Entrepreneurship, Search Costs, and Ecological Rationality in an Agent-based Economy

New paper, "Entrepreneurship, Search Costs, and Ecological Rationality in an Agent-based Economy", forthcoming in the Review of Austrian Economics:

Since Coase’s paper on the firm, transaction costs have occupied much attention as a field of economic inquiry. Yet, with few exceptions, neoclassical theory has failed to integrate transaction costs into its core. The dominant mode of theorizing depends upon Brouwer fixed points which cannot integrate transaction costs in more than a superficial manner. Agent-based modeling presents an opportunity for researchers to investigate the nature of transaction costs and integrate them into the core of economic theory.

To the extent that transaction costs reduce economic efficiency, these costs provide opportunities for entrepreneurs to earn a profit by reducing these costs. We employ an extension of Epstein and Axtell’s (1996) Sugarscape to demonstrate this point one type of transaction costs: search costs. When agents do not face the cost of finding a trading partner, the system quickly reaches a steady state with tightly constrained prices regardless of agent production strategies. When search costs are present, entrepreneurs may use competing strategies for production and exchange that allow them to earn higher revenues than they would earn otherwise. These cost reducing innovations tend to promote concatenate coordination (Klein 2012). In our model, search costs are tied to consumption rates of our agents. The agent’s production strategies represent technology in the form of mental models (Denzau and North 1994) that shape agent action with regard to the agent’s environment. The success of these are dependent on their ability to overcome search costs. Finally, we find that the average profit, or market return, earned by each of these mental structures tends to equalize as a result of competition.

Being and Decision: New Interests, New Blog

I have a new blog to serve as an outlet for more general interests.

The essence of human life can be categorized broadly as being - life as it is without the intervention of consciousness - and decision - the reprogramming of existence so as to transform on some margin or margins. Humans employ logic to understand their environment, which includes themselves, and intervene in it with intention of generating some outcome. The outcomes generated may or may not be in accordance with the intention of the acting agent. Agents face the challenge of how to be effective in action while not generating outcomes that harm themselves and others. To the extent that they harm themselves, agents will not long survive. To the extent that agents harm others, they form relationships defined by enmity. This also hurts their ability to survive, though many engage in such practice while successfully isolating themselves from the negative consequences of their actions. "He who lives by the sword dies by the sword." Such isolation must be finitely lived. 

The challenge that confronts society is for those acting within it to do so in such a manner that does not make others worse off: to aim for Paretian improvements. When this is not possible and others are made worse off by our own actions, whether or not recompense is required by law, we can at least be sure to leave others the opportunity to improve their own situations whenever possible. We need an ethic that appreciates that the social animal is also an institutional animal. Humankind must be careful to consider the effects of our interventions as the effects of these are travel through institutional channels that increase the distance of the outcome from the motivator of that outcome. This is the golden rule applied to the logic of institutions.