Essays on Decentralized TradeNicolaas J. VriendDepartment of Economics of the European University Institute, Florence April 1993 Thesis submitted for assessment with a view to obtaining the Degree of Doctor of the European University Institute Complete thesis (PDF format)
Contents
Introduction
One of the main tasks of economic theory is to explain the outcomes of a
decentralized economy. That is, one of its principal aims is to construct
logically coherent, comprehensive stories about what is going on in such
an economy that are compatible with observed facts. In this sense,
explanation of the course of events in a decentralized economy equates to
understanding its disparate phenomena (see Aumann [1985]). It might be
tempting to interpret the difficulty of economic theory to explain the
fluctuations in the aggregate economic activity known as business cycles,
as merely a matter of a degree of precision not yet reached in the
understanding of decentralized economies. However, the most recent
empirical evidence pertaining to Eastern Europe suggests that
decentralized trade entails deeper questions that economic theory does not
yet offer an answer to. The first essay is a discussion of the Walrasian view on the problem of
decentralized trade. Fundamental of that approach is the idea that a
theory of decentralized trade must necessarily be based upon autonomous
agents, i.e., by making assumptions only with respect to the individual
agents' preferences and their physical environment. Many economists claim
that Walrasian models are capable to explain both the behavior of
individual agents and the overall outcome of their actions in a
decentralized economy, in which all individual choices may be realized as
planned. Actual deviations from such a remarkable and fortunate state, are
said to be due to real world complications in the form of external
effects, public goods, increasing returns, etc. We delineate the Walrasian
perspective through an analysis of the structure of not only the basic
Walrasian flexible price model, but also fixed price models, imperfectly
competitive models and temporary equilibrium models. Those models are
often called non-Walrasian, but we show that they share the same,
Walrasian, perspective. We argue that the Walrasian approach in order to
explain anything, has to take resort to concepts and structures that
transcend the level of the individual agents, and does not succeed in
proving what it claims. In other words, the structure of Walrasian models
is such that they cannot be considered as ideal representations of
decentralized economies. Hence, statements about the acceptability or
optimality of decentralized trade cannot be based on theoretical results
concerning them. In essay II a formal model of a decentralized economy is presented, in
which we consider explicitly some forms of interaction between individual
agents. In particular, we do no longer assume that all trade and
communication take place centrally through `The Market', a public good
kindly provided by the auctioneer, but instead, that the individual agents
have to create their own markets. Some of the essential properties of
decentralized trade taken into account are that individual agents have a
limited knowledge of their economic environment, that such knowledge
requires some kind of communication or interaction between these agents,
and that individual agents need some information about other agents in
order to meet potential trading partners. In this approach, a market is
not a central place where a certain good is exchanged, nor is it simply
the aggregate supply and demand of a good. A market is constituted by
communication between individual agents. Therefore, essay III discusses not the scaffolding, but the foundations of
an economic theory of decentralized trade. The starting-point of economics
is the homo oeconomicus who, given his preferences, pursues his
self-interest, seeking to do the best he can. Often it is said that the
fundamental characteristic of the homo oeconomicus is his rationality.
Rational behavior in economics means that an individual agent chooses the
most preferred action in his perceived opportunity set, where
opportunities are defined such that all perceived costs and benefits are
taken into account. Hence, rationality is necessarily constrained to be an
essentially contentless notion in economics. We discuss several
alternative approaches to rationality sometimes found in the literature,
such as expected utility theory and theories of bounded rationality, and
show that these are inconsistent with the economic approach. In essay IV we analyze a dynamic model of decentralized trade that bears
some resemblance to the model of essay II, with its explicit communication
structure, incorporating the insights from essay III concerning the
modeling of the actions of individual agents. A model of decentralized
trade is considered with two types of agents: firms that produce a given
commodity, and consumers who repeatedly wish to purchase one unit of that
commodity. Consumers `shop around', while firms may attract the attention
of potential customers by sending information signals. Trading
opportunities perceived by the locally interacting individual agents
change endogenously from period to period; either due to a change in
underlying circumstances or to a change in the perception of these
circumstances. Important is the interaction between these two, i.e.,
between the dynamics of learning and the dynamics of economic forces as
such. We use a combination of Genetic Algorithms and Classifier Systems to
model each individual agent as a `machine'. One of the important
advantages of these Artificial Intelligence techniques is that they make
it possible to analyze in how far the market provides sufficient structure
to tie down the set of possibly perceived opportunities, thus constraining
the behavior of the individual agents. Nick Vriend, n.vriend@qmul.ac.uk Last modified 2012-12-07 |