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Blink 3 of 8 - The 5 AM Club
by Robin Sharma
What Physics, Meteorology and the Natural Sciences can teach us about Economics
Forecast by Mark Buchanan explores the science of prediction and the limits of our ability to predict the future. It offers insights into why our forecasts often fail and how we can make better predictions by understanding the complexity of the systems we're trying to predict.
As any economist worth her salt will know, Adam Smith played a major role in developing economics – the scientific study of the economy in the eighteenth century.
In 1776, Smith wrote the influential The Wealth of Nations, in which he explained how the division of labor could increase a company’s productivity.
Let’s say a company produces pins. If every employee were responsible for just one step in the production chain – for example, one person to cast the metal, and another to smelt it – the company would be far more productive.
Smith also introduced another major concept: the invisible hand. According to his theory, if everyone pursued his or her selfish interests, eventually this would lead to beneficial outcomes for our society.
If we apply this concept to the pin company example, if the company introduces a division of labor into its production process, the result is that it can offer its pins at a cheaper price, hence benefiting itself (more sales) and society (cheaper prices).
In order to give these early discoveries scientific credibility, economists adopted the concept of equilibrium. They invoked the Greek physicist Archimedes, who used equilibrium to explain the workings of levers and other simple mechanisms. Equilibrium, for Archimedes, was achieved when both arms of a lever bore an equal weight at an equal distance.
Early economists also used Isaac Newton’s theory of gravity to lend credibility to the equilibrium concept. With his theory, Newton claimed that unbalanced forces affect every object, essentially accelerating it until it reaches a state of equilibrium. According to Newton, an apple falling from a tree reaches its equilibrium when it hits the ground.
It was in such august company as Archimedes and Newton that, in 1874, economist Léon Walras adopted the concept of equilibrium in order to explain Smith’s theory of the invisible hand. Using mathematics, Walras demonstrated the way in which both supply and demand eventually come to a state of equilibrium, where the total demand is satisfied by a sufficient supply.
As we’ll see in the following blinks, the concept of equilibrium still plays a major role in modern economics.
Forecast critiques modern economic theory by revealing its major flaws. Physicist Mark Buchanan takes a close look at basic scientific assumptions behind our economic understanding and, with deft analytical skills, he unveils their inaccuracy. In the second part of the book, Buchanan presents a range of scientific discoveries that he believes might eventually help us to improve modern economics.
Belief in equilibrium confers a sense of safety and predictability, and reflects a firm belief in the triumph of human logic over nature.
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Try Blinkist to get the key ideas from 7,000+ bestselling nonfiction titles and podcasts. Listen or read in just 15 minutes.
Start your free trialBlink 3 of 8 - The 5 AM Club
by Robin Sharma