Two
ECONOMIC RATIONALITY
Adaptive Artifice
p 31
Economics will serve well to illustrate how outer and inner environments interact, and in particular, how an intelligent system's adjustment to its outer environment (its substantive rationality) is conditioned by its ability to discover appropriate behavior (its procedural rationality).
THE ECONOMIC ACTOR
The Normative Theory
p 33
...the business firm might ask whether it should seek a compromise between maximizing profit and minimizing risk (responding to a shadowy "utility function" that lurks somewhere in the recesses of the entrepreneur's mind).
Procedural Rationality
p 34
...the inner constraints on adaptation include uncertainty about the outer environment [...] as well as limits on the calculation capabilities available... The normative theory of the firm becomes a theory of estimation under uncertainty and a theory of computation...
Today several new branches of applied science assist the firm to achieve procedural rationality. One of them is operational research (alias management science); another is organization theory.
Satisficing
p 37
...my main theme [...] is to show how the behavior of an artificial system may be strongly influenced by the limits of its adaptive capacities.
MARKETS AND THE ECONOMY
p 37-38
For some purposes statistics provide an adequate basis for coordinating behavior patterns...
For other purposes a society may rely on bargaining and negociating processes to coordinate individual behaviors... For still other coordinative functions, societies employ hierarchic organizations... Finally [...] some societies employ a wide variety of balloting procedures.
The Invisible Hand
p 40-41
We have become accustomed to the idea that a natural system like the human body or an ecosystem regulates itself. To explain the regulation, we look for feedback loops rather than a central planning and directing body.
...
Market processes commend themselves primarily because they avoid placing on a central planning mechanism a burden of calculation that such a mechanism [...] could not sustain. They conserve information and calculation by making it possible to assign decisions to the actors who are most likely to possess the information [...] that is relevant to those decisions.
Citation from von Hayek in "The Use of Knowledge in Society", p 41-42
...the knowledge [...] never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.
Uncertainty and Expectations
Uncertainty
p 44
Although uncertainty does not therefore make intelligent choice impossible, it places a premium on robust adaptative procedures instead of strategies that work well only when finely tuned to precisely known environments.
Expectations
p 44
In general a system can be steered more accurately if it employs feedforward, based on predictions of the future, in combination with feedback, to correct the errors of the past.
...
Feedforward in a market system can become especially destabilizing when each actor is trying to anticipate the action of the others [...]
The standard economic example of destabilizing expectation is the speculative bubble.
Rational Expectations
[The Prisoner's Dilemma game] p 46
...each player has a choice between two moves, one cooperative and one aggressive.
...if players are striving for a satisfactory rather than optimal payoff, the cooperative solution may be stable even for finite repetition of the game. Insofar as this result can be generalized, bounded rationality appears to produce better outcomes than unbounded rationality in this kind of competitive situation.
Markets and Organizations
Decentralization in Organizations
Externalities
p 50
The economist's preferred remedy for externalities is to bring the unaccounted-for consequences within the calculus of the price system, tax the emission of smoke, for example.
Uncertainty Absorption
THE EVOLUTIONARY MODEL
The Alternative Theory of Economic Man
p 52
Adaptation comes about through selection *by* rational actors, not through natural selection *of* actors whose behavior happens to be adaptive.
Local and Global Maxima
p 53-54
Linear programming owes its computational feasibility and its popularity to the fact that its postulates are strong enough to guarantee that a local maximum will be the global maximum.
... There is no reason to suppose that the real world [...] has the simplicity of a linear programming problem.
The Myopia of Evolution
p 55
[Example of the metric system as a global maximum, the English system as a local one] On the other hand, if future benefits are discounted at some rate of interest, it might never be economical to switch from the one system to the other...
p 56
Each species in an ecosystem is adapting to an environment of other species evolving simultaneously with it. The evolution and future of such systems can only be understood by their histories.
The Mechanisms of Economic Evolution
p 57
[In economic evolution] the hypothesised system is Lamarkian, because any new idea can be incorporated in operating procedures as soon as its success is observed and successful mutation can be transferred from one firm to another.
ECONOMICS AND PSYCHOLOGY
p 57
Economics is a theory of human rationality that must be as concerned with procedural rationality [...] as with substantive rationality.
The Utility Function
Levels of Aspiration
p 59
We can speculate about some of the properties a thermometer of happiness might have... To deal with phenomena like these, psychology has introduced the concept of aspiration level.