelled by physics? What could be the tools to prevent a recession based on your research?

David : For complex systems, the best you can do is hope for pockets of predictability. For example, a main part of my applied mathematics career has been using mathematical models to predict the effect of anti-cancer drugs in experiments, which works because it is a very controlled situation. If someone tries an experiment with a brand new drug, it is much harder to make a useful prediction. And predicting an adverse reaction such as a stroke is of course even harder. The economy doesn’t allow for a lot of controlled experiments, however there are pockets of predictability, for example patterns in option prices. It is hard to predict the timing of a crash or recession, but it is possible to say something about the risk in the first place. I don’t think a quantum approach is necessary for this, but it certainly helps by e.g. drawing attention to the dynamics of debt. One of the main reasons neoclassical economists didn’t predict the 2007/8 crisis was because the financial sector wasn’t included in macroeconomic models.

Q4) How can quantum concepts be applied to money? Why is money dual?

David : People often talk about the “magic of money” because it has remarkable properties — for example it can change form, it can jump from one place to another, it can be created out of nothing or vanish in a flash. But I would say that money only appears magical because it has properties which are confounding from a classical perspective. It makes much more sense when viewed from a quantum approach. For example, a key idea in the quantum approach is that entities can appear and disappear, and this is handled by so-called creation and annihilation operators. More important though is the idea of wave function collapse, which in economics corresponds to the measurement of price through a transaction. Money is dual because it does this trick of collapsing our subjective ideas about value to an objective number.

Q5) Why economists can’t predict the future?

David : One problem is that mainstream economists start with the idea that they can’t predict the future, because markets are efficient and price changes are random. Another as mentioned above is that prediction is hard. But as I noted in the Quantum Economics book, many heterodox economists did predict the 2007/8 crisis, because they were more alert to the dynamics of credit.

Q6) What, in your opinion, is the most important quality in an Economist?

David : Humility. The economy is a complex system, and our models are like patches which capture some aspect of this system. During the crisis, a lot of harm was done by models which ascribed a false degree of confidence to e.g. the value of a derivative.

Q7) The quantum revolution was born when physicists found that at the subatomic level energy was always exchanged in terms of discrete parcels, which they called quanta. In economics, the equivalent would be exchanges of money. The money objects we use in exchange, such as coins, might not seem to resemble subatomic objects. According to you what are the common elements in the fields of economics and quantum physics?

David : Instead of quantum physics, I would prefer to say quantum mathematics. The main difference between quantum and classical approaches is that they measure probability in a different way, and the quantum approach can handle things like interference. As computer scientist Scott Aaronson notes, quantum methods are adapted to handle “information and probabilities and observables, and how they relate to each other” which applies as well to economics as it does to physics. For example, transactions are inherently probabilistic, and if you build a probabilistic model of supply and demand it leads naturally to a quantum model. Money is also a social technology, so it depends on cognitive effects (including interference between incompatible concepts) which are often best handled using a quantum approach. My latest book Quantum Economics and Finance: An Applied Mathematics Introduction gets into the mathematics:

The reason neoclassical economics has been so influential is because it is not just an analogy for how we behave, but a mathematical model, and I would say the same of the quantum approach — it is not just a metaphor or an analogy (though that is part of the picture) but instead is a mathematical framework for understanding money and financial transactions.

Q8) Basic economic concepts (Pareto optimality, rationality, Nash equilibrium) are mainstream economics. According to you why economics should do all of the following: look beyond homo economicus, run more Behavioral experiments, use more agent-based modelling, study disequilibrium behaviour, focus more on money, introduce complexity theory, use less mathematics, include quantum theory, have fewer equations. Why economics needs a paradigm change or different approach from neoclassical economics? Based on your research, can you give some comparison points between Quantum Economics and Neoclassical Economics?

David : As an applied mathematician, I am OK with equations when used in moderation but they shouldn’t be viewed as an end in themselves, which is why I always go back and forth between the math and the written description. To compare economics and physics: physics progressed from Aristotelian equilbrium, to Newtonian dynamics, to quantum physics. Economics got stuck in the Aristotelian stage because it couldn’t come up with the right dynamical framework. Things like game theory or rational economic man are used to justify this approach. Adjustments such as behavioural economics are a bit like the epicycles used by the ancient astronomers to make their models seem more realistic, without changing the basic framework. An interesting feature of the quantum economics approach is that it leads naturally to economic versions of things like mass and force. So I think economics has to jump to the quantum stage.

In economics, the most basic difference between the quantum approach and the mainstream approach is that the latter thinks in terms of barter, while the former starts with the concept of money. In the quantum view, money is a social technology which is used to attach numbers (prices) to the fuzzy concept of value. This process can be captured using the mathematics of wave function collapse. If you follow that thread, it leads naturally to things like dynamics, entanglement, and indeterminacy, instead of equilibrium, independence, and rationality as in the neoclassical approach.

Thank you all for reading and a big thanks to David Orrell for collaborating in today’s post!

It’s a pleasure!

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