Broken Symmetry

Iterated Prisoner’s Dilemma contains strategies that dominate any evolutionary opponent

From William H. Press and Freeman J. Dyson

The two-player Iterated Prisoner’s Dilemma game is a model for both sentient and evolutionary behaviors, especially including the emergence of cooperation. It is generally assumed that there exists no simple ultimatum strategy whereby one player can enforce a unilateral claim to an unfair share of rewards. Here, we show that such strategies unexpectedly do exist. In particular, a player X who is witting of these strategies can (i) deterministically set her opponent Y’s score, independently of his strategy or response, or (ii) enforce an extortionate linear relation between her and his scores. Against such a player, an evolutionary player’s best response is to accede to the extortion. Only a player with a theory of mind about his opponent can do better, in which case Iterated Prisoner’s Dilemma is an Ultimatum Game.

Personally, I kind of enjoy living in a world in which a fundamental "truths" about things as abstract and oversimplified as the prisoners' dilemma can turn out to be incorrect for so long. Still trying to understand and wrap my head around these results.

Mechanisms for Cultural Evolution

From Lesley Newson and Peter J. Richerson:

The basic cultural evolutionary mechanism is a “teaching bias” in the terms of Boyd and Richerson (1985). Most people normally espouse values, norms, and behaviors similar to those held by others in their community. Thus, younger people’s values, norms, and behaviors substantially refl ect those of the previous generation, and culture includes an inertial effect simply by consequence of people learning from each other. However, the same people when communicating with a close relative are slightly more likely to express variants of conventional norms that favor reproductive success, while those communicating with a friend, coworker, or other non-relative are slightly more likely to emphasize other goals. Newson et al. (2007) report role-play experiments that show this effect and also present a theoretical model that indicates how a decrease in the ratio of relatives to non-relatives in a social network can lead to the decline of norms favoring inclusive fi tness derived from the biased teaching effect. The rate of decline depends upon the strength of the teaching bias and on the ratio of kin to non-kin in social networks. But, even if the change in network structure is rapid and the teaching bias is quite strong, it is still likely to take several generations for a population to approximate a new equilibrium in norms related to reproduction.

Via @GarrettJones on Twitter. The paper is interesting throughout.

Brad Taylor on the Reciprocality of Institutions and Ideology

From Virtue and the Voluntary:

If ideology is the most important factor affecting freedom, given that it produces rules through the workings of political institutions and also produces those institutions themselves, it is tempting to suppose that political institutions are unimportant. This would be a mistake. Political institutions also feed back upon preferences by changing the conditions under which they develop,[7] making the relationship between institutions and ideology reciprocal. We need, then, to carefully consider which institutional arrangements best promote the virtues of tolerance and neighbourliness. In the remainder of this essay, I will argue that government tends to undermine both.

I love the way Brad Taylor thinks, but I disagree with his ultimate conclusion. In a nutshell, my reasons are that the costs of government (to tolerance and neighborliness) are not unique to government.

George Soros Explains His Worldview

And it is surprisingly fascinating:

While I was reading Popper I was also studying economic theory and I was struck by the contradiction between Popper’s emphasis on imperfect understanding and the theory of perfect competition in economics which postulated perfect knowledge. This led me to start questioning the assumptions of economic theory. These were the two major theoretical inspirations of my philosophy. It is also deeply rooted in my personal history.

The FT has a whole website up with transcripts from each of his lectures, which are ongoing this week. It's little things like this that make my day.

Transcripts of first three lectures are here, here, and here.

For an earlier post on epistemlogical and ontological questions that offers one version of reflexivity, see here.

In reponse to Soros's proposal that we dichotomize the natural and social sciences, I have this to say: His misinterpretation of Heisenberg's uncertainty principle kills his proposal. In fact it is true of both natural and social scientific theories that our theories influence how reality evolves. It is true too that bad natural science may not have as catastrophic or immediate consequences for us as bad social science. But what we perceive depends in part on our theory of what exists, and those theories are not social. Soros's dichotomy is in fact a continuum.

To wit, from whence did Soros derive his understanding of positive and negative feedback loops? By analogy to the natural sciences. Our exploration of nature is the ultimate origin of all of our theories, bot natural and social.

Feedback Loops in Education

From the Frontal Cortex blog:

Kids learn material much faster when they screw-up first. In other words, getting the wrong answer helps us remember the right one.

Not only kids, I might add. The information content of negative feedback is greater than that of positive feedback. The trick is creating an environment in which it is both encouraged and welcomed.

The work of Carol Dweck has been covered in earlier posts here and here. When I heard her speak to an audience of parents in Palo Alto about a year ago (all there to figure out how to get their kids into Stanford, natch), I asked her whether anybody had looked to see whether the growth mindset was correlated with higher levels of flow experiences. She said that a study had been done of race car drivers, which found some correlation between the two. I haven't been able to find a link on the web.

Hayek and Group Selection Theory

From the first volume of Law, Legislation, and Liberty:

The other view, which has slowly and gradually advanced since antiquity but for a time was almost entirely overwhelmed by the more glamorous constructivist view, was that orderliness of society which greatly increased the effectiveness of individual action was not duly solely to institutions and practices which had been invented or designed for that purpose, but was largely due to a process described at first as 'growth' and later as 'evolution,' a process in which practices which had first been adopted for other reasons, or even purely accidentally, were preserved because they enabled the group in which they had arisen to prevail over others.

(Italics mine.)

Ecological and Constructivist Rationality

Vernon Smith has articulated a distinction between "constructivist" and "ecological" rationality in economics:

We have become accustomed to the idea that a natural system like the human body or an ecosystem regulates itself. To explain the regulation, we look for feedback loops rather than a central planning and directing body. But somehow our intuitions about self-regulation do not carry over to the artificial systems of human society...

"[C]onstructivist rationality (or ‘constructivism’) ... stems particularly from Descartes (also Bacon and Hobbes), who believed and argued that all worthwhile social institutions were and should be created by conscious deductive processes of human reason...In summary, constructivism uses reason to deliberately create rules of action, and create human socioeconomic institutions that yield outcomes deemed preferable, given particular circumstances, to those produced by alternative arrangements...

Since our theories and thought processes about social systems involve the conscious and deliberate use of reason, it is necessary to constantly remind ourselves that human activity is diffused and dominated by unconscious, autonomic, neuropsychological systems that enable people to function effectively without always calling upon the brain’s scarcest resource– attentional and reasoning circuitry...

These considerations lead to the second concept of a rational order, as an undesigned ecological system that emerges out of cultural and biological evolutionary processes: home grown principles of action, norms, traditions, and ‘morality’.

An analogy may be helpful in understanding and remembering the difference between these two concepts of rationality. In a dance performance, the choreographer may exercise constructivist rationality by designing and explaining the moves to the individual performers. But it is ecological rationality that takes over as the individual performers together -- though practice and attention to their neighbors -- execute the performance:

Both forms of rationality are necessary to the pleasing result.

Here's an interesting question to consider: By what mechanism does constructivist order become embedded in ecological order? By reference to the analogy we can make this question more concrete: By what mechanism does the choreography influence the performance of the dancers?

In considering the dance analogy, the answers are not so difficult to see, although the details are surely interesting and important. The choreographer communcates her design with verbal or written instructions to the dancers, who then practice under the choreographer's direction until the design is reproduced. But when we drop the analogy and consider the question more broadly in the context of markets and market-based institutions, the answers seem fuzzier and more difficult to envision.

Perhaps one slice at the answer is provided in a paper by Barbara Drossel reviewed earlier here on Broken Symmetry:

These systems essentially have three states which are called quiescent, excited, and refractory. If there is an excitation, it spreads to the quiescent neighbors. After excitation, a region is refractory to further stimulation and needs some time to recover its quiescent state. The model discussed in this paper describes an excitable medium in the limit where excitation spreads fast on the scale of the refractory time, and where spontaneous excitation is rare. In cases where this limit can be realized experimentally, such a system should show either synchronization or SOC, depending on whether the transition from the refractory to the quiescent state and from the quiescent to the excited state are deterministic or stochastic.

Within Drossel's terminology, sync is acheived through excitation from a quiescent to a refractory state. When in a refractory state, any additional excitation will be passed onto neighboring states. In this regard, Drossel's model seems to have fundamental links to models of population inversions, which produce the coherent radiation of masers and lasers.

Given the right circumstances, even a weak coupling between the neural networks of individuals might be enough to induce a group of people into a state of sync or self-organized criticality.

Feedback Loops at Stanford

From Steve Blank's series on the Secret History of Silicon Valley:

The close tie between the two labs was a unique aspect of the Stanford Lab. Stanford had a Customer Development loop going on inside their own lab. The discoveries in tube and circuit research suggested new electronic intelligence and countermeasure techniques and systems; in turn the needs of the Applied Lab pushed tube and circuit development. With the Applied Electronics Lab Stanford was becoming something akin to a federal or corporate lab run under university contract. The university found government contracts profitable as the government reimbursed their overhead charges (their indirect costs.) This means they could fund other non-military academic programs from this overhead.

What do Ants and Neurons Have in Common?

From Seed Magazine:

According to Cornell University neurobiologist Thomas Seeley, the social insect metaphor can be scaled up even further, all the way to government. He is currently writing a book entitled Honeybee Democracy (Princeton University Press, 2010) about how we can improve our group decision making and government by imitating honeybees, which, like ants, are social insects. Honeybees have been making group decisions for tens of millions of years. And as Seeley says, “Democracy among humans traces back only 2,500 years or so to Athens, Greece, so it is perhaps not surprising that we are still fumbling around.”

Again via Omnivore

Music and the Brain

From an interview of Oliver Sacks:

Using loud music as torture draws on these qualities of music, as well as simple sensory overload. I personally find the assault of loud public music—in stores, restaurants, airports–a minor form of torture. One wants to listen to one’s own music, in one’s own way, not to have it force-fed, especially at great volume.

One of the things I found remarkable about Beijing when I visited in 1998 was the ubiquity of public address speakers, which were usually playing some kind of music in the background in between and during public announcements. One had the sense that people there were uncomfortable without these sounds, since one could have observed these speakers installed even in improbable locations. Here's another quote from the interview:

Rhythm, actual or imagined, activates areas of the motor cortex, crucial in synchronizing and energizing movemen... There is a great deal of debate about the relationship between music and language, and speculation about which capacity evolved first. It has often been suggested that music emerged as a by-product of linguistic capacities. But musical rhythm, with its regular pulse, is very unlike the irregular stressed syllables of speech.

Musicophilia may be worth a look.

We are most free when we are most bound to others

Robert Jensen makes the case:

When bonds are created under conditions of mutual respect and shared power, our freedom is deepened by such interdependence. Our strength is not sapped by these bonds but is enhanced by the emergent properties of collective human action. The individual efforts of numerous people cannot simply be added together and plugged into an equation to predict the outcome, but rather their simple actions come together in a collective result that is novel and irreducible. The most creative force does not come from a power, centralized either in one person or one institution and its bureaucracy, which imposes its will on others and treats people as inputs whose energy can be plugged into a formula for production. The most creative force comes from distributed power that channels the contributions of many into ends that people define collectively.

Via the Omnivore at Bookforum -- the same that I have failed to cite on numerous occasions in the past because of the way I open and close tabs going through the links to those posts. Get yourself on the Omnivore feed!

Vintage Steve Blank

If you're not reading his blog, you are missing out. Every post is priceless. Here's a bit from his latest:

When I was at Zilog, the Z8000 peripheral chips included the new “Serial Communications Controller” (SCC). As the (very junior) product marketing manager I got a call from our local salesman that someone at Apple wanted more technical information than just the spec sheets about our new (not yet shipping) chip. I vividly remember the sales guy saying, “It’s only some kid in field service. I’m too busy so why don’t you drive over there and talk to him.” (My guess is that our salesman was busy trying to sell into the “official” projects of Apple, the Lisa and the Apple III.)

Zilog was also in Cupertino near Apple, and I remember driving to a small non-descript Apple building at the intersection of Stevens Creek and Sunnyvale/Saratoga. I had a pleasant meeting and was as convincing as a marketing type could be to a very earnest and quirky field service guy, mostly promising the moon for a versatile but then very buggy piece of silicon. We talked about some simple design rules and I remember him thanking me for coming, saying we were the only chip company who cared enough to call on him (little did he know.)

I thought nothing about the meeting until years later. Long gone from Zilog I saw the picture of the original Macintosh design team. The field service guy I had sold the chip to was Burrell Smith who had designed the Mac hardware.

The SCC had been designed into the Mac and became the hardware which drove all the serial communications as well as the AppleTalk network which allowed Macs to share printers and files.

Some sales guy who was too busy to take the meeting was probably retired in Maui on the commissions.

Creating My Own Create Your Own Economy

On Saturday, I received my hard copy of Tyler Cowen's latest work of popular economics, Create Your Own Economy: The Path To Prosperity in a Disordered World. Although a work of popular nonfiction, which read easily over the course of a few hours this weekend, this book is chock full of creative insights into what might be called an alternative economic vision of social life. I say "alternative" because until recently most academic economists had confined their interests to finance rather than culture, although Cowen is careful to trace the threads of Adam Smith, F.A. Hayek, and Thomas Schelling (among others) from which his unique vision is woven together. In the sense of developing this alternative vision, this book is actually the continuation of his last, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. In both books, Cowen assumes the point of view of individual consumers; his data is drawn from individual stories and experiences; his understanding of group behavior and consumption are correspondingly richer with local and temporary detail than most economic analyses of culture. Read in conjunction with Schelling's Micromotives and Macrobehavior and Robert H. Frank's The Economic Naturalist, one can see how the methodologies of Thomas Schelling are facilitating a gradual evolution in economic thought among his students and (thanks to their attention to the needs of non-economists), the public at large. All are recommended reading.

A central premise in Create Your Own Economy is that technology is fostering a more "autistic" lifestyle. Cowen envisions "autism" as a superior ability to filter out particular bits of information from the barrage of stimuli we experience in everyday life, to absorb those filtered bits, and to imbue those disparate bits with meaning by ordering and re-ordering them into a collage of our own creation. John Milton would be proud. It is part of Cowen's project in this book to encourage a more positive definition of autism, a definition that focuses on the cognitive strengths of people who might otherwise be called autistic only because of their inferior ability to communicate in traditional social settings. We might even call this "positive abnormal psychology." Although this aspect of the book is interesting, and is sure to get attention from both the autistic community and the community of psychologists and clinicians who specialize in working with people diagnosed with autism, my focus as reviewer will be on how this vision of culture could be seen through the lens of science. More specifically, I'm going to explain how Cowen's vision of a more creative economy fits with the systems theory that has been the theme of Broken Symmetry. I think it would give Prof. Cowen pleasure to see somebody using his own work as a source of information to be re-ordered within the particular mental framework I bring to bear on understanding economics and culture -- i.e., to see me creating my own Create Your Own Economy. So here's how this book fits within my interior world.

I see Cowen's book as premised on a particular epistemology of culture. Although that epistemology is not quite laid out systematically, what is clear from his unique vision of autism, Hayek's Sensory Order, and his pyramid diagram is that culture is embedded in the neural networks of individuals. For Cowen, economics and culture emerge organically from a process of filtering, absorbing, and reordering information. This is an appealing vision because it promises the possibility that someday economic theories might be understood in terms of biology. And Cowen mentions neuroeconomics in passing, but again Cowen's focus is on culture.

What is interesting is what Cowen does not say about these neural networks and their process of development. Cowen's emphasis is on the largely individualistic process of ordering information that flows into our neural networks. What he does not emphasize is the activity -- especially the social activity -- required to obtain desired bits of information and (perhaps more importantly) to decide what bits should be given privilege in our internal ordering.

For example, in his Chapter on the contrast between autism and Buddhism, Cowen's vision seems heavily weighted in favor of the autistic approach to interior life. On Cowen's view, educational institutions are mostly about using social influence to encourage non-austistic young people to develop more autistic habits. The trouble with this view is that it does not seem to leave enough room for the possibility that some learning and information processing may occur at the social level -- i.e., that some ordering of information cannot be done autistically.

In that vein, I find another theory of learning interesting. According to psychologist Mihalyi Csikszentmihalyi, learning is an individual process, but one that alternates between modes of openness and closedness to external feedback. There is potentially a deep scientific basis for Csikszentmihalyi's theory, which is drawn from the science of networks and self-organized criticality. Given the right balance of external stimuli and internal constraints, networks can self-organize into structures that optimize the flow of information. Optimal flow through networks was studied by Mandelbrot in connection with Zipf's Law. But today it is known that the same self-organized critical structure can be found in an incredibly diverse array of networks in nature, including neural networks and even our economy. In each case, the network structure emerges from an evolutionary process whereby particular network structures persist over time only so long as they can accommodate the stable or unstable variations in flow through the network.

This theory of flow is complementary with Cowen's vision of autistic culture. In particular, the closed mode of operating corresponds directly with Cowen's vision of autism. What seems to be missing from Cowen's vision is the other phase, the phase of extreme openness to feedback and diverse stimulus. (Is this what zen meditation is designed to facilitate?) Within the theory of autism presented by Cowen, it would seem that such openness would be difficult for autistics. Yet it would seem equally important to the creativity and learning characterized by Csikszentmihalyi as "flow."

But why is it so important to maintain balance between openness and closedness? By the end, what becomes clear is that Cowen envisions a radically different structure for society in which individuals cluster into small units -- perhaps even as small as one. And perhaps Cowen is right that this is where current technology is leading us. But can that kind of culture survive?

Robert H. Frank, also a student of Schelling, provides an answer in a recent NYT editorial titled, "The Invisible Hand, Trumped by Darwin?":

By calling our attention to the conflict between individual and group interest, Darwin has identified the rationale for much of the regulation we observe in modern societies... Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again... The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.

Technology has enabled us to take finer and finer control over the flow of information and goods that we access as individuals. But over very long times, the benefits of finer control over flow have tended to accrue to the most well-organized groups rather than the most well-ordered individual minds. So perhaps the most dramatic impact of technology will be in how it enables us to be more social, even as autistics.

Capitalism and Culture

A brilliant player wants a referee, for only when the game has appropriate rules can he really show his talents. While the sports of baseball and football haven't changed much in the last century, the economy has -- and American financial regulation hasn't had an overhaul in 70 years. The challenge for the Obama administration, along with the U.S. Congress and our SROs, is to invent a new and better American version of the capitalist game.

-Akerlof and Shiller in the WSJ on April 23, 2009.

Human history has been blighted with dark ages in which our games were little different from the games played by animals in the jungle. Eat or be eaten. Might makes right. During these dark ages, drawing a short straw on health or wealth in the birth lottery meant a life sentence of hunger, ignorance, and fear. A lifetime of hard work was often not enough to guarantee a person her own welfare, much less the welfare of her children.

Civilization writ large can be understood as an effort to redefine the rules of engagement we knew in our ancestral environment. At some moment in time long ago, two competing groups of people either explicitly or implicitly agreed not to kill each other in competing for scarce resources. We will never know exactly what this first agreement looked like, but it is at least plausible that it would have substituted combat for some other form of a competition -- a competitive game. Each group could hold the other accountable to the rules of the new game by the implicit threat of mutually destructive violence should cheating be found. Cheating, and hence violence, did not and have not disappeared as a result of new games being adopted. But as Robert Axelrod demonstrated first with Tit-for-Tat, the individuals or groups that adopt a default strategy of cooperation (or in this context, playing by the rules), reserving punishment only for cheaters, over time outperform other strategies in nearly any local environment. In other words, human civilization evolved to play formal games, games with symbolic rules and procedures agreed in advance.

This shift from chaotic violence to the order of symbolic rules and procedures has had ramifications far beyond mere escape from violence. In the negative space created by the escape from violence, there was room for individuals and groups to develop the knowledge and skills useful to learning and experimenting with strategy in the formal games. Strategies for winning became overlaid on the rules and procedures, and on the commitment to play by the rules and procedures. So long as the agreements that formed the lower layers of this hierarchy of rules remained stable, there was opportunity for individuals to earn reward and recognition from their group by proposing winning strategies. Over time, reward and recognition began to flow to the individuals who were better equipped to learn, analyze, and make strategy rather than the individuals who were more likely to have won in an environment of violent chaos.

This shift in reward and recognition itself was a source of conflict within some groups. It was probably easier for groups to give rewards and recognition to the individuals who came up with winning strategies when those individuals were also the strongest warriors. But over time, as symbolic rules replaced chaotic violence, the coincidence of these traits became less necessary. One choice for the strong bodied but weak minded was to try and impose their own violent order on the group. But when that option failed, it only made it less likely to be attempted in the future. Another was to leave and found another group. This strategy was risky, but more likely to succeed over the long-term should the founding of the competing group be successful. Depending on the fecundity of the new group relative to the old, the new group might overwhelm the old with shear numbers, thereby imposing a violent disorder.

But somewhere over the course of human history, perhaps toward the end of the Dark Ages, it seems that the cooperative groups picked up enough momentum to squeeze the more violent groups into the cracks and crevices of global civilization -- into place like Papua New Guinea, for example. And once the creative power of these cooperative groups was unleashed, it began to transform the face of the earth. Not since Greece and Rome has so much art, music, architecture, law, and technology been developed so fast.

Within this new, non-violent order, the rules of the game themselves have been subject to evolution. Not only are we playing a game rather than killing one another, we are constantly looking for better games to play. Cultural evolution is evolution within evolution. Capitalism is a game that everybody can play, although like any game there will be winners and losers.

[MFM Note: I had most of this post together in April and didn't like it. I circled back around today, made a few edits and am now posting. Comments are welcome. This is a little diffuse even for me.]

More Systems Theory from Judge Posner

My remaining proposals are of measures to improve regulatory performance, as distinct from the organization of financial regulation. First, we need a program that will rotate financial regulatory staff among the different financial regulatory agencies, to broaden the perspectives of regulators, reduce the "stovepiping" of information that may relate to a wide range of companies and financial markets, expose regulators to new ideas, reduce turf warfare based on misunderstandings, and make a career in financial regulation more interesting and challenging.

At his Atlantic Correspondents blog. This is a prescription that could be drawn directly from Ciskszentmihalyi's systems theory as applied to cultural economics.

More on Group Selection Theory

From the Independent:

In his study, published in the journal Science, Dr Bowles takes on the proponents of the selfish-gene theory of human evolution by suggesting that natural selection worked on groups of people co-operating together, rather than just individuals.

See also earlier posts from Broken Symmetry relating group selection theory to Tribal Leadership and Executive Compensation.

Whom can you trust?

From Clay Shirky:

To describe the world before or after the spread of print was child’s play; those dates were safely distanced from upheaval. But what was happening in 1500? The hard question Eisenstein’s book asks is “How did we get from the world before the printing press to the world after it? What was the revolution itself like?”

Chaotic, as it turns out. The Bible was translated into local languages; was this an educational boon or the work of the devil? Erotic novels appeared, prompting the same set of questions. Copies of Aristotle and Galen circulated widely, but direct encounter with the relevant texts revealed that the two sources clashed, tarnishing faith in the Ancients. As novelty spread, old institutions seemed exhausted while new ones seemed untrustworthy; as a result, people almost literally didn’t know what to think. If you can’t trust Aristotle, who can you trust?

Our notion of credibility and authority is changing in fundamental ways because of the Internet.

Organic Economics

Since the Arrow-Debreu-McKenzie model was introduced to economics in the 1950s, changes over time have been given less consideration in economic models. See, for example, this statement about changes in market prices by Eugene Fama. The efficient-market hypothesis implies that at any given moment an equilibrium market price exists, and (here's where the flow of time drops out of the picture) that the current price at any given moment is most likely the equilibrium price. Unless you have some information that nobody else in the market has, then you're probably making a mistake by guessing that most people are either underestimating or overestimating the value of a particular good. There are exceptions, of course, but in general economists and policymakers (including judges and lawmakers) think about (or at least did think about prior to this recession) economic equilibrium as static —- a perfect allocation of people and things that the market maintains more or less constantly.

Is there a more realistic way to model an economy? How about as an hierarchical social network? The social network must be hierarchical because smaller markets (i.e., smaller subnetworks) are usually connected to larger markets (i.e., bigger networks) such that there is nesting and overlap among them through the mechanism of cross-elasticity in demand.

Already, our model of the economy is of networks within networks. But the hierarchy goes deeper still. Each individual within an economy has his or her own neural network, which orders decisionmaking and behavior. In principle at least, we could identify subnetworks within an economy by looking to see whether particular individuals share substantially similar neural networks. Similar brain structure and dynamics are probably a physical (and biological) manifestation of consensus in belief and perception about past, present, and future within a subnetwork. Market equilibrium could be identified as the state of the system in which neural networks are matched in structure and dynamics so that the flow of goods through the economy is stable over a period of measurement. Such stability would be manifest in a market price that fluctuates only within the range of transactions costs.

From time to time, however, an individual within a subnetwork might make a new connection in his or her neural network. The new connection would arise from a new structural or dynamical pattern within that individual's neural network. Such a new pattern might be induced directly by exposure to new sensory information or statistically random variations in the individual's neural network, or indirectly from exposure to a new pattern communicated by another outside the subnetwork. In any case, the result would be a modification to the preexisting structure and dynamics of that individual's neural network.

An individual with a new pattern in mind (literally) might then attempt to reproduce the new pattern in the subnetwork of individuals who share (now similar, but not the same) neural network structure and dynamics. Through communication, the new pattern is either recognized, thereby rerouting every neural network in the subnetwork (albeit, through feedback loops, probably with some refinements), not recognized at all because too great a variation from preexisting patterns to be communicated, or rejected as inconsistent with important preexisting accepted patterns. Although a ridiculously difficult problem to solve mathematically, whether a new pattern would be accepted or rejected by the subnetwork could in principle be characterized using control theory to analyze the stability of the system including the new pattern within its preexisting environment. In practice, it's probably necessary to carry out the experiment to know.

The iteration of such a process eventually results in an increasingly sophisticated neural network shared among the subnetwork, with more and more specialized ability to recognize and explain more and more complex information over time. Interconnections among subnetworks, although difficult to achieve, might be expected to produce large returns to the individuals who are capable of matching the patterns in otherwise disconnected subnetworks.

To understand the new insights that such a model would give us in understanding economics, consider how individuals within the network of an economy include both entrepreneurs and customers. A successful entrepreneur, in practice, is one who is able to anticipate what patterns are going to be accepted by the neural networks of customers. Within this organic model of economics, capitalism is a game in which entrepreneurs conduct experiments in order to discover what patterns of behavior (i.e., what neural networks of prospective customers) will adapt by accepting a new pattern offered as an alternative to a preexisting pattern of behavior used to live with time-evolving resource constraints. Correct predictions are rewarded by the mass of individuals that adopts a new pattern of behavior. Incorrect predictions -- or inappropriately timed predictions -- generally disappear without a trace.

Not coincidentially, this game of capitalism provides a social parallel to the flow experience described by Mihalyi Csikszentmiahlyi as optimal to individual psychology. The same basic rules of the game apply both at the level of neural networks and at the level of networks of individuals within an economy. Because of how neural networks constitute economic networks, it should not surprise us to see that similar mathematical structure and dynamics apply to both. Consumer internet marketing professionals probably already know more about how neural networks work than do many neurologists!

Neoclassical theory offers zero insight into any of these dynamics.

Letter Comment to the FTC on the Evolving IP Marketplace

Here are a few excerpts:

According to systems theory, innovation emerges from iterated cycles in which data, theory, and the people who collect data and form theory constitute feedback loops, which evolve over time. Each cycle manifests as the gathering and exchange of information among a network of experts who act as gatekeepers to a set of symbolic rules and procedures. Following the terminology of Mihaly Csikszentmihalyi, I call the network of experts a “field,” and the set of symbolic rules and procedures a “domain.” To give examples, topology, physical chemistry, and constitutional law are domains. Each of these domains is associated, respectively, with the fields of mathematicians who specialize in topology; academic and practicing physical chemists; and academics, practicing lawyers, and judges who work on constitutional law.

From the point of view of an economist, the most important difference between systems theory and neoclassical theory may be that systems theory permits for economic actors (the field) to have preference functions (the domain) that evolve over time. As a result, although neoclassical theory is still a useful model of economic activity when changes in preferences are small within the window of time in which economic activity is observed, more generally no stable equilibrium may be reached because preferences may change during the period of observation. In addition, because systems theory need not assume that economic actors know how their preferences have or will change over time, an assumption that actors will try to match their allocation of resources to their preferences can be called “rational” only in a weak sense. Under systems theory, whether an economic actor will engage in an activity of consumption, production, or exchange is a function of: (1) their history of preferences; (2) their history of consumption, production, and exchanges with others; and (3) the frequency of their exchanges with others. Whereas within neoclassical theory institutions are designed to promote allocative efficiency, within systems theory institutions are designed to promote the discovery of information about preferences, and thereby the synchronization and frequency-matching of consumption and production activities through exchange and cooperation.

For example, the systems theory makes explicit the spatial and temporal dynamics underlying the knowledge problem described by F.A. Hayek in “The Use of Knowledge in Society.” With the systems theory in mind, we can identify the function of markets with their facilitation of the exchange of information and coordination of economic activity independent of central planning. This is in stark contrast with neoclassical theory, which often identifies the function of markets with the maximization of aggregate utility based on an assumption of stable preferences — a function that cannot be carried out by a central planner beyond a small scale. The systems theory therefore identifies markets as a mechanism for rewarding information exchange and cooperation, thereby facilitating economic growth.

Download Letter Comment to FTC on the Evolving IP Marketplace (Final)

Revisiting Robert Ellickson's Critique of Functionalism

An excerpt from Order Without Law:

[E]arly functionalists had a tendencey to consider a human group as a single organizm whose "health" could be examined. It was then easy for them to surmise that Darwinian evolutionary processes would help favor the survival of socially adaptive norms. In the following passage the libertarian scholar Friedrich Hayek lapsed into this sort of analysis:

It is not only in his knowledge, but also in his aims and values, that man is the creature of civilization: in the last resort, it is the relevance of these individual wishes to the perpetuation of the group or the species that will determine whether they will persist or change. It is, of course, a mistake to believe that we can draw conclusions about what our values ought to be simply because we realized that they are a product of evolution. But we cannot reasonably doubt that these values are created and altered by the same evolutionary forces that have produced our intelligence. All that we can know is that the ultimate decision about what is good or bad will be made not by individual human wisdom, but by the decline of the groups that have adhered to the "wrong" beliefs. [The Constitution of Liberty at 36]

(Before nonlibertarian scholars dismiss these thoughts, they should be aware that both Lon Fuller and Thomas Schelling have also harbored suspiciously functionalist sentiments.) [Citing Fuller's "Human Interaction and the Law," and Schelling's Micromotives and Macrobehavior at 124-133].

The difficulty with this sort of organic analysis is that evolutionary processes, as most biologists understand them, select either genes or individual organisms, not groups, for survival. [Citing Dawkins's Selfish Gene and E.O. Wilson's Sociobiology at 106-129; and noting V.C. Wynne-Edwards's dissent.] Assume, for example, that honesty is a functional norm in the sense that, if all the members of a group were consistently honest, they would each be better off than if everyone were consistently dishonest. Would the Darwinian struggle favor the survival of the groups of honest persons? Not necessarily. A dishonest individual living in an environment surrounded by honest people might especially prosper, surrounded by easy marks. As a result, the Darwinian process would tend to select dishonest people for survival. In short, to support a Panglossian scenario of group evolutionary progress, functionalists could not rely simply on the biological theory of natural selection. Instead, they had to develop theories to explain how social-control systems would evolve within groups to prevent successful invasions by deviants who would subvert group welfare.

The punchline is that group selection theory is now enjoying a resurgence among some evolutionary biologists, notably including E.O. Wilson, whom Ellickson cites in support of the proposition that the theory has been rejected by evolutionary biologists. Wilson and Holldobler recently published, The Superorganism, which lays out a group selection theory for how cooperation evolved among insects.

The other objections to functionalism raised by Ellickson are also moot now in view of the improved theoretical tools for being more quantitative about functionalism. In particular, associating a group with a network, and individuals with nodes therein, permits evolution of group behavior to be modeled using mathematical models for network growth and decay. Such models help to eliminate much of the conceptual circularity to which Ellickson objects in this passage.

Network Theory of Bose-Einstein Condensates

This is pretty cool. I've been interested in how synchronicities in the models for BECs and Josephson Junctions might be useful in modeling markets since I read Steve Strogatz's Sync.

The mapping of a Bose gas predicts the existence of two distinct phases as a function of the energy distribution. In the fit-get-rich phase, describing the case of uniform fitness, the fitter nodes acquire edges at a higher rate than older but less fit nodes. In the end the fittest node will have the most edges, but the richest node is not the absolute winner, since its share of the edges (i.e the ratio of its edges to the total number of edges in the system) reduces to zero in the limit of large system sizes (Fig.2(b)). The unexpected outcome of this mapping is the possibility of Bose–Einstein Condensation for T < TBE, when the fittest node acquires a finite fraction of the edges and maintains this share of edges over time (Fig.2(c)).

Why is our System of Executive Compensation so Broken?

Robert H. Frank has an answer:

When the strength of positional concerns differs across domains, the resulting conflict between individual and social welfare is structurally identical to the one inherent in a military arms race. To illustrate, consider rival nations faced with deciding how to apportion available resources between domestic consumption and military armaments. Each country’s valuations are typically more context-dependent in the armaments domain than in the domain of domestic consumption. After all, having lower domestic consumption than one’s rival might entail psychological discomfort, but being less well armed could spell the end of political independence. The familiar result is a mutual escalation of expenditure on armaments that does not enhance security for either nation. Because the extra spending comes at the expense of domestic consumption, its overall effect is to reduce welfare. Note that if each country’s valuations were equally context-sensitive in the two domains, there would be no arms race, for in that case the attraction of having more arms than one’s rival would be exactly offset by the penalties of having lower relative consumption.

So long as CEO pay performance is determined by what other CEOs are getting paid rather than by how much value the company creates during the CEO's tenure, CEO pay will be a positional good in Frank's terms, which draws value away from employees, customers, and investors.

How could CEO pay become less positional? By giving other stakeholders (but especially investors) more transparency into the cash-flows in and out of the firm. Boards and shareholders are forced to compete with other boards and shareholders because those measurements of CEO performance are right now more reliable than more direct measurements of company growth.

Best Four Sentence Summary of the Crisis and How to Fix It

From Shiller and Akerlof in today's WSJ:

Commercial and savings banks used to have reason to be careful initiating mortgages -- they would most likely hold the debt for years. But banks would increasingly sell the mortgages they initiated to others. And regulation did not adapt to reflect this change in the financial structure. The regulatory failure led to a profound systemic instability in our economy, which accounts for the severity of our economic crisis. Devising new regulatory structures that will allow financial innovation to proceed and yet prevent new such systemic problems is the major challenge to our creative capitalism today.

Donald T. Campbell on Multiple Inventions

From Evolutionary Epistemology available here:

A major empirical achievement of the sociology of science is the evidence of the ubiquity of simultaneous invention. If many scientists are trying variations on the same corpus of current scientific knowledge, and if their trials are being edited by the same stable external reality, then the selected variants are apt to be similar, the same discovery encountered independently by numerous workers. This process is no more mysterious than that all of a set of blind rats, each starting with quite different patterns of initial responses, learn the same maze pattern, under the maze's common editorship of the varied response repertoires. Their learning is actually their independent invention or discovery of the same response pattern.

Sociologists could have just checked with the Patent & Trademark Office, where multiple simultaneous inventions have been a way of life since way before Darwin.

But is Campbell right here about there being no difference between blind rats in a maze and inventors tackling the same problem? Maybe. But doesn't the "pattern of initial responses" matter in terms of how fast a particular rat runs the maze? And if some rats run mazes faster than others, then don't we want to reward those rats?

In fact, the "initial pattern of responses" of an experienced inventor may take on the characteristics we more typically associate with artistic or mathematical genius after a lifetime of inventing. But who will devote a lifetime to inventing without inventions being protectible as property? Rats in a maze indeed.

What Kind of Competition Promotes Innovation?

Charlie Munger offers his view here:

Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure -- a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields like cereals, for example almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.

Here's my question: When an industry ends up in price competition alone, shouldn't we expect competition regulatory authorities to do something just as much as we would expect the same competition regulatory authorities to do something if the industry ended up with too little competition? Why don't we have both protrust and antitrust law?

We do. This is exactly the problem that intellectual property law is setup to solve. Granting temporary monopolies forces competitors to differentiate rather than competing on price alone. A properly tuned system of intellectual property rights transforms competition into an engine for discovery of new information about the market. Crescat scientia; vita excolatur.