Wednesday, June 1, 2016

Free Competition as "Random" Innovation

What if no one anticipates real innovation in the future, because substantive change would prove too disruptive for general equilibrium conditions? While "sticky markets" have their own problems, they contain elements of stability that can't be ignored. Free competition for infrastructure, building components and time based services, would be too random in many frameworks. Even knowledge use systems need to make infrastructure choices at the outset, hence couldn't use a full range of options in each instance. Instead, each community could provide variations for building components and infrastructure choice, rather than replicating the same choices over and over again.

Meanwhile, marketplace innovation (of a sort) continues apace in less disruptive forms, such as adult coloring books. Ah well! Joshua Gans writes:
We don't speak of it very often but economists face a fundamental challenge with respect to innovation: if innovation is something no one has anticipated, then the (Savage) axioms upon which we base our rational choice decision-making cannot apply. Let me explain. Decision-making is all about actions and their consequences. Leonard Savage created the framework by which economics deals with this by assuming that all agents "look before they leap". That is, an agent would choose amongst actions available taking into account all possible states of the world and the consequences in each state. This requires agents to have complete knowledge of the state-action space.
He notes that while rationality is bounded, innovation is random, hence it's fundamentally impossible to plan everything out. I would add that in general equilibrium conditions, the "irrationality" of innovation can also disturb interconnecting price structure. Further, any desire to maintain given structural "knowns", can lead to the cost issues which occur with naturally arising monopolies. As Adam Smith explained:
The price of monopoly is upon every occasion the highest which can be competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, for any considerable time together. 
Even knowledge use systems would need systematic organizational capacity, to allow free competition for time value in understandable context. In such a marketplace, layered sets of options for time based product would be staged in regular intervals, thereby making it easier for individuals and groups to coordinate preferences and desires. While some forms of time based product would occur on spontaneous terms, others are ongoing and more fixed in nature. By coordinating for time value, innovation becomes a reference to broad organizational capacity. Still, the primary innovation is coordinating for mutually desired cost savings in a non tradable sector environment.

While knowledge use systems aren't completely random, they nonetheless incorporate free competition to a degree that a base wage structure can be highly effective. By moving a combined set of common costs (mutual goals) closer to the participants involved, fewer resources are needed in aggregate which would otherwise force everyone to "move further" to reach local non tradable sector costs. This makes it possible for all concerned to focus on the life challenges of disposable income, instead of losing disposable income options to non tradable sector formation, as so often occurs in general equilibrium conditions.

No comments:

Post a Comment