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Alchian's Evolutionary Selection

Markets select surviving firms as if they maximised profit whether or not managers actually optimise, so the outcome does not require the assumption.

Alchian's 1950 point was methodological: you need not assume businesses calculate optimally, only that the market kills the ones that do not. It rescues economic prediction from an implausible psychology.

In practice

  • A restaurant owner who has never heard the word "margin" prices by instinct, survives ten years, and behaves indistinguishably from one who optimises.
  • Two shops on the same street price identically; one ran the numbers and one copied the neighbour.
Subject
Economics & Incentives
Essay
The theories behind every argument about money

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