And you thought physics and economics weren't related.
In the decades following World War II, economists believed they had finally cracked the code. John Maynard Keynes had given them a framework as powerful, in its own way, as Newton's laws of motion. The economy, Keynes argued, could be managed like a machine. When recession threatened, governments should increase spending to stimulate demand. When inflation loomed, they should pull back. The equations were elegant. The logic was compelling. And for nearly three decades, it worked.
Finance ministers spoke with the confidence of engineers. Central bankers made pronouncements with Newtonian certainty. The business cycle—that chaotic swing between boom and bust that had plagued capitalism since its inception—could be smoothed out through careful adjustment of a few key variables. Unemployment and inflation moved in predictable, inverse relationships. Push one down, the other rises. Pull the right levers, and you could keep both in check. It wasn't just theory. It was working. The post-war boom seemed to prove that economics had finally become a science.
Then came 1973.
When the Model Broke
The oil crisis hit, and something impossible happened: unemployment and inflation rose simultaneously. Economists called it "stagflation"—stagnant growth combined with inflation—and their models had no explanation for it. According to Keynesian theory, this shouldn't exist. It was like discovering an object that falls up, or light that travels at different speeds. The equations that had guided policy for a generation suddenly produced nonsensical recommendations.
Increase government spending to fight unemployment? You'd accelerate inflation. Reduce spending to fight inflation? You'd worsen unemployment. The dials and levers that had worked so well for thirty years now seemed disconnected from the machine. Policymakers twisted them frantically, but nothing responded the way it was supposed to. The framework hadn't just failed at the margins—it had encountered a boundary where its core assumptions no longer held.
New frameworks rushed to fill the void. Milton Friedman's monetarism argued that controlling the money supply was the key variable Keynesians had missed. Supply-side economics claimed that tax cuts and deregulation would unleash growth. Rational expectations theory suggested that people would anticipate government policy and adjust their behavior, making most interventions ineffective. Each new framework worked for a time. Each claimed to have found the missing variable, the deeper truth that Keynesianism had overlooked.
But the pattern kept repeating. Monetarism guided policy through the 1980s, then seemed to lose its predictive power as financial innovations changed how money flowed through the economy. Supply-side policies worked in some contexts, failed in others. The rational expectations framework couldn't explain why markets regularly overshoot, why bubbles form, why panics spread. By the 2000s, economists had developed increasingly sophisticated models that incorporated insights from all these schools, models built on assumptions of rational actors and efficient markets.
Then came 2008.
The Crisis That Shouldn't Have Been Possible
The financial crisis caught nearly every economic model by surprise. Housing prices had risen steadily for decades—surely they couldn't all fall at once. Banks had diversified their risk through complex securities—surely they couldn't all fail simultaneously. Markets were efficient—surely massive mispricing couldn't persist. The models said a crisis of that scale had a probability so low it should happen once in several lifetimes of the universe. It happened on a Tuesday in September.
The problem wasn't that economists were stupid or that their math was wrong. The problem was that their models were built on assumptions that held true in normal times—assumptions about how people behave, how information spreads, how risk distributes itself across markets. Those assumptions worked brilliantly for decades. They worked right up until they encountered conditions they weren't built to handle: systemic instability, cascading failures, panic-driven feedback loops. The models hadn't been wrong. They'd been contextual.
What makes economics particularly instructive is that it sits between the hard sciences and the human sciences. Economic systems involve both mathematical regularities—compound interest, supply and demand curves, probability distributions—and human psychology, social dynamics, and political pressures. When economists try to model the economy like physics, treating people as predictable particles, they capture something real but miss the ways human systems can suddenly shift into entirely different regimes. When they focus only on human behavior and institutional analysis, they lose the mathematical regularities that do exist.
The truth is that economic systems operate under different rules in different regimes. A peacetime economy functions differently from a wartime economy. A stable growth period operates under different dynamics than a financial crisis. A small open economy faces different constraints than a large reserve-currency nation. What works in one context—austerity during a boom, stimulus during a bust—can be disastrous in another. The search for universal laws of economics may be looking for something that doesn't exist: rules that apply the same way across all scales, all contexts, all conditions.
Multiple Valid Frameworks
Today, economics doesn't have one dominant paradigm the way it did in the 1960s or 1980s. Instead, it has multiple schools that coexist, sometimes uneasily. Keynesian approaches still guide thinking about recessions. Monetarist insights inform central bank policy. Behavioral economics incorporates psychological findings about how people actually make decisions. Institutional economics examines how rules and norms shape outcomes. Each framework reveals genuine patterns. Each also encounters phenomena it cannot adequately explain.
The question is whether this plurality represents failure—economics hasn't yet found its Newton—or success at recognizing a deeper truth. What if economic systems genuinely operate under different rules at different scales and in different contexts? What if a recession-era economy and a boom-era economy aren't two states of the same system, but two different systems requiring different analytical frameworks? What if trying to find one model that perfectly predicts all economic behavior is like trying to use Newtonian mechanics to describe both billiard balls and electrons?
The parallel to physics isn't superficial. Both fields discovered that reality doesn't respect our desire for unified, universal laws. Both found that different scales and different contexts require different frameworks. Both learned—though economics is still learning—that the boundaries where models break down aren't defects in the models, but genuine transitions between domains that operate under incompatible rules.
And here's what makes this pattern particularly revealing: if it happens in physics, where measurement is most precise and controlled, and in economics, where human behavior complicates everything, where else might it appear? If even our most rigorous attempts to understand reality—whether physical or social—encounter these boundaries, what does that tell us about the structure of knowledge itself?
Bridge to Chapter 3
The physics story showed us how reality operates differently at different scales of size and speed. The economics story shows us that even within human systems—where we might expect more consistency—the same pattern emerges. Different contexts require different rules. Frameworks that work brilliantly in one regime break down in another. The boundaries aren't failures; they're transitions.
But perhaps these are still systems "out there," external to us. Perhaps when we turn inward, to understanding the human mind itself, we'll find something more unified, more consistent. After all, we're all running on the same hardware, operating with the same basic cognitive machinery. Surely psychology—the science of the mind—should reveal universal patterns.
That hope, too, encounters boundaries. And those boundaries cut closer to home.