Social computing. How the market works from the point of view of cybernetics
The market mechanism is a social computer.
A network of millions of natural intellects, united through voluntary economic relationships, leads to continuous calculations deciding the question of optimally distributing resources between individuals.
Each of these, in their turn, is an isolated "social processor" in the market's social computer.
Let's call these calculations "social computing".
Prices and payments, credit rates and insurance deductibles, growth and falls in markets, the birth and death of entire industries — the results of social calculations.
[Similar in meaning to the term "catallactics" by Mises and Hayek.]
The market computer is the most complex control system ever created by mankind.
Millions (globally billions) of real intellects.
[At the same time, all of the world's computers of today combined do not reach the sophistication of the intellect of a single person.]
United and bound through an unthinkable amount of social connections and unimaginable variety, comparing the social computer with the internet is like comparing the human body to a LEGO sculpture.
Less obvious, however, is that the free market's social computer simultaneously embodies the limit for complexity for the control system which can be built by mankind.
[At least, until a fully functional quantum computer is developed. The thesis can be shown on the basis of Penrose's work, but it's illegible.]
The maximal possible complexity leads to the maximal possible effectiveness.
Therefore, the social computer of the free market is the most efficient management system of all.
Most characteristically, completely free.
Accessible to all.
Obviously, when the size of the market increases, the social computer's complexity (and the efficiency of the calculations) increases exponentially.
That is why the greater the number of people and goods in the market, the greater its effectiveness.
The SC simultaneously incorporates elements of classic digital electronics and quantum computers.
Making calculations from probabilities (weighing several variations) makes the SC more similar to quantum computers.
As where a quantum computer (in the interpretation of Everett-Deutsch) validates alternatives in "parallel universes", each of which has its "own" version, the social computer tests the variations across a plethora of decisions by independent (and statistically random) intellect nodes in the SC's network.
Taking time to make calculations makes the SC similar to digital electronic computers (quantum computers "think", so to say, instantly).
So, the market needs time to find a locally sustainable balance; more time results in a wider-spread and more varied consequences, creating and need to "recalculate" the equilibrium.
Tens of billions of these events happen daily on the global free market of mankind; from a hamburger being bought at McDonald's in Asuncion to the bankruptcy of Lehman Brothers.
Because of this, in an ideally balanced state (and therefore, ideally effective) there can only be locally isolated markets.
In general, a broad market should be in an unbalanced state, but be stable overall.
In other words, the maximal attainable effectiveness of the social computer does not guarantee an optimal state for any given market at every point in time.
Rather, the opposite.
But, the managing mechanism of the free market does guarantee the best possible results in the long term.
At any given moment, a competent dictator can make a more effective decision than the apparently synchronized and unfolding social calculations.
But, no matter how complete the dictatorship, in the long term, it will lose to the free market because of moronic political leaders.
From the aforementioned, it is clear how naive attempts at "state planning" are.
It is time to point out the elephant in the room.
This exact "State Planning" is preached by MBA authorities in corporate practice (ERP paradigm — Enterprise Resource Planning). Just as "planning", "budgeting", etc.
Question: how come the junk that doesn't work in the macroeconomy is supposed to work on the level of a company?
Here is how it does not work.
Like we wrote earlier, the typical corporation's classic bureaucratic hierarchy of "divisions" and "departments" is a mistaken (and usually accidental) choice from a century and a half ago.
It's time to open your eyes.
What chance does the "analytics department" with "sales plans" have to fool the most complex management system ever known to man?
Betting on "zero" in roulette is 1 in 35.
This is exactly why the Intelligent Enterprise Managing paradigm is based on management by the market.
- Sell what customers buy;
- How much they buy;
- Don't waste the time and talent of employees or customers.
"With this you will conquer."
P.S. Specifically the social computer is the medium to spread market memes almost as computer viruses are spread through the internet.
P.P.S. Extra for those who are particularly interested.
The speed of SC calculations (and their instant effectiveness) obviously depends on:
- The density of economic interactions;
- The speed of messages about the interactions between nodes (from clay tablets to the Internet;
The greater both parameters are, the quicker the SC "calculates", and therefore, the markets are more effective in every moment of time (the average deviation of market parameters from their theoretical ideal will be less).
The social computer, in general, is an emergent phenomenon.
It doesn't function if the density of contacts and speed of messaging is below a certain level.
The complete freedom of Robinson Crusoe’s island didn’t move towards forming a market nor did it help Friday.
In addition, even a fairly dense economic society with fairly rapid interpersonal interactions does not always lead to social calculations.
The third necessary component is rational decision making.
[The term "rational" is widely accepted, but formally inaccurate; any given individual is irrational in most situations.
Rather, it should be about decisions made in "sound mind and secure memory".]
In times of bubbles and baking panics, or social revolutions, any conversation about "rationality" is impossible.
This is why, for example, closing banks and exchanges during crises is not a non-market response, since at that moment the market does not exist.
How does irrationality on the human level guarantee the best possible results on the market level?
A physical analogy.
The flat, smooth surface of water (in a calm state) on the microscopic level shows the chaotic movement of a billion molecules.
The random interactions of these balance each other into the perfect mirrored surface that we see with our eyes.
By analogy, the ideal mathematic effectiveness of social calculations comes from the superposition of random deviations from "average" by billions of individual wills, passions, and intentions.
Given this, the greater the deviation from "norms", the greater the chances for innovation (and this, like outstanding entrepreneurial success, is largely coincidence), and its subsequent replications in the SC.
The previous paragraph is the cybernetic proof for maximizing variance (tolerances) in society.
Maximize to the natural limits, as long as it does not affect the functional independence for social processors in the SC.