Economic Governance

Institutions are sets of rules that govern human interaction. The main purpose of many institutions
is to facilitate production and exchange. Examples of institutions that affect human prosperity
by enabling production and exchange include laws, business organizations and political
government. Economic governance research seeks to understand the nature of such institutions
in light of the underlying economic problems they handle.

One important class of institutions is the legal rules and enforcement mechanisms that protect
property rights and enable the trade of property, that is, the rules of the market. Another class of
institutions supports production and exchange outside markets. For example, many transactions
take place inside business firms. Likewise, governments frequently play a major role in funding
pure public goods, such as national defense and maintenance of public spaces. Key questions
are therefore: which mode of governance is best suited for what type of transaction, and to what
extent can the modes of governance that we observe be explained by their relative efficiency?

This year’s prize is awarded to two scholars who have made major contributions to our understanding
of economic governance, Elinor Ostrom and Oliver Williamson.

More...

NB: this post does not imply that I subscribe to the notion of "pure public goods" :)

Memes and Almost Rational Actors

I have yet to see evolved economic theory that does not depend on economic actors being rational - and unboundly so.

From what I see in real life, people do not evaluate their utility functions; they often cannot rationally compare two similar financial products of very simple nature.
What they do instead, is reliance on ready-made recipes, heuristics, or memes.

Instead of evaluating utility of different potential scenarios, people just juggle a lot of "if..then.." memes - many of them taught by media.

One way to develop economic theory would be to decouple actors, who have property rights and some limited rationality, from memes, that influence many decisions.
This might open an interesting dimension, which could bring education, religion, and culture into scope of economic theory.

Attack on Utility

Let's attack established notions of utility function and time value of money.

Settings: economic problems in a world populated by rational consuming actors.

Every actor is characterized by its preferences between different schedules of consumption.

Definition: A schedule s : S =def= R -> Rⁿ is a function from real time to real intensity of n different modes of consumption.

Definition: A preference >= : A =def= S x S is a partial order - a binary reflexive, transitive, and antisymmetric relation between schedules.

In game theoretic term both schedule and preference form a strategy for choosing moves - consumption intensities.

Assumption (unbounded rationality): actors have no problems comparing huge or even infinite objects.

Assumption (decisiveness): actors always prefer one of two different schedules.

Thus all preferences are total orders.

In a world without other rational actors or random nature, the state of world limits the possible schedules.
E.g., if the actor has some bread, and no means to produce or acquire more, then the possible schedules are limited to those where cumulative consumption of bread over time is not more than given.

Definition: A deterministic state of world w : W =def= P(S) is a set of possible schedules.

Under certain natural conditions, every every actor prefers some schedule in every state of world.

Definition: maxWS : A x W -> S.

This induces total order between world states: lift : A -> P(W x W).

TODO: probabilistic states. how do actors know probabilities?
TODO: concurrent actors. how do actors know who caused what?
TODO: long-term decisions.

The Ethics of Money Production

The Ethics of Money Production by Jörg Guido Hülsmann, 2007

We will argue that natural money production can work;
that it has worked wherever it has been tried; and that there
are no tenable technical, economic, legal, moral, or spiritual
reasons to suppress its operation. By contrast, there are a
great number of considerations that prove conclusively the
harmful and evil character of inflation. And in our time
inflation has become persistent and aggravated because various
legal provisions actually protect the monetary institutions
that produce this inflation.

Also:

Central planning or hyperinflation (or some mix between
the two)—this is what the future holds for an economy under
paper money.

Patterns

Brokerage of "double coincidence of wants" and "indivisibility of goods", increasing liquidity (leading to uniform prices), and possibly decreasing number of markets:
# Money (broker of N products and services; N markets instead of N*(N-1))
# Banking (broker of loans and deposits - time market)
# Exchange (broker of participants - money without storage/time market function; futures and options as storage function?)

Joint-stock companies?

http://mises.org/rothbard/mes/chap3a.asp
http://www.econlib.org/library/YPDBooks/Jevons/jvnMME15.html

Force funding - a loop with a positive feedback:
More force obtains more funding, more funding obtains more force
By itself is detrimental (extortion), but can be a vehicle for public benefit.

Marketability/demand for a medium of exchange is another loop with a positive feedback.
# It either originates from a directly useful commodity
# Or via fiat/force
Can protection from force be encoded as tokens, which are "a directly useful commodity"? This would unify two origins of money.

For durable goods, each unit may be sold in toto, or it may be hired out for its services over a certain period of time.
People are both agents with utility preferences AND durable goods, either sold or hired out for their services.
Non-durable goods also perform services, but only once - during their consumption.
Prices of goods are induced by prices of their services.

Prices are determined by beliefs. All agents have limited rationality. Manipulation of beliefs of others may be profitable.

Utility. Elasticity. Substitutability. Complementability.

Making Actuaries Less Human

Making Actuaries Less Human

Work by psychologists suggests
that, as human beings, actuaries are subject to a variety of mental biases and decision
making errors. The field of behavioural finance looks at how such biases affect
financial decisions.

This paper first looks at a selection of these biases including how:

• decisions are often made by adjusting from an existing position
  (anchoring)
  
• people are risk averse when facing gains but become risk seeking when
  facing losses (prospect theory)
  
• the framing of a problem can materially impact the decision that is made
  
• the frequency with which something is monitored can impact the decision
  (myopic loss aversion)
  
• people have a tendency to ignore underlying probability distributions
  
• almost everybody is overconfident
  
• when a number of different options are presented, the number, order and
  degree of difference between the options will affect which option is
  chosen.
  
• the use of separate mental accounts impacts financial decisions (mental
  accounting)
  

Asynchronous Collaboration in Online Games

Asynchronous Collaboration in Online Games