the economy. There seems to be no escaping the conclusion that all economic processes and phenomena in the market economy are, to some extent, also probabilistic by their nature. Hence, there is only one step prior to obtaining the fundamental conclusion that the market economy is not simply a complex dynamic, but that it is still probabilistic [2–5]. Therefore, in order to be able to give a sufficiently complete description of such complex probabilistic systems, adequate economic theory must also be probabilistic to a considerable extent. For this, it is necessary to incorporate into the classical economic theory the uncertainty, as well as probability at the appropriate mathematical level, i.e., to develop probabilistic economic theory adequately in relation to the contemporary economic reality. Specifically, the present study is devoted mainly to this purpose.
In this book we have limited ourselves to the study of the probabilistic aspects of functioning markets in a sufficiently free market economy. More accurately, we study the details of supply and demand, as well as the mechanisms of the formation of prices and the establishment of equilibrium in the markets. Emphasis is given to the description of probabilistic nature of these fundamental market categories and notions. All these market concepts have been the subject of intensive investigations and critical rethinking in the book within the framework of the main paradigm of physical economics, which can be briefly formulated as follows.
All markets consist of people, buyers of some goods and sellers of other goods, simultaneously. Everything that the markets do, these people do, and it is precisely the action of all these people in the market that determine all results of the work of that market [1]. We have defined five fundamental or general principles of physical economics (and probabilistic economic theory naturally): the cooperation-oriented agent principle, the institutional and environmental principle, the dynamic and evolutionary principle, the market-based trade maximization principle, and, finally, the uncertainty and probability principle. These determine, in essence, the work of markets in our physical economic models. The cooperation-oriented agent principle speaks about the unique moving role of the market agents and significant role of social cooperation in modern market economy. The institutional and environmental principle expresses the fact that the interaction of agents with the various institutions and external environment must be taken into account simultaneously with the interaction of the agents with each other. The dynamic and evolutionary principle reflects the fact that the market behavior has, to certain extent, a deterministic character and consequently can be described with the aid of the equations of motion. The market-based trade maximization principle determines the direction of the motion of the free market as a whole under the influence of internal market forces. The uncertainty and probability principle tell us that all market phenomena are probabilistic in nature and thus help us to understand what a mathematical apparatus must do in order to adequately describe market behavior under uncertain conditions. We refer to the appropriate approach to as probabilistic economic theory, and since this theory is built by analogy with the “probabilistic physical theory” (quantum mechanics) of many-particle systems, we designated it more precisely as quantum economy [4]. Since the picture of the market economic world is built in physical economics at the micro level in approximately the same way as in physics, there is, in principle, a possibility of developing the quantitative methods of calculating the market economies by analogy with the calculation methods in physics. Consequently, it becomes possible to fruitfully use natural science concepts and speak natural science language to describe and analyze market structures and dynamics. In this book, we widely explore these great possibilities that help us to look at economic reality from the natural science points of view and discover new perspectives of economic theory for investigation and development.
In conclusion, it is natural that the direct mechanical transfer of methods and concepts of physics into the economic theory would be impossible. We only can accurately borrow and transfer general concepts and formal methods, since economic and physical phenomena are principally different in their essence and content. In this book and within the framework of this approach, the basic concepts and general principles of physical economics are developed and described. On this basis, we have developed the complex of the principally new quantitative methods of calculation and analysis of many-good, many-agent market economies that we named probabilistic economic theory.
References
1. Ludwig von Mises. Human Action. A Treatise on Economics. Yale University, 1949.
2. Emmanual Farjoun and Moshé Machover. Laws of Chaos: a Probabilistic Approach to Political Economy. Verso, London, 1983).
3. Philip Ball. Physical Modelling of Human Social Systems. Complexus 2003; 1:190–206.
4. A.V. Kondratenko. Physical Modeling of Economic Systems. Classical and Quantum Economies. Nauka (Science): Novosibirsk, 2005.
5. K.K. Val’tukh. Development of a Probabilistic Economic Theory. Herald of the Russian Academy of Sciences, 2008, Vol. 98, N 1, p. 51–63.
PART A. The Agent-Based Physical Modeling of Market Economic Systems
“In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be”.
CHAPTER I. Fundamentals of the Method of Agent-Based Physical Modeling
“For a social collective has no existence and reality outside of the individual members’ actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals’ actions”.
“The whole market economy is a big exchange or market place, as it were. At any instant all those transactions take place which the parties are ready to enter into at the realizable price. New sales can be effected only when the valuations of at least one of the parties have changed”.
PREVIEW. What is the Main Point of the Concept of Agent-Based Physical Modeling?
The concept of agent-based physical modeling is based on taking the known, fundamental concepts of classical economic theory, and uniting and eventually converting them into probabilistic economic theory. It is described with the help of formal approaches and methods borrowed from theoretical physics, beginning with the method of equations of motion for many-particle physical systems. The role of the theoretical physics methods is only to provide the framework for physical economics and eventually for probabilistic economic theory. This theory is developed step-by-step with the creation of the more complicated models, each subsequent step building on the last. It includes and increases the number of concepts and principles of physical economics, and reflects on one or more of several fundamental features of the market economy. The first one, the cooperation-oriented agent principle, is the cornerstone of all the physical economic models which holds that all market phenomena have their origins in agents’ actions. To put it differently, since the action of the market as a whole is a result of the actions of all the market agents and nothing other, the market agents and their actions must be at the basis of the physical economic models. In other words, according to the agent principle, all market phenomena have their origins in agents’ actions.
1. The Concept of Agent-Based Physical Modeling
It is well-known that the method of conceptual modeling of economic systems has long and widely been used in economic theory. According to the new physical economic mode of