NP in Economics: Welcome to the 19th Century!

The Nobel Prize in economics was awarded today for work done in game theory. WaPo reports:

Asked to describe game theory, he said "it's the study of how people interact when each person's behavior depends on, or is influenced by, the behavior of others."

It departs from conventional applications of economics which traditionally focus on "consumers and producers who take prices for granted and react to them," he said.

In game theory, he said, "everyone's best choice depends on what others are going to do, whether it's going to war or maneuvering in a traffic jam," he said in a phone interview.

Thus, as he wrote in "Micromotives and Macrobehavior," horn honking in traffic may seem related to a single reason but upon further analysis, "drivers in traffic start honking their horns . . . because someone else honked their horn first. Hearing your car horn, I honk mine, thus encouraging you to honk more insistently. . . . People are responding to an environment that consists of other people responding to their environment," Schelling wrote, "which consists of people responding to an environment of people's responses.

"These situations, in which people's behavior or people's choices depend on the behavior or the choices of other people, are the ones that usually don't permit any simple summation or extrapolation to the aggregates. . . . .We usually have to look at the system of interaction."

His admirers have credited him with giving them a "new way of thinking" about any number of situations. One reviewer called his approach "logic applied to patterns that are recognizable in real life."

In physics, we called this "statistical mechanics" and pretty much plumbed the math for it in the 19th century, although mathematical work in magnetohyrodynamics continues to this day. Economics isn't physics and we have the advantage of large numbers of particles vs. relatively small numbers of human inter-actors. Still, I think every economist should take a year or two of basic physics, just to hurry the process along. There's lots of overlap and I think we could shave a couple of decades off the completion of a Grand Unified Theory of Economics if we made science a stronger part of the economics curriculum.

The reverse is also true, but not just for physicists. I think everyone should take a year of economics.