13. The Baryonic Ladder: The Firm, the Market, and the Economy

This book has invoked physics as a guide to constructing models of economic behavior that obey basic rules at different scales. Even cursory examination of stock–bond correlations and the impact of macroeconomic news on capital markets suggests that econophysics hinges on perhaps no more than two sets of rules. First, the binary state of the economy matters. Whether a capital market is on the positive or negative side of mean returns matters. So do investor sentiment and the current phase of the business cycle. Second, comovement is the other great force in finance. Correlation indicates comovement between an asset and the broader market. For its part, the discount-rate component of beta addresses the vulnerability of stock values to macroeconomic forces far beyond strictly idiosyncratic cash-flow effects. The structural unity of economic dynamics at the individual, household, firm-specific, market-wide, and macroeconomic levels is reminiscent of scientific efforts to reconcile the Standard Model of particle physics with levels general relativity, through string theory or some other explanatory framework that can harmonize chromodynamics with cosmology.