Cost, The Limit

Today’s big hit is a cute little paper by a couple econophysicists in Bremen. They built a toy model where a whole bunch of limited agents each have two types of interactions: they decide a ‘trustworthiness’ value for themselves [0-1] as well as who all to contract with, and strategize to maximize the number of folks contracting with them times those folks’ trustworthiness and minimize their own trustworthiness in the contracts they initialize with others (each agent is forced to initiate said contracts/interactions with a set number of people per round). This asymmetry between initiated interactions and responsive interactions is intended to mirror a distinction between selling and buying and I’ll stick to that metaphor from here on out although it’s not unproblematic. Who to buy from in this model is decided by a straight comparison of prices while sellers set prices (quality/trustworthiness) by comparing the immediately preceding prices and resulting payoffs of their competitors. Long story short there were three major environmental variables, the set number of people the buyers were forced to buy from, a randomness factor localized to a single agent each iteration and the relative speed at which buyers updated their strategies versus sellers. The resulting system behavior revealed that this market had only two stable points: extreme competition (selling with next to no profit above marginal costs) or extreme cartelization (sellers get ridiculous profit). source

‘Cost should be the limit of price’ Josiah Warren, or similarly: “the labor theory of value recognizes no distinction between profit and plunder” SEK3. Nice to see an example.

I remember a friend lamenting that his bids for roadwork were approaching the cost of doing the work because of the competition in bids from “cheaper” guys. A real world example I just loved to hear considering Warren’s catchphrase. I didn’t think his lament was a bad thing, but didn’t really get into it with him. I did wonder how “extra” money, i.e. profit, if small, could ever pay for repairs and future new equipment, but all things equal, if the market for the equipment and everything else were near cost I could see them doing just fine, and giving taxpayers the true price, not some inflated price to go into bonuses, investors, and who knows what else. The only ‘problem’ here was that labor was paid a ‘prevailing’ State mandated wage. This is a problem if the market says one thing, and the State another. The bid essentially revolves, or devolves, around this ‘prevailing’ number. I realize this can be a good thing for the prevailing employee, but if all things were at cost, including labor, then the bids could even be cheaper not to mention the cost of living (and taxes ta boot). A simple solution with complicated implementation when beholden to what amounts to a fettered market.

If the overall governance structure reinforces the capability of local groups to deal with their own problems, then user groups have an incentive to manage their own common-pool resources wisely. Under these circumstances, development is likely to be sustainable. Conversely, if local rules are routinely superceded by the policies of higher authorities, then it will be much more difficult to restrain individual appropriators from engaging in opportunistic behavior. In those circumstances, any effort to develop the national economy as a whole will rest on shaky foundations at the local level. source

The solution seems to be local, duh…Smash the State! Smash Government, Not governance.