Self-Organized Criticality in Economic Fluctuations: The Age of Maturity

Claudio Tebaldi

doi:10.3389/fphy.2020.616408

Abstract

Self-Organized Criticality (SOC) has been proposed as a paradigm that may rationalize the emergence of macrofinancial fluctuations. The wave of innovative thinking sparked by this proposal continues to produce interesting contributions in many areas of economics, ranging from macroeconomics to finance. In this review, we propose a guided tour to these achievements, highlighting that analysis of SOC equilibria is a promising avenue to establish a nexus between i) a statistical equilibrium characterized by the spontaneous emergence of dynamic critical fluctuations and ii) a strategic equilibrium concept modeling a large number of interacting players. The critical state is the stable outcome arising from a trade-off between cooperation and competition.

Highlights

The interaction between economic and physical sciences is so rich that a new interdisciplinary field has emerged, econophysics
It is fair to say that the self-organized critical (SOC) paradigm for economic and financial fluctuations put forward in the seminal contributions [1,2,3] is one of them
While many are sympathetic with the proposal that an SOC paradigm underlies financial and macroeconomic fluctuations, the introduction of a common language and of analytic tools useful to make this proposal effective at both the descriptive and normative level are still underway

Summary

INTRODUCTION

The interaction between economic and physical sciences is so rich that a new interdisciplinary field has emerged, econophysics. It is virtually impossible to produce a systematic discussion of the overall state of the art, given the relevance of the topic and the number of research contributions in this area In this short review, I propose a guided tour through the research spillover originating from those seminal proposals and argue that the SOC paradigm is an important building block of an emerging interdisciplinary paradigm suitable for framing a notion of statistical equilibrium relevant for both social and natural sciences. While the emphasis in physics is more focused on the descriptive content, these considerations explain why economists often consider acceptable a poor description of outside uncertainty as an acceptable price to pay in order to achieve a better description of inside uncertainty that is necessary to account for the policy reaction of individuals At first sight, these fundamental issues look completely unrelated and far from the SOC paradigm. In light of these considerations, it is striking and puzzling that the SOC paradigm may often provide an effective and accurate description of many empirical stylized properties of a competitive (economic) equilibrium

SELF-ORGANIZATION AND THE “INVISIBLE HAND”

SOC AND ECONOMETRICS

Universality

Renormalization Group

AVALANCHE DYNAMICS