Economy

You can find the first article on Social Physics and Science of Traffic Jams here.

In traditional economic theory, few concepts have as respected a position as that of equilibrium. The concept of equilibrium suggests that the economy transitions smoothly from one state to another, with the supply of goods perfectly balancing out the demand for goods. Such a mechanical clockwork-like operation was implied by the first great economist, Adam Smith (1723-1790), in his magisterial book, The Wealth of Nations. He conjured up the metaphor of the “invisible hand” to describe the economy’s ability to self-regulate.

The problem with this pretty picture as anyone who reads magazines about business and the economy would have noticed, is that the economy and by extension markets have a habit of slipping into instability. They experience booms and busts from time to time. Traditional economists tend to explain this away by saying that the booms and busts are anomalies that are not inherent features of the market and that they come about through causes that are external to the economy (the economic jargon for this is that they are caused by exogenous events). Common examples of these external causes given by economists are the introduction of new technology and the change in government policy/regulations.

Not all economic thinkers agree/agreed with the traditional economists’ assessment of market instability. Arguably, the most influential dissenter was Karl Marx (1818-1883), whose ideas on socialism led roughly one third of the globe to declare themselves communist countries in the 20^th century. In an equally magisterial book titled Das Kapital that came in three volumes, Marx countered the position of the traditional economists by suggesting that booms and busts are an intrinsic feature of a capitalist society. His reasoning was that since in a capitalist society, the means of production is in the private hands of autonomous individuals scattered across the economy, capitalist societies suffer from huge coordination problems that result in fluctuations that ultimately bring about the booms and busts. He concluded by saying that these booms and busts would lead to the demise of capitalism and usher in the age of communism, what he referred to as the “proletariat revolution”.

Well, it seems safe to say that Marx was wrong about the demise of capitalism. Capitalism is clearly alive and well (Okay, some might disagree with the well part). Nevertheless, there are those who believe that Marx was onto something when he said that there are natural fluctuations that arise within the economy that give it bouts of instability. Physicists interested in economics had begun to take that line of reasoning shortly after Marx’ death.

One of the most influential works done by physicists about market fluctuations was carried out by Frenchman Louis Bachelier (1870-1946) and was published in a thesis titled Theorie de la Speculation (Theory of Speculation) in the year, 1900. Bachelier’s contention was that the fluctuations in the prices of stocks and shares, and thus the underlying structure of the market economy, are random. To reach this conclusion, he had to formulate what is now known as random walk theory, a theory that went on to have and continues to have a huge impact on the world of finance. In secondary school, you were exposed to random walk theory when you were taught “Brownian motion” in biology. For you to get a sense of how big an achievement random walk theory was, I will point out that the great Albert Einstein himself used random walk theory to explain Brownian motion and thus decisively prove the existence of atoms, which at the time was contestable, 5 years after Bachelier came up with it.

The direction of motion of a particle undergoing a random walk fluctuates unpredictably, and Bachelier assumed that stock prices did the same. If you plotted a graph of the size of the fluctuation of such a particle against the number of times such a similarly sized fluctuation appears, you will get the all too familiar “bell curve”. The bell curve is the mathematical signature of a random process.

Bachelier’s theory was indeed a very brilliant one, but it had one problem. It wasn’t quite correct. Close examination of stock price fluctuations show that they aren’t quite random. What’s more if you model stock price fluctuations as a random walk, the resulting distribution of fluctuations suggest that booms and busts occur much less often than they actually do in real life markets. The danger of this is that financial traders that use random walk models (which is to say just about everybody using statistical trading models) could get hit by a financial market crash that they never saw coming. Sound familiar?

Physicists attempts to model stock price fluctuations did not stop with bell curve distributions (formally known as the normal distribution or Gaussian distribution, so named after 19^th century German mathematical genius Friedrich Gauss). In the 1960s, French mathematician Benoit Mandelbrot, who played a crucial role in the development of chaos theory, suggested that stock price variations could be modeled using a Levy flight, named after another French mathematician Paul Levy (1886-1971), who came up with the idea in 1926. Levy flights are similar to random walks except that they from time to time, exhibit some very large fluctuations relative to the size of the vast majority of fluctuations. In a true random walk, all variations are roughly the same size. Processes that can be modeled this way are known as Levy-stable processes.

In modeling stock price variations, the Levy-stable process is a significant improvement over the Gaussian distribution. Financial practitioners, however overwhelmingly still use Gaussian models because they are much easier to handle. Despite the improvement it brings, the Levy-stable process is not perfect. Where the Gaussian distribution severely underestimates large fluctuations, the Levy-stable process overestimates them, but to a significantly less degree than the Gaussian distribution underestimates them. It seems the true curve lies somewhere in between. Further research by physicists and other scientists have not been able to locate a single curve that captures price variations perfectly, but they have found that the behaviors price variations exhibit is consistent across many global financial markets, suggesting that perhaps, capitalism has a universal statistical signature.   

The models discussed above try to describe market fluctuations without bothering about their source. Common sense suggests that the source are the interactions of buyers and sellers in financial markets, an observation that could be reasonably extended to the larger economy. However, traditional economics treats each and every market participant as independent, assuming that we never interact with one another. For instance, if someone wanted to buy a car, traditional economics assumes that the person would gather every bit of information there is on the car market, logically analyze all the information and independently come up with the most rational choice of car to buy, without ever asking another human being for his/her opinion or looking to see what other people interested in buying cars are buying. You are probably laughing by now. Well don’t. You probably wouldn’t have done much better if you were an economist. You see, modeling how our interactions affect our economic decisions is a very complex problem, and until recently, economists did not have the tools to model those interactions adequately, so they left them out of their economic models.  

This is precisely where physics can help. Statistical physicists have been dealing with systems of interacting particles for over a century. While one would not expect their tools to translate perfectly from physics to economics, some useful insights can be gleaned. The class of models that have been borrowed from physics to model interactions in economics are known as “interacting-agents” models. The first of such models was developed in 1974 by a German mathematician familiar with both physics and economics. Interacting-agents models are based on models from the field of magnetism known as Ising models. Ising models model the interaction of atoms in a magnet. For those of you who did physics in secondary school, you might recall that atoms have a characteristic spin where it could spin in one direction or the other. Each atom’s choice of spin is affected by its neighbors. In the same vein, interacting-agents models present each economic agent with choices of how to trade, with the agent’s choice being affected by other economic agents. One very useful result that has come from the use of interacting-agents models is that the phenomenon of herding, where agents copy one another, emerge naturally from the models, an impossibility with traditional economic models because of the assumption of independent agents. Given how often the phenomenon of herding has been fingered in market crashes, one can hardly argue that interacting-agents models haven’t made a useful contribution to the field of economic modelling.

Bibliography

1. Ball, Philip. 2005 Critical Mass: How One Thing Leads to Another. London: Arrow Books

In the ever-evolving theatre of global trade, policy decisions taken in Washington can ripple across the globe—from Wall Street to the markets of Lagos, Kano, and Port Harcourt. President Donald Trump’s return to office has brought a renewed wave of protectionist fervour, marked by an expanded tariff regime that reflects his “America First” worldview. While global attention has largely focused on the United States, China, and the European Union, it is imperative that countries such as Nigeria respond not with reactive diplomacy but with a deliberate, forward-looking strategy grounded in domestic economic reform and long-term competitiveness.

The recent decision by the United States government to impose a 14% tariff on most Nigerian exports—excluding oil and gas—has introduced a new layer of complexity to Nigeria’s already delicate trade outlook. Although the affected export categories represent a relatively small share of total trade volumes, the sectors involved—agriculture, textiles, leather, and light manufacturing—are among the most promising for future diversification and industrial development. The tariff announcement has, therefore, sparked concern not only for its immediate commercial implications but for what it signals about the shifting architecture of global trade. For Nigeria, a country that has historically relied on preferential trade access to key markets, the move is a wake-up call. It underscores the urgent need to wean the economy off its dependence on externally dictated terms and to recalibrate trade relationships based on mutual competitiveness rather than asymmetrical concessions. This development also reflects a broader pattern: the growing fragility of long-standing trade arrangements such as the African Growth and Opportunity Act (AGOA), and the return of transactional bilateralism that places domestic political priorities above multilateral cooperation. Nigeria’s response to this shift must be grounded not in appeals for exemptions, but in a sober assessment of its structural vulnerabilities—and a decisive strategy to address them.

Nigeria’s reliance on instruments such as AGOA has provided short-term access to U.S. markets but has not translated into long-term structural competitiveness. While AGOA created openings in sectors like apparel and agro-processing, the country’s utilisation rates have remained consistently low compared to peers such as Kenya, Lesotho, and Madagascar. This underperformance is rooted in domestic constraints—ranging from poor infrastructure and regulatory inefficiencies to the absence of scale economies in manufacturing. Over the years, trade with the United States has remained heavily skewed in favour of crude oil exports, with limited progress in developing a robust non-oil export base. U.S. imports from Nigeria have largely reflected commodity cycles, while Nigerian imports from the U.S. consist mainly of high-value machinery, vehicles, and refined products. The result is a structurally imbalanced relationship in which Nigeria remains a supplier of raw inputs and a consumer of industrial outputs. With the reintroduction of tariffs and the global trend towards protectionism, the logic of dependency on preferential schemes is becoming increasingly untenable. Nigeria must now focus on enhancing its supply-side capabilities, improving export readiness, and negotiating trade relationships that reflect mutual benefit rather than structural subordination.

The shifting dynamics of global trade often mirror the clash of economic giants, where smaller economies bear the unintended consequences of disputes they did not initiate. Yet Nigeria can no longer afford to remain the grass trampled underfoot in such conflicts. The time has come to reposition itself—not as a passive observer, but as a strategic actor capable of shaping outcomes in its favour. This requires shedding the posture of vulnerability and embracing a new economic diplomacy grounded in capability, coherence, and confidence. As global alliances realign and preferences erode, Nigeria must assert itself not on the margins but at the table.

This moment presents an opportunity—indeed, a necessity—for Nigeria to pivot decisively toward production-driven growth. The structural imbalances exposed by recent trade developments cannot be addressed through tactical trade negotiations alone; they require a deeper commitment to building domestic industrial capacity. Central to this transformation is the development of light manufacturing, which offers a viable entry point for industrialisation in a resource-constrained environment. Sectors such as garments, footwear, and agro-processing are particularly well-suited to Nigeria’s labour force and resource base. They demand modest capital investment, have proven export potential, and are capable of absorbing a growing pool of underemployed youth. A focus on these industries would not only diversify Nigeria’s export portfolio but also reduce its reliance on volatile commodity cycles, improve value retention, and expand the formal sector. To move in this direction, however, Nigeria must confront the foundational barriers that have long undermined industrial growth—chief among them infrastructure deficits, inconsistent policy execution, and a regulatory environment that remains cumbersome and unpredictable.

The most immediate concern lies in the disproportionate role of crude oil in Nigeria’s export earnings. While oil has been excluded from the new tariffs, it remains a single point of vulnerability in our external sector. Any future shift in policy or deterioration in global demand could have serious implications for public revenue and foreign exchange stability. That the Central Bank of Nigeria was compelled to intervene with a $198 million injection to stabilise the naira following the tariff announcement speaks to how deeply exposed our economy remains to decisions taken elsewhere.

Nigeria continues to operate a trade model that privileges the export of raw materials and the import of finished goods. It is a model inherited from a colonial past that constrains job creation, weakens domestic value chains, and stunts industrial growth. Whether it is cocoa exported in bulk and re-imported as chocolate or cashew nuts shipped raw and returned as packaged snacks, the pattern is the same. We generate little value domestically and, in doing so, limit both fiscal space and developmental outcomes.

To begin to shift this pattern, Nigeria must prioritise light manufacturing and agro-processing as first steps toward industrialisation. These sectors are labour-intensive, offer strong linkages with agriculture, and do not require the scale of investment or infrastructure that heavy industry demands. Textiles, garments, footwear, and processed food products can all serve as entry points for job creation and export diversification. With the right mix of policy support and market access, they could help reverse the deindustrialisation that has characterised Nigeria’s economic story in recent decades.

Realising this potential, however, requires more than rhetoric. It demands practical steps to address the long-standing bottlenecks that hinder industrial activity. These include unreliable power supply, poor logistics infrastructure, fragmented regulatory frameworks, and limited access to affordable credit. Investors—both domestic and foreign—require greater policy clarity, macroeconomic stability, and regulatory coherence. Where reforms have been attempted, implementation has often faltered. This time must be different.

Institutional capability is equally important. Nigeria’s trade institutions must be fit for purpose. Agencies such as the Nigerian Office for Trade Negotiations and the Nigerian Export Promotion Council should be adequately funded, professionally staffed, and empowered to lead the country’s engagement in global and regional trade negotiations. Trade policy can no longer be seen as an appendage of foreign policy; it must be understood as a core element of national economic strategy.

Domestically, efforts to stimulate demand for Nigerian-made goods must continue. Public procurement policies can play a critical role in this regard. If government at all levels commits to sourcing locally manufactured goods—from furniture and uniforms to building materials and ICT components—it can help drive production, improve standards, and support enterprise development. Beyond procurement, public campaigns to promote local consumption must be backed by consistent quality assurance and consumer protection. Patriotism alone cannot sustain demand if products do not meet expectations.

Trade strategy must also include a regional lens. Nigeria’s location and market size give it a comparative advantage within West Africa and across the African continent. The African Continental Free Trade Area (AfCFTA) offers the scale, proximity, and policy framework to expand intra-African trade, build regional value chains, and deepen industrial linkages. Yet Nigeria has not fully leveraged this platform. Fragmented customs procedures, non-tariff barriers, and inadequate transport corridors continue to limit the volume and value of regional trade. At the same time, Nigeria’s long-standing membership in the Economic Community of West African States (ECOWAS) provides an additional layer of opportunity. As the region’s largest economy and a founding member of ECOWAS, Nigeria is well-positioned to lead the harmonisation of trade standards, infrastructure development, and policy alignment across West Africa. The ECOWAS Trade Liberalisation Scheme (ETLS), if implemented effectively, can provide an immediate boost to cross-border commerce by eliminating tariffs on qualified goods and reducing transaction costs for small and medium-sized enterprises. Coordinating Nigeria’s leadership across both AfCFTA and ECOWAS is not merely diplomatic; it is a strategic imperative to anchor the country as the linchpin of continental trade integration.

To operationalise this vision, Nigeria must invest in border infrastructure, digitise customs procedures, and support logistics corridors that connect its manufacturing hubs to key ECOWAS markets. The Lagos–Abidjan corridor, for instance, remains underutilised due to weak enforcement of trade protocols and poor transport connectivity. Beyond infrastructure, regulatory consistency is essential. Disparate product standards, bureaucratic delays, and overlapping authorisations often frustrate traders and discourage formal commerce. Nigeria must work closely with regional partners to streamline cross-border processes, foster mutual recognition agreements, and ensure that trade facilitation commitments are implemented in practice, not just on paper. These reforms will not only enhance Nigeria’s regional competitiveness but also increase its attractiveness to global investors seeking access to African markets.

Strategic diversification also calls for stronger engagement with emerging markets. As global supply chains shift due to geopolitical tensions and evolving cost dynamics, countries like Nigeria must position themselves as credible alternatives. With reforms in infrastructure, logistics, and regulation, Nigeria could attract investment as a manufacturing base for regional and even global markets. This will not happen overnight, but the groundwork must be laid now.

There are valuable lessons to draw from elsewhere. The success of South Korea, Taiwan, and Malaysia in developing robust manufacturing sectors was not accidental. It followed years of deliberate policy, targeted support, and investment in education, infrastructure, and institutional capacity. More recently, African countries such as Rwanda and Ethiopia have shown that investor confidence can be built through transparent governance, stable policy frameworks, and focused industrial development strategies. Nigeria can learn from these examples while tailoring its approach to local realities.

The trade challenges triggered by President Trump’s new tariff regime are not without precedent, but they come at a time when Nigeria is already grappling with a fragile macroeconomic environment, fiscal pressures, and high unemployment. These conditions heighten the urgency of reform. Yet they also provide the political justification to act boldly. Policymakers must not wait for perfect conditions. The imperative is to begin—strategically, incrementally, and with sustained commitment.

If Nigeria responds with clarity and purpose, the current moment can be a turning point. The 90-day pause is not a reprieve; it is a deadline. It is a chance to articulate and defend our interests with confidence, and to anchor our trade and industrial policy in a framework that prioritises resilience, competitiveness, and inclusive growth. The decisions we take now will shape our ability to navigate an increasingly unpredictable global economy. The choice is ours to make.

Dr Tope Fasoranti is an Economist, Banker, and Consultant on Digital Transformation