Non-Equilibrium Economics: A Physicist's Point of View

Abstract

Financial and economic history is strewn with bubbles and crashes, booms and busts, crises and upheavals of all sorts. Understanding the origin of these events is arguably one of the most important problems in economic theory: are economies intrinsically unstable, and can one ``stabilize unstable economies''? In this review I argue, from a physicist's vantage point, that the concept of equilibrium -- so central to mainstream economic thinking -- is likely to be the exception rather than the rule in large, complex, interacting systems. Drawing on a series of stylized ``toy'' models, I show how excess volatility, endogenous crises and crashes, inflation swells and persistent inequalities can all emerge naturally from genuinely out-of-equilibrium dynamics, without invoking large exogenous shocks. Three generic mechanisms recur throughout: trapping in a multiplicity of history-dependent equilibria; the impossibility of dynamically reaching equilibrium, leading to oscillations and chaos; and the spontaneous evolution towards fragile, marginally stable states -- the self-organized criticality paradigm. I stress that these are phenomenological scenarios rather than calibrated theories: there is, at this stage, no ``smoking gun''. But the burden of proof, I contend, should be on the equilibrium camp.