This piece is the latter part of Chapter 4 (2) of The Declaration of the Age of Physical Economics (Yoon Jong-won, Yoon So-ri, Yoon Jun). It is an academic exposition presenting the authors' physical economics hypothesis, and the body, figures, and citations follow the manuscript as written.
The Critical Point: The Point Where, at Some Moment, It Suddenly Collapses
The critical point is the point at which a system shifts from gradual change to sudden collapse. It is the point at which minute differences accumulate until, at some moment, the system moves from one state to another.
A paper published in the journal Nature in 2009 by the Dutch ecologist Scheffer comprehensively assembled the fact that lake ecosystems, forest ecosystems, and coral reef ecosystems all follow the same critical-point dynamics. Around the same period, a paper published in the Proceedings of the National Academy of Sciences by the British climatologist Lenton and others assembled the fact that there are 9 tipping elements within the Earth's climate system, and that when each element crosses its limit, the entire system shifts into a different state.
A nation's economy also has a critical point. In the stage where debt is accumulating, the system wavers yet holds. But once it crosses the critical point at some moment, the system no longer possesses the capacity for self-recovery and collapses all at once. What happened in South Korea in 1997 is an instance of that event. If the critical point can be caught in advance, one can take action before crossing that point. Korea's self-employed would not have to suddenly close their shops.
The Five Words of Flow: A Grammar Common to Nature and the National Economy
| The Five Words | One-Line Definition |
|---|---|
| Flux | The quantity of the medium that flows per unit time (the magnitude of flow) |
| Deposition | Accumulation that hardens onto the wall of a passage and builds up irreversibly (does not dissolve spontaneously) |
| Nonlinear sensitivity | Halve the radius of the passage, and the flow volume becomes one sixteenth (Poiseuille's r⁴ law) |
| Dual blockade | The system collapses only when two passages are blocked at the same time (a single blockade does not bring it down) |
| Critical point | The point where gradual change turns into sudden collapse (the line of no recovery) |
The Same Law That Nature Shows Us
Now that we have the five words, we look in turn at how the same law operates throughout nature. After seeing, in the four domains of river, star, ecosystem, and climate, how difference makes flow and how flow stops, we arrive at the conclusion that a nation's economy too follows the same law.
River: The Tragedy of the Aral Sea
The Aral Sea in Central Asia was once the fourth largest lake in the world. In 1960 its area reached about 68,000 square kilometers, and fishing and agriculture were the lifeline of the towns along its shores. But from the 1960s, as the Soviet government began drawing off, on a large scale, the water of the two rivers flowing into the lake (the Amu Darya and the Syr Darya) for cotton agriculture, the volume of water entering the lake fell to less than half.
The result proceeded slowly but without pause over 50 years. The lake's surface dropped by 50 centimeters to 1 meter every year, by the 1990s its area had shrunk by nearly half, and in 2014 the eastern lake dried up completely. Muynak, once a port city, has now become a desert city more than 100 kilometers from the shore.
The reality of the Aral Sea tragedy is the halting of flow. As the flow of the two rivers was cut off, the volume of water entering the lake decreased, while at the same time evaporation from the lake surface in the hot climate proceeded as before, so the volume leaving remained the same. It is an event in which a dual blockade occurred. The incoming flow was blocked, yet the outgoing flow stayed as it was. Over 50 years, stagnation accumulated until the lake lost its capacity for self-recovery, and once it crossed the critical point at some moment, no effort could bring the lake back to life. Like a deposition, a lake that has once vanished does not return of its own accord.
Star: When Flow Stops, It Explodes
A star is a vast flow system. In the core of a star, hydrogen fuses into helium and enormous energy is produced, and that energy flows slowly toward the surface. The temperature difference between the core and the surface is the star's gradient, and along that difference light and heat flow as the medium. As long as a star is giving off light, its flow is alive.
But every star eventually meets the time when its flow stops. When the hydrogen fuel in the core is fully consumed, the fusion reaction stops, and the energy that had been produced in the core vanishes. When the energy vanishes the gradient vanishes, and when the gradient vanishes the pressure that had held up the star's exterior collapses along with it. In that moment the star, crushed under its own weight, collapses inward, and the collapsed star soon explodes. A star's death approaches slowly and ends, at some moment, in an explosion. It is an event in which the critical point operated exactly as it does.
Ecosystem: Cross the Line of Recovery and It Does Not Return
Ecosystems follow the same law. In the material assembled by Scheffer and his fellow researchers, once nutrient salts in a lake cross a certain limit, it shifts all at once from clear water to an algal-bloom lake. Until then the lake has a self-purification capacity and absorbs a little pollution. But the moment it crosses the critical point, the self-purification capacity collapses and the lake moves into a different state. Interestingly, even if the nutrient salts are reduced afterward, the lake does not readily return to its original state. Once a system has moved into a different state, it tends to stay there. It is the same principle as the irreversibility of deposition.
Coral reefs are the same. If a rise in water temperature above a certain level persists, coral reefs pass through bleaching and shift into a different ecosystem. Even if the water temperature recovers afterward, the coral reefs do not readily return. Once a system moves from one state to another, it does not return of its own accord.
Climate: The 9 Tipping Elements
The paper published in the Proceedings of the National Academy of Sciences by Lenton and his fellow researchers assembled the fact that there are 9 tipping elements within the Earth's climate system. The melting of the Greenland ice sheet, the collapse of the West Antarctic ice sheet, the savannization of the Amazon rainforest, the thawing of the Siberian permafrost, the bleaching of coral reefs, and so on. When each element crosses its critical point, not only that element but the entire Earth's climate system shifts into a different state. A system that has once shifted does not readily return to its original state.
In all four domains of river, star, ecosystem, and climate, the same law operates. Where there is difference it flows, and when difference vanishes it stops. A system that has once stopped does not return of its own accord. Deposition accumulates, nonlinear sensitivity comes into play, a dual blockade is established, and once the critical point is crossed it collapses all at once. Nowhere in nature is there an exception.
The Six Masters of Economics: The Questions They Answered and the Questions They Did Not
It has been confirmed that the same law operates throughout nature. One more question remains. If this law operates within a nation's economy as well, why did economists fail to reach it over 250 years? The answer is surprisingly simple. It is not that they failed to reach it, but that they reached it partially and did not go all the way. The six masters who rewrote the history of economics, Quesnay, Keynes, Friedman, Minsky, Reinhart and Rogoff, and Brunnermeier, each added a piece of the answer, and none of them completed the whole picture.
The Six Masters of Economics: The Questions They Answered and the Questions They Did Not
| Master | Year | The Question Answered | The Question Not Answered |
|---|---|---|---|
| Quesnay | 1758 | The economy flows like blood | How the flow becomes blocked |
| Keynes | 1936 | A shortage of demand creates crises | Saw only the quantity of demand, ignored the path |
| Friedman | 1963 | The money supply determines prices (MV=PQ) | Saw only M, ignored V (velocity of circulation) |
| Minsky | 1992 | Debt accumulates in stable times | Did not see where the debt is deposited |
| Reinhart and Rogoff | 2009 | An 8-century pattern of crises repeats | Saw the pattern but did not formalize the stages |
| Brunnermeier | 2009 | The multiplicative structure of liquidity and credit | Did not extend it to universality across domains |
Quesnay, an 18th-century French physician, published a diagram called the Tableau Économique in 1758. The fact that Quesnay was a physician is decisive. Quesnay saw the economy as a single person's body. He drew, in a single table, the picture in which farmers grow grain and sell it to city dwellers, city dwellers make clothes and the farmers buy and wear them, and in between money flows in one direction and returns in the opposite direction. This table is the first diagram of economics. But Quesnay could not answer how the flow becomes blocked. He pointed out only the starting point and stopped there.
Keynes, a 20th-century British economist, published The General Theory in 1936 and argued that the fundamental cause of crises lies in a shortage of demand. The logic was that if people do not spend enough, the market cannot recover, and this logic became the standard for explaining the economic recovery after the Great Depression of 1929. But Keynes saw only the quantity of demand. He did not see along which path demand travels and where it arrives, or where it becomes blocked. The fact that even releasing 4 trillion dollars in stimulus does not reach the back alley cannot be explained by Keynes's theory.
The American economist Friedman, together with Schwartz, published A Monetary History of the United States in 1963 and formalized the proposition that the money supply determines prices. The core equation is MV=PQ. It is the equation that the money supply multiplied by the velocity of circulation equals prices multiplied by output. The interesting fact is that V, namely the velocity of money circulation, is contained within the equation. V is a variable that indicates how many times one unit of money turns over in the course of a year, and it is the speed of flow itself. But Friedman and his successors scarcely dealt with V. They concentrated on the money supply M, and assumed that V remains constant no matter what happens. Time passed with the speed of flow almost never being measured.
The American economist Minsky formalized the Financial Instability Hypothesis in 1992 and pointed out the fact that debt accumulates in stable times. It is the insight that crisis begins in stability. But Minsky did not see where the debt is deposited. He saw only the quantity of accumulation, not the location of accumulation.
The American economists Reinhart and Rogoff published the book This Time is Different in 2009 and assembled the pattern of financial crises spanning 800 years. The simple fact that crises repeat was proven with 800 years of data. But the two of them saw the pattern, yet could not formalize through which stages a crisis arises. They confirmed only the existence of the pattern.
The German-born American economist Brunnermeier published a paper titled Deciphering the Liquidity and Credit Crunch in the journal Journal of Economic Perspectives in 2009 and formalized the fact that liquidity and credit have a multiplicative structure. It is the insight that when the two collapse at the same time, a crisis is created. But Brunnermeier remained within a single domain, and did not extend it to the universality across domains whereby the same multiplicative structure operates throughout nature.
The six masters each added a piece of the answer, but none of them completed the whole picture. The model that the present author has established is the result of synthesizing the six answers: Quesnay's flow, Keynes's demand, Friedman's V, Minsky's accumulation, Reinhart and Rogoff's repetition, and Brunnermeier's multiplication. It is also the result of proving, with 690 months of data from Korea and the United States, the fact that all six masters' answers are different facets of the same universal law.
The Economy Follows the Same Law: The Answer of 690 Months
In the river, in the star, in the ecosystem, and in the climate, the same law operated. If so, do the Korean and American economies also follow the same law? The result the present author verified with 690 months of data from Korea and the United States is clear. When every event that occurred in the Korean and American economic systems over the 690 months, combining Korea's 351 months and America's 339 months, was analyzed with the five words of flow, all 4 crises were captured exactly through blockade formation and passages of the critical point (the formation of dual blockade applies to the four Korea-U.S. cases of 2008 and 2020, while 1997 and 2003 were single-blockade advance warnings of the signal blockade alone), and in the 3 cases of single blockade that recovered on their own the system survived in every instance.
The fact that the law nature showed us operates identically within the Korean and American economies as well was confirmed with 690 months of data. Where there is difference, capital flows, and when difference vanishes, capital stops. Bad debt is deposited, the passage narrows and the flow decreases nonlinearly, and when two passages are blocked at the same time, the critical point is crossed and the system collapses. A nation's economy is one instance of a natural system, and it is subject to the universal law that governs nature.
This conclusion is the starting point of the book. Therein lies the reason the 250-year-old assumption of the invisible hand is being shaken. It is because it has become clear that the assumption that the market balances itself is an assumption that exists nowhere in nature. A river does not balance itself. A river merely flows along the difference, and merely stops when the difference vanishes. A star, too, does not balance itself. A star merely explodes the moment its flow stops. A national economy is the same.
Flow Follows the Same Law
The core point examined in this chapter is simple. It is the conclusion that the same law operates throughout nature, and that a nation's economy too is one instance of the application of that law. The reason a river flows, the reason a star shines, the reason a lake dries up, the reason the climate shifts, and the reason a nation's capital flows and becomes blocked all occur under the same universal law.
If so, how does that law reveal itself within a nation's economy? Where and how capital flows, where and how it becomes blocked, at which stage deposition accumulates, and at which critical point the system collapses, we examine in earnest in the next chapter. There, the 30 years of the Korean self-employed person who opened a restaurant in 1996 appears again. In which moment of those 30 years, which passed in turn through the 1997 foreign exchange crisis, the 2003 card crisis, the 2008 global financial crisis, and the 2020 COVID crisis, which flow was blocked and which deposition accumulated is the story of the next chapter.
For Korea's self-employed not to be struck by shocks without advance warning, the flow must be caught in advance. Now that we have confirmed the fact that the universal law operates throughout nature, in the next chapter we follow how that law reveals itself within a nation's economy.
References
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3. Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States, 1867-1960. Princeton University Press.
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