Physical economics is a school of thought and area of economics that aims to study the economy along the lines of natural sciences (in particular, physics) with the use of mathematical modeling. Physical economics puts aside the financial and monetary aspects of the economy, and treats the economy of the world, a nation, or region as en entity analogous to a living organism, or, in other words, a single, integrated, self-reproducing physical process. Since the fall of the Soviet Union, the Lebedev Physical Institute at the Russian Academy of Sciences has emerged as the world's leading centre of research in physical economics, large part to the studies of Dmitrii S. Chernavskiy, Nikolai I. Starkov, and Andrei V. Shcherbakov.
The term physical economics was first proposed by Lyndon LaRouche, drawing on the work of the Russian mineralogist and geochemist Vladim ir Ivanovich Vernadsky. These economists asserted that Vernadsky's concept that the three elements of the biosphere (the abiotic, the biotic, and the social) are closely interconnected, and differ in how they function on the biosphere also offers a promising explanatory model of the economy.
The approach gained popularity in the former Soviet Union and Eastern Europe following the fall of Communism, which gave researchers a chance to move=20 away from Marxism and explore new approaches in economics. The Lebedev Physics Institute has now become a leading center for research in physical economics in much the same way that the University of Chicago led the way in the development of monetarism. With their background in physics, Chernavskiy, Starkov, and Shcherbakov, along with other researchers at the Russian Academy of Sciences, got interested in economics in response to events since the early 1990s across the world that appeared to be unexpected for neoclassical economists. These events included the sharp rise in poverty and inequality and the severe contraction of GDP throughout much of Eastern Europe following the collapse of the Soviet Union and the implementation of neoliberal free market reforms.
Physical economists argue that the avenues of research developed in classical and neoclassical economics (expressed in traditions as diverse as classical liberalism, Marxism, Keynesianism, and monetarism) are well equipped mathematically, and constitute a closed system, with its own conceptual tools, axioms, and methodology. However, they see this area of research as standing separate from the natural sciences, including physics. They argue that natural sciences have more experience in constructing and studying models of evolving, dynamic systems, to which human society belongs. In an era of integration of sciences and the development of allied sciences, they see the self-isolation of classical and neoclassical economy theory as especially evident today in hindering the development of economics, thus explaining why neoclassical economists have failed to predict or explain the development of real-world economy over the last few decades.
Chernavskiy, Starkov, and Shcherbakov have found that under given external conditions, a self-sufficient country can be in two stationary, stable states either in a high-productivity or in a low-productivity state. Transitions between them appear to be either an "economic crisis" or an "economic miracle."
In applying their dynamic model to Russia, they have concluded that the while Russia's economic crisis of the 1990s is over, the country remains in a stable low-productivity state, characterized by uneven distribution of wealth, with the coexistence of the poor and a very small number of very wealthy Russians with virtually no middle layer in between them. These findings have led to an impetus for further research focusing on possible transitions to a high-productivity state.
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