In fact, Economics is much more complex than rocket science. Many people don't know that actually rocket science is extremely simple: it's described by relatively simple differential equation, which has an exact analytical solution, which is called "Tsiolkovsky equation". Rocket technology is extremely complex, but science under it is simple.

Economics is not simple. It's not simple for two reasons. First, the most important reason: economy is interaction of people. You can never create exact math describing people interaction. Second reason is that all math describing economy is always oversimplified. Even the most complex math found in some papers is simplified and many assumptions are doubtful, to say the least.

Here's the example. Let's take the simplest equation:

M * V = P * Q

It supposedly describes relation between money mass, money velocity, amount of goods and prices of said goods. Every component of this equation is oversimplified. First of all, all goods are different, and similar goods are sometimes sold at different prices, so equation should possibly look like:

M * V = SUM(PQ)

Next comes M. What kind of money mass is it? Is it M1, M2, M3 or something completely different?

V isn't much better. Thing is, different industries have different money velocities. They also have different velocities in different time of year.

All together, the more you look at it, the less sense it makes. This equation, obviously, should be taken for some period of time. But time periods are different, and how you can compare Q1 with Q3 of any given year? And situation is changing all the time, but dynamics is not reflected in this equation.

So next time somebody tells you that Economics is not rocket science, agree immediately. It's much, much more complex.

## Wednesday, February 18, 2009

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