Friday, 8 March 2019

Probabilistic economics

Supply and particularly demand curves are probabilistic. A demand curve shows the amount that would likely be demanded for a given price, over a certain time period. Each point on the curve is actually a probability distribution.

If a market is particularly "liquid", the variance of the probability distributions will be low. For a given price, I can predict the number of goods sold per week with high accuracy. But in an illiquid market, I may have to wait a long time to achieve a good price. Or I might get lucky and find a buyer quickly, at a good price.

Economics needs more probabilistic thinking. Austrian Economics' deductivism fails because it is not probabilistic. Austrians say "a minimum wage fixes the price of labour artificially high, therefore, all other things being equal, it will reduce demand for labour and increase supply, causing unemployment". However, this is not certain. In the multiverse, there are many worlds where, even when all other things do remain equal, minimum wages do not cause unemployment. They might be a minority of worlds, but they exist. The probability is low but not zero.

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