Probabilistic Economic Theory

The book, as noted above, is the collection of lectures, each of which is called to answer one or several questions given above. The genre of lecture (or essay) is selected for the purpose of concentrating on the compact, clear presentation of physical economics. In it I have used a whole series of new ideas, concepts and notions for the economic theory, which arise from theoretical physics. I believe I have succeeded in avoiding the necessity of making numerous surveys and references, the like of which can be found in most other textbooks on economics and economic history. Therefore, references in the book are made only to those sources which were actually used for the fulfillment of studies, the development of models, and writing of the book. To provide convenience to students in lectures, figures and fragments of the text are reproduced several times in some chapters.

It should be emphasized once more that I borrowed ideas, concepts and notions from physics, many of which are completely consistent with the discoveries of the classical economic theories of the 19th century, the first of which being the subjective theory of value. This concerns first and foremost such important milestones in the development of classical economic theory as [5]:

1. Regularity in the sequence of market economic phenomena.

2. Exclusive and dominant roles of market agents in the market phenomena.

3. Uncertainty of the future and the probabilistic nature of all market agents’ decisions.

4. Social cooperation of market agents etc.

All these aspects of human economic activities have an exceptionally important effect on market processes and determine the course of economic development. But any formal methods of providing an adequate formal description of these economic phenomena and processes at a strict mathematical level in economic theory, until now, have been absent. Necessity and expediency of borrowing by economics from physics is substantiated by the fact that theoretical physics already developed sophisticated mathematical methods to incorporate analogous concepts into formal physical models. The method of equations of motion was first, and uses systems of differential equations of the 1st and 2nd orders, but economic theory still did not.

I would like to stress here that this creative process of the transfer of the formal methods of physics into classical economic theory presents the main point of the concept of the agent-based physical modeling of the economic systems and physical economics as a whole. One can say that, in essence, physical economics is first and foremost the mathematical apparatus of classical economic theory at the contemporary level of its development. This mathematical apparatus is borrowed from theoretical physics and has therefore practically nothing to do with the mathematical apparatus of neoclassical economics.

In order not to overload the text of the book by the descriptions of the known concepts of classical economic theory upon which I rested in this investigation, I make use of complete quotations from the fundamental monograph of Ludwig von Mises [5] as epigraphs to each part and chapter of the book, with two exceptions. This method allowed me to avoid the mixing of completely different styles of the presentation in the book, which could hinder the perception of the text by readers. This is very important for me, since I have attempted to not to disappoint the readers, and to convince them of how it is fruitful to make use of achievements in theoretical physics for the development of economics. The point is not in the book’s detail, but rather in its broader concept of agent-based physical modeling of economic systems, which, in my view, has enormous potential. Here lies, I think, a new and enormous field for investigation, in which an abundant harvest will be gathered for many decades yet to come. I hope that the readers will obtain a certain benefit from the acquaintance with this new physical economic perspective for economic theory.

References

1. Rosario N. Mantegna, Eugene H. Stanley. An Introduction to Econophysics: Correlations and Complexity in Finance. Cambridge University Press, 1999.

2. Peter Richmond, Jürgen Mimkes, and Stefan Hutzler. Econophysics and Physical Economics. Oxford University Press, 2013.

3. D.S. Chernavsky, N.I. Starkov, A.V. Shcherbakov. On some problems of physical economics. UFN, Vol. 172, N 9, pp. 1046–1066, 2002.

4. A.V. Kondratenko. Physical Modeling of Economic Systems. Classical and Quantum Economies. Nauka (Science): Novosibirsk, 2005.

5. Ludwig von Mises. Human Action. A Treatise on Economics. Yale University, 1949.

Anatoly Kondratenko

Novosibirsk, 2015

INTRODUCTION. Probabilistic Economic Theory

“The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as at the satisfaction of his own. Everybody in acting serves his fellow citizens. Everybody, on the other hand, is served by his fellow citizens. Everybody is both a means and an end in himself, an ultimate end for himself and a means to other people in their endeavors to attain their own ends.

This system is steered by the market. The market directs the individual's activities into those cha

Exactly how is our economic market world arranged at the deepest micro level, at the level of individuals and businesses, buyers and sellers on markets? How does the market economy function? According to what laws and rules do people make decisions about price and quantity of bought and sold goods? How does a market price eventually become established, and how can one and the same volume of goods be sold regularly each year at this price on the market? How and why does this regularity change over the course of time, and how and why do markets grow or fall? We attempt to answer these and many other similar questions in this book within the framework of a new economic discipline, namely, physical economics.

In general terms, at the conceptual or descriptive level, the answers to these questions are known from classical economic theory. They are obtained with the aid of the logical method of economic theory and they are given in this book in epigraph form to the parts and the chapters. These answers represent by themselves extensive quotations from the fundamental work of Ludwig von Mises [1]. But other questions agitate us more. Where can we search for the answers in this book, and how can all these answers of classical economic theory be expressed in terms of the natural exact sciences, i.e., in mathematical language? Therefore, in the book we attempt to develop quantitative methods of calculation for economic systems, as well as their structure and dynamics, which would make it possible to speak about the further development of quantitative economic theory.