Abstract
The basic economic problem is how to allocate resources in a system where information about preferences, endowments and production possibilities is dispersed among the many (Hayek 1945; Hurwicz 1973). In some areas of economic activity resource allocation happens through the “invisible hand” of markets, while in other areas one sees the visible hands of managers. What accounts for the difference in economic organization? In a system with dispersed information, the problem of efficient allocation of resources is essentially a problem of communication. And communication involves noise. Firms take less time than markets to communicate information, but markets are more robust to noise. In so far as the degree of noise and value of speed vary across economic activities, so will the optimal form of economic organization.
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Notes
- 1.
In this essay the problem of agent-level computation is assumed away. Each agent has access to an oracle that instantaneously computes the right answer to problems posed to it, given the requisite information. The oracle has no independent means of getting the requisite information.
- 2.
- 3.
? develops an agent-based model of the team production idea and reproduces numerous stylized facts about US firm size distribution.
- 4.
As to why much of the literature ignores this problem may have to do with the use of formal logic where “the only thing that is important is whether a result can be achieved in a finite number of elementary steps or not. The size of the number of steps which are required, on the other hand, is hardly ever a concern of formal logic. Any finite sequence of correct steps is, as a matter of principle, as good as any other. It is a matter of no consequence whether the number is small or large, or even so large that it couldn’t possibly be carried out in a lifetime, or in the presumptive lifetime of the stellar universe as we know it” (Von Neumann 1951, p. 15).
- 5.
Needless to say, no interactions are necessary if market participants have access to equilibrium prices. However equilibrium themselves have to be discovered, and there is no way to do this except through interactions between economic agents.
- 6.
This is assuming that coding and decoding of messages take the same time in both cases.
- 7.
This point is courtesy Peter Boettke.
- 8.
This point is courtesy an anonymous referee.
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Veetil, V.P. (2015). Why Do Firms Exist?. In: Amblard, F., Miguel, F., Blanchet, A., Gaudou, B. (eds) Advances in Artificial Economics. Lecture Notes in Economics and Mathematical Systems, vol 676. Springer, Cham. https://doi.org/10.1007/978-3-319-09578-3_2
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