Why isn't the economy more like hydraulics?

The strange simplicity of economic relationships

An odd feature of economics is that economies constitute an apparently complex system, but analysts are often willing to give confident answers about aggregate outcomes, based on simple relationships that always hold.

Q: What effect will imposing a minimum wage have?
A: Increase unemployment, if set above equilibrium wage for any job.

That's just one example; you can find examples favoring various political positions.

People giving such answers are usually quite confident in the answers as well, describing them as "Economics 101" or even perhaps "basic logic", a simple application of logically necessary relationships. To take a physical analogy, this seems to conceive of economies as something like ideal gases.

Q: What happens if, in a constant-volume, closed container, one increases the temperature?
A: The pressure increases, because PV = nRT
.

Basic laws exist, one finds them, and then one can use them to answer questions fairly confidently.

Economies as a series of pipes

If I were shopping about for a physical analogy for the flow of money through an economy, though, I would've picked hydraulic piping as a more obvious candidate than ideal gases. But in that case, you don't get nearly as simple answers.

Q: What happens if you increase the rate of flow in this incoming pipe?
A: Depends on the flow regimes, and possibly also on the specific system.

In hydraulics, asking how a change in one variable will impact another one is not just a question of applying one set of relationships between variables that always holds (e.g. flow rate proportional to pressure drop), but a question that is typically broken into two parts. In the first part of the inquiry, we can indeed find relationships between variables, but for specific flow regimes. For example, if we know that the flow is laminar, the Hagen-Poiseuille equation tells us that pressure drop in a pipe is proportional to volumetric flow rate.

But then there is a second part to the inquiry: does the hypothetical change impact the flow regime? For example, increasing the flow rate in a pipe can cause laminar flow to transition to turbulent flow. These flow-regime transitions can significantly impact any answer about what a change to a given quantity would do to the overall operation of the system. Depending on the system, a further inquiry may need to look at both what are called "minor losses", the effects caused by the specific configuration of the system's bends, valves, and so on.

Of course, economies are not literally pipes. But why is economics not at least as complicated as hydraulics? When analyzing the relationships between economic variables, why isn't it necessary to, at a minimum, consider both: 1) the relationship between the variables, assuming a specific economic regime; but also 2) the possibility that the change will cause regime-switching?

Perhaps someone has already provided a good answer to that question. I'm open to answers in either direction. The tone of this brief essay is admittedly oriented as a bit of a challenge, but if there is some reason that economic flows, unlike fluid flows, really don't experience any significant regime-switching, I'd be interested to understand why not.

Economies as dynamical systems

A bonus question, briefly sketched:

If, instead of as hydraulic piping, we view economies as general dynamical systems, the regularity becomes even more puzzling. "Well-behaved" dynamical systems, in the sense of systems free from strange pathological attractors and oscillations, are quite rare in dynamical systems study. It's not very common to find a non-trivial system where variables relate in a reasonably clean, time-independent way with no examples of chaotic, sensitively-dependent parts of the state space.

If the real-world economy is a well-behaved dynamical system, characterized by general relationships between things like supply and demand that hold straightforwardly and aren't significantly complicated by internal system dynamics (attractors, feedback loops, oscillations etc.), it would be quite interesting to understand what causes that remarkable lack of pathologies.


Mark J. Nelson, 2011-10-05.
Comments welcome: mjas@itu.dk
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