“And that’s the core concept of a market: a bunch of subsystems at pareto optimality with respect to a bunch of goals.”
The other key property is that the subsystems are able to reliably and voluntarily exchange the resources that relate to their goals. This is not always the case, especially in biological settings, because there is not always a way to enforce contracts- e.g. there needs to be a mechanism to prevent counter-parties from reneging on deals.
“Markets can arise spontaneously whenever individuals are able to engage in voluntary exchange and when they differ in their preferences and holdings. When the individuals are people, it’s economics. When they’re not it’s biology”
There are various ways nature overcomes the problems of contracts. One is to perform trade incrementally to gradually build trust. Alternatively, co-evolution can sometimes produce the equivalent of a secure payment system, as we discuss in our paper:
”an alternative solution to the problem of contracts is to “lock” the resource being traded in such a way that the only way to open it is to reciprocate. For example, if we view the fructose in fruit as a payment made by flora to fauna in return for seed dispersal, we see that is is very difficult (i.e. costly) for the frugivore to consume the fructose without performing the dispersal service, since it would become literally a ‘sitting duck’ for predators. By encapsulating the seed within the fructose, the co-evolution between frugivore and plant has resulted in the evolution of a secure payment system”.
Nope, voluntary exchange is not a key property. Indeed, the fact that we don’t need that property is a key point of this post (and my older post Comparative Advantage is Not About Trade). One does need some process which tends to produce a pareto optimum, and voluntary exchange is one way that can happen, but it is certainly not the only way. So long as we have pareto optimality, we have the key properties, regardless of whether voluntary exchange is involved.
Right, what I’d say there is that central planning when it achieves pareto optimality is behaviorally equivalent to a “market” in the sense that the post uses the term. (Indeed, it was roughly that observation which made “shadow prices” as an optimization technique such a politically-volatile topic in the USSR for a time.) Pareto optimality implies that the central planner has at least implicit prices, and behaves accordingly.
Thank you for sharing this insightful article! It was a refreshing take on economic concepts, especially the way it used the apples-and-bananas analogy. It’s intriguing how these ideas extend beyond traditional economics, almost like how discussions on r/superstonk branch into unexpected territories. I appreciate the engaging read—looking forward to more thought-provoking insights!
yes if you take a particular side in the socialist calculation debate then a centrally-planned economy is isomorphic with “a market”. And yes, if you ignore the Myerson–Satterthwaite theorem (and other impossibility results) then we can sweep aside the fact that most real-world “market” mechanisms do not yield Pareto-optimal allocations in practice :-)
There needs to be some variable level of exchange that can equilibriate with prices. It does not need to be euvoluntary, nor equal, nor completely free, but it needs to be SOMEHOW negotiable to find the point on the price curve.
Another way to show this is that there needs to be some competitive pressure—a tension between forces that creates/defines the equilibrium. Competition requires choice.
I suspect there’s a difference in what “voluntary exchange” means in different contexts. In social contexts, it’s about individual rights. In large-scale economics, it’s just about the fact that the exchange curve curves downward.
@Dagon perhaps I should have place the emphasis on “transfer”. The key thing is that we are able to reliably transfer ownership in exchange for renumeration and that the resource on which on goals are contingent at least needs to be excludable. If we cannot prevent arbitrary counter-parties consuming the resource in question without paying for it then we can’t have a market for it.
I don’t think the emphasis should be on transfer, but on the contingency of transfer. In order for a transaction to be part of a market, as opposed to theft or other non-market transfer, the participants must have the choice NOT to make the transfer, if the exchange is not acceptable.
There are lots of variants and levels of optionality, leading to legitimate debates about “how much is this a market, vs a coerced behavior”. But the core of markets and analyses of how they behave is that they are, on some scale and timeframe, voluntary.
If an arbitrary counter-party can consume the resource, this can be rephrased as destroying other agent’s utility and this seems to be solved with threat-resistant ROSE values.
Not sure this is a totally correct application, though, because the consumer also gains some utility.
“And that’s the core concept of a market: a bunch of subsystems at pareto optimality with respect to a bunch of goals.”
The other key property is that the subsystems are able to reliably and voluntarily exchange the resources that relate to their goals. This is not always the case, especially in biological settings, because there is not always a way to enforce contracts- e.g. there needs to be a mechanism to prevent counter-parties from reneging on deals.
The anonymous referees for our paper Economic Drivers of Biological Complexity came up with this concise summary:
“Markets can arise spontaneously whenever individuals are able to engage in voluntary exchange and when
they differ in their preferences and holdings. When the individuals are people, it’s economics. When they’re
not it’s biology”
There are various ways nature overcomes the problems of contracts. One is to perform trade incrementally to gradually build trust. Alternatively, co-evolution can sometimes produce the equivalent of a secure payment system, as we discuss in our paper:
”an alternative solution to the problem of contracts is to “lock” the resource being traded in such a way that the only way to open it is to reciprocate. For example, if we view the fructose in fruit as a payment made by flora to fauna in return for seed dispersal, we see that is is very difficult (i.e. costly) for the frugivore to consume the fructose without performing the dispersal service, since it would become literally a ‘sitting duck’ for predators. By encapsulating the seed within the fructose, the co-evolution between frugivore and plant has resulted in the
evolution of a secure payment system”.
Nope, voluntary exchange is not a key property. Indeed, the fact that we don’t need that property is a key point of this post (and my older post Comparative Advantage is Not About Trade). One does need some process which tends to produce a pareto optimum, and voluntary exchange is one way that can happen, but it is certainly not the only way. So long as we have pareto optimality, we have the key properties, regardless of whether voluntary exchange is involved.
@johnswentworth ok but we can achieve Pareto optimal allocations using central planning, but one wouldn’t normally call this a market?
Right, what I’d say there is that central planning when it achieves pareto optimality is behaviorally equivalent to a “market” in the sense that the post uses the term. (Indeed, it was roughly that observation which made “shadow prices” as an optimization technique such a politically-volatile topic in the USSR for a time.) Pareto optimality implies that the central planner has at least implicit prices, and behaves accordingly.
Thank you for sharing this insightful article! It was a refreshing take on economic concepts, especially the way it used the apples-and-bananas analogy. It’s intriguing how these ideas extend beyond traditional economics, almost like how discussions on r/superstonk branch into unexpected territories. I appreciate the engaging read—looking forward to more thought-provoking insights!
yes if you take a particular side in the socialist calculation debate then a centrally-planned economy is isomorphic with “a market”. And yes, if you ignore the Myerson–Satterthwaite theorem (and other impossibility results) then we can sweep aside the fact that most real-world “market” mechanisms do not yield Pareto-optimal allocations in practice :-)
There needs to be some variable level of exchange that can equilibriate with prices. It does not need to be euvoluntary, nor equal, nor completely free, but it needs to be SOMEHOW negotiable to find the point on the price curve.
Another way to show this is that there needs to be some competitive pressure—a tension between forces that creates/defines the equilibrium. Competition requires choice.
I suspect there’s a difference in what “voluntary exchange” means in different contexts. In social contexts, it’s about individual rights. In large-scale economics, it’s just about the fact that the exchange curve curves downward.
@Dagon perhaps I should have place the emphasis on “transfer”. The key thing is that we are able to reliably transfer ownership in exchange for renumeration and that the resource on which on goals are contingent at least needs to be excludable. If we cannot prevent arbitrary counter-parties consuming the resource in question without paying for it then we can’t have a market for it.
I don’t think the emphasis should be on transfer, but on the contingency of transfer. In order for a transaction to be part of a market, as opposed to theft or other non-market transfer, the participants must have the choice NOT to make the transfer, if the exchange is not acceptable.
There are lots of variants and levels of optionality, leading to legitimate debates about “how much is this a market, vs a coerced behavior”. But the core of markets and analyses of how they behave is that they are, on some scale and timeframe, voluntary.
If an arbitrary counter-party can consume the resource, this can be rephrased as destroying other agent’s utility and this seems to be solved with threat-resistant ROSE values.
Not sure this is a totally correct application, though, because the consumer also gains some utility.