Economics has evolved from theoretical explanations by Classical economics to mathematical illustrations provided by Neo-Classical Economics and many others beyond. Each of these evolutions has resulted from economic crises, most commonly remembered one being the birth of Keynesian Economics arising from the Great Depression. A deeper dive into the literature regarding this transition would reveal details about the adoption of tools, techniques and analogies from sciences in an attempt to make the analysis scientific. A quite recent series of tools adopted among them is the usage of analogies from Quantum Mechanics, which has led to the emergence of Quantum Economics.
For instance, consider the Wave-Particle Duality of Quantum Mechanics, according to which matter exhibits the properties of both a particle and a wave. The same can be noticed in the case of a coin. The two sides of a coin represent two different things: a “numerical” value and a “material” value. While the former value exists in the virtual world of numbers, governed by the existing rules of Mathematics, the latter value exists in the real world as a tangible entity.
Now take the Superposition Principle: any microscopic system in a given state can be assumed as being partly in either of two or more other states, but not in both the states entirely. We can, for example, assign a position or direction to a particle, but not both. It only exists in a range of potential. Once a transaction is completed in the financial world, this potential collapses into a fixed number, called price. Before that, the properties are indeterminate, not fixed thus rendering the smooth demand and supply curves of Neo-Classical Economics invalid for price determination. This is the essence of Schrodinger’s Cat: till an observer opens the box, the cat is both alive and dead.
Economies and financial markets can be very much similar to the world of Quantum Mechanics than that of Classical Physics. In the realm of the former, the systems under observation are so small that the very act of observation disturbs the individual system itself. This situation is similar to that of financial markets, where the actions of market players are not separate from market outcomes; rather, the actions of market players produce the market outcomes, like being part of an entangled system. Hence, these cannot be explained as actions occurring independently of each other. A good example of this would be the way money entangles debtors and creditors through loans, in terms of liability settlements. In this case, a debtor can be considered as a particle, and the corresponding creditor as an anti-particle; change in the state of one would influence the state of the other.
What about the precision of the theory? The Correspondence Principle answers this: Quantum Theory should generate predictions identical to the Classical Theory when the system being studied is large. Newtonian Mechanics is not absolute but is a pretty good approximation at the scale of human society. The same goes for Neo-Classical Economics, an approximation but not absolutely precise. This analogy is crucial for Behavioural Economics, especially to look at the exceptions of the so-called rational behaviour, a prominent one being the “satisficing versus profit-maximizing” behaviour of a firm. What appears to be an action that can lead to higher profits for one set of people, may appear to another set as an action keeping oneself content, leading us to conclude that the conflict of individual perceptions about one single action breaks the universal perception about the same. Alternatively, as Quantum Theory puts it, the absoluteness is shattered, so only an approximation is possible.
Having discussed the major principles of Quantum Mechanics and linking them to Economics, it becomes important to see how these analogies come into play in a bigger space. Let us consider a specific group of producers from Microeconomics, namely the Cartel, defined as a group of firms that organize together to make price and output decisions. The dual nature is found among the individual participants, where the seller at one point becomes a buyer at another point. The instability of the cartel with respect to price decisions reflects the entanglement, wherein even a single member lowering the price is bound to affect the output decisions of the entire cartel, thereby collapsing the cooperation element. Also, unlike the basic theory that predicts output decisions based on price alone or vice-versa, the real-world cartels face information asymmetry with respect to quality and production techniques among many others. This accurately reflects Schrodinger’s Cat, leading the members to have multiple perceptions about each other’s actions until they come into reality, thus forcing them to approximate the actions and outcomes.
Although brief, while Quantum Mechanics has only just begun to touch Economics, with the validity still in question, it gives a direction for adopting a series of such innovative techniques in future research avenues.
Mueller, S. (2020, March 25). Key Ideas of Quantum Economics. Medium.
Binod, S. (2020, April 20). Quantum Economics: The New Science of Money by David Orrell: Book Reviews by Binod. The Real Finance Mentor.
Orrell, D. (2018, January 4). Has the time come for a Quantum Revolution in Economics? Aeon.