Revisiting Adam Smith’s Invisible Hand in the Data Economy
By: Arjan Haring
Tags: Algorithms, Data Science, Market, Economics, Invisible Hand

Revisiting Adam Smith’s Invisible Hand in the Data Economy

Fundamental paradigms of the free market should also be scrutinized by data science

An unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically and efficiently is what we call the invisible hand. But I am a data scientist, I don’t deal in unobservable forces, no observations means the phenomenon doesn’t exist. Computer says no.

If there is a force driving the market I want to find it. As an entrepreneur I even want to make money from these forces. And with the coming of the Data Economy, this will probably be the main business model.

In this post I will argue that:

Data science is impacting many (if not all) scientific fields of research, testing paradigms, theories and concepts with real data

Up for scrutiny is also the fundamental paradigm of our times, the invisible hand, the corner stone of the free market philosophy

The rise of computational sciences

Economics, one of the social sciences, is not immune to the scrutiny of scientific progress. A clear paradigm shift happened when economics started dealing with irrational agents, something behavioral economics evangelized. But even that transformation didn’t hold up to data science, as I personally experienced running experiments at Booking.com.

More and more relevant data can be attained to test assumptions, your model of the world and the theories that go with it. We are just at the beginning of the further datafication of the scientific method. Parallel to the rise of data science, as a field in itself, different sciences branche out in a computational version of themselves, as well did computational economics.

Free Markets NOT Free Loaders

In Adam Smith we trust, all others bring data

To refresh your mind; in a free market where there are no regulations or restrictions imposed by the government, if someone charges less, the customer will buy from him. Therefore, you have to lower your price or offer something better than your competitor. Whenever enough people demand something, it will be supplied by the market and everyone will be happy.

“Now is the perfect time to demand data on the corner stone of society.”

This sounds fair, and very efficient. But is it really? What does the data show us? We don’t know. There never really was any data. Nor did many people care to rigorously test the free market paradigm. Times have changed. Now is the perfect time to demand data on the corner stone of society.

Entrepreneurs are already getting their hands on the first data, this might just be the gold that everybody is looking for. Big Tech; Amazon, Uber, Alibaba and the likes are busy with running their own market design experiments. Not only ecommerce is affected, in a decentralized energy market for example, platforms that can match supply and demand best, by powerful algorithms, are winning the race for revenue.

These tech companies are effectively constructing society, and with it implementing their idea of fair and efficient markets in their algorithms. Do we need to regulate these markets? Do we want to? And how the heck should we do that? Normally I would say more research is needed, and that would be it. But this time I am taking up the challenge myself. On this, still broad, topic I am taking a leap, going down the rabbit hole, hoping to resurface some day. Yep, I am starting a PhD on this very topic…

For now, let’s recapitulate: