From: chased@rbbb.Eng.Sun.COM (David Chase)
Newsgroups: ca.politics,ba.politics
Subject: Re: Distracted Economic Theory
Date: 25 Aug 1992 22:14:53 GMT
Organization: Sun Microsystems, Mt. View, Ca.
NNTP-Posting-Host: rbbb

In article <1992Aug24.185429.7380@clipper.ingr.com> ald@clipper.ingr.com (Al Date) writes:
>When you start throwing around terms like global 
>vs. local function minimization in an economic context, I 
>get a little confused.  Perhaps if you explained this a little
>more, there might be something there that my brain could
>decipher.  

Okey-dokey, I'll give it a shot.  The intuition behind the Arrow paper
(*) is that the way a "free market" seeks economic efficiency is not
unlike many function minimization algorithms -- given a choice between
equal products or services, you buy the cheaper one.  Note that
function minimization algorithms can get "stuck" at a local minimum --
if you take a 1$ step in any direction from where you are, you get
less than 1$ back in added value.  To get to the true minimum, you
might have to spend (or worse, invest, meaning "spend and wait") a
very large sum of money.  I think, but I'm not sure, that various
stock and options markets correspond to minimum-seeking algorithms
that attempt to exploit local information about the first and second
derivatives of a function.

(*) that is, my understanding of the intuition.  Best to browse back
issues of Sci. Am. to find it.

In the real world, probably the best example of this is the
synergistic effect that popular hardware and software have on each
other.  Because there are PCs everywhere, software writers see a
potentially huge market, and thus they write software.  Because so
much software is available, more PCs are sold.  Economies of scale are
also involved.  The most popular computer architecture in the world is
not the "best" architecture (divorced from the software which runs on
it).  MSDOS is not the "best" operating system by any stretch of the
imagination (all the power of MacOS with the friendliness of Unix).

A second example (also close to home) is the transportation network
that we have in the Bay Area.  *If* we rearranged all the houses, and
added more rail (BART or CalTrain or light rail) and etc etc, then we
*might* end up with a superior transportation system.  Doing that now
would cost a hell of a lot of money.  If, at some point in the past,
the powers-that-be had decided to subsidize local rail a little bit
more, and local roads a little bit less, we might well have ended up
with a superior transportation system (no Phil, brownshirts would not
have been necessary -- just a gentle tilt in the government subsidies.
Doing it now, a heavier hand would be necessary).

Note that this theory half-invalidates arguments of the form "if there
were a better way, then we would already be there (or we would, as
soon as the government quit meddling)".  It is quite likely that we
would stay at whatever local minimum we had found.  However, it is
also true that departing from the local minimum would cost more money
(temporarily) than we could afford or were willing to risk (i.e.,
seeking the better world might not be practical).

David Chase
Sun
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