Evidence of Wealth in Agent-Based Institutions

Here is an illustration of wealth in institutions. In my closely related project, Perceived Order, I am developing the Resource-Patterns Model of life. The central thought experiment in that model places agents (critters, I call them) in a setting in which they can grow wealthy if, and only if, they somehow learn to restrain their behavior, to make their choices in conformity with a set of rules.

In this post I will not attempt to repeat all the definitions and circumstances which you may need to understand. I hope you can find that background in early posts on Perceived Order.

Here I will repeat the two pictures in A Resource Pattern Appears in the World of the Critters, and call attention to the difference between the two.

A unexploited resource pattern in the world of dirt-poor critters

After embracing rules of behavior, most critters are comparatively wealthy

In the second picture numerous critters live in the line of exchange between the water (on the left) and the sugar (on the right). These critters are wealthy, I assert, compared to their kin who live outside the line. They are wealthy because they acquire their needs of water and sugar with less time spent searching. They have larger internal stores of water and sugar (they are fatter perhaps); they have more free choices (time) in which they may do things of their choosing other than search for food; they may spend a larger fraction of their time reproducing or reading poetry. True, they had to follow rules, to restrict their choices sometimes in order to attain their wealth, but as a result they have more favorable choices available to them in the remainder of their time.

It seems we have many different concepts contending for what we might mean by "wealth". I am promoting the concept that wealth consists of an array of favorable choices. In the second picture above the critters in the line of exchange enjoy greater wealth which is expressible as the sum of the favorability of their choices.

Of course some people may argue that the wealth is in the raw materials, in the large supplies of water and sugar. I must agree that the wealth enjoyed by the critters in the second picture requires the raw materials; they could not have their wealth without the raw materials.  But the presence of the raw materials does not make the critters wealthy in the first picture. Only the discovery of rules of behavior, of institutions, created the much greater wealth enjoyed by critters in the second picture.

This Work Continues, But Mostly Elsewhere

Some viewers may have noticed a slowdown in the frequency of my posts on this Wealth In Institutions thesis. I explain:

• I have shifted my attention for the most part to another project which arguably encompasses this Wealth In Institutions thesis. That project, which I call the Resource Patterns Model of Life, shows how groups of agents can grow wealthy as they learn to conform their behavior to the constraints of the larger environment. They grow wealthy, that is, as they discover institutions. I am developing this post-by-post on another Blogspot site named Perceived Order.
• The Wealth In Institutions thesis is hard. Or, let me say that I may be unable to find much direct support. I have read quite a lot in search for compatible, supporting research (see the bibliography) but have come up almost empty handed. It could be this science is still in its infancy, in the stage of development where nouns and verbs are still hazy and ill defined, where it is difficult to get more specific than the telling of anecdotes.

Nonetheless let me report one find. The following sentence comes from Vernon Smith, Rationality in Economics (2008), p. 57.

As I have noted, David Hume (and Adam Smith) used reason to understand and interpret the intelligence captured in the emergent orders of economy, law, and society.

I pick my words out of that sentence, "intelligence captured in orders of economy, law, and society", and claim that Smith, Hume, and Smith are referring to institutions. And they are interested because of the wealth contained therein.

Value in goodwill

Yesterday I enjoyed a conversation with a cousin of mine.  This cousin made a point which provides an example for my Wealth in Institutions thesis.

My cousin has a business as a licensed professional structural engineer.  He told how most of his work comes from architects with whom he has worked before.  He has learned how to work with these architects, and they with him.  When one of these architects gets new work, or the prospect of new work, the architect can communicate with my cousin by using only a few words because they know each other's expectations.  This efficiency of communication between trading partners did not grow overnight.  It has taken over 15 years to develop.

My cousin spoke about the value of a business such as his, that is the price if such a business were to be sold to a buyer.  The value comes almost entirely from the established pattern of trade, from the flow of calls from architects who need help with engineering and who expect to be satisfied with the help they get from this business.  Other assets of the business, such as furniture and computers, have little value in comparison with the value of established trade.

So this provides an example of wealth in institutions.   The wealth is expressed in the value or price of such a business.  The institutions are the established expectations of trading partners.  Most of this wealth is not visible to the untrained eye; it is not tangible.  This wealth exists only in the expectations in the minds of some architects.

When I took the accounting classes required of an MBA student, I learned to think of this kind of wealth as Goodwill.  The balance sheet of a company may show that most of the value of the company exists in this intangible category.  The point I am trying to make with this Wealth in Institutions (WI) thesis is that most of the wealth in a modern capitalist society also exists in such an intangible category, in institutions, that is in expectations – and not in physical assets.

On my to-do list, I want to review double-entry bookkeeping to think about the steps leading up to an entry of goodwill.  I hope such study may offer insight which connects our established ways of thinking with the WI thesis.

October update

My work on this thesis has slowed down because I have picked up another project.

First, to report on this wealth-in-institutions thesis, I continue reading materials which might help by showing that someone has already done serious work on the questions I raise.  I continue to update the bibliography.  But I continue to find almost nothing of direct relevance.  Perhaps this should encourage me since it might suggest that I am onto something novel.  But it might also suggest that I am attempting something very difficult, or something for which data do not exist in readily usable form.  This theses engages me in a struggle at the level of basic terms.  I do not share a "language community" with others who perceive and mention the same issues.

Second, let me mention the project which I have picked up, which has taken most of my time during the last two months.  It is a computer simulation, a multi-agent model, of primitive life.  My little critters need both water and sugar to survive.  A thin population of these critters lives on a plane where water and sugar sometimes appear at random locations.  One critter can swap water for sugar with a second critter if both critters would gain, that is if one critter has a greater need for water and the second has a greater need for sugar.  Probably I will start a second "blog" here on Blogger, to report on this second project of mine.  Ultimately I hope my model will suggest an answer to the question asked by Ronald Coase: Why do people form firms?

Late July Updates

I have been working on this website's theses.  Although you might not guess that because there have been no new posts for almost three weeks.  Nonetheless, a careful follower might have detected a number of updates on the bibliography page, as well as additions on the full-thesis page.  Here I will give a few notes about what is going on.

I was quite charmed by double entry bookkeeping, when I was introduced to accounting as taught to MBA students almost 40 years ago.  Because of that, and because I have a sense that I do not have an adequate definition of wealth, I wanted to review my accounting textbook to see where new wealth appears in the accounts of a business.  I guessed this might give a helpful view of wealth.

Now I have found my first answer.  When a sale is made to a customer, the cash received will normally be more than the cost of the goods sold, so a balancing entry is made to increase the owner's equity in the firm. I believe that shows new wealth.  I do not know if I have learned anything important in that.  I wonder about the larger economy surrounding a profiting firm.

So I want to carry the examination further: to a model economy with only two or three firms.  If the economy is prospering (each firm profiting) and each firm keeping double-entry books, will the creation of wealth require an expansion of the money supply?  Or how will the added wealth appear in the books? and will the added wealth necessarily reflect an inflow of physical resources from the environment?

My interest in checking the effects in double-entry bookkeeping may grow from my curiosity about where we (in present wealthy society) have our wealth stored up.  Could the balancing entries made, as we accumulate our wealth, suggest where we have our wealth stored?

Transparency in Language: We Forget What We Have Taken for Granted

I studied computer science in my second trip to graduate school (UNC Chapel Hill, 1982-86).  In computer science I noticed the abstractions of language used at various levels.  A programmer writing in a high-level language such as Fortran can refer to a variable by a name such as ‘X’.  In this programmer’s thinking X refers to a value, say 3.14, which the programmer has assigned to X.  But in order for the Fortran program to run, it must be translated into a lower-level language.  In this lower-level language X is probably a pointer, an address of a memory location on the computer.  Go to that address, which might be C49AF016, and in that memory location you will find the 3.14.  Referencing is necessary for the computer to work: X refers to a memory location and that location contains a value. 

But the user of the high-level language does not need to think about the memory location.  The Fortran programmer can think X is simply 3.14.  He does not have to think about C49AF016, and because of this he has more time to think on an abstract level about his job assignment.  We summarize this by saying that memory addressing has become transparent to the Fortran programmer.  Just as I can be completely unaware that a transparent pane of glass separates me from a scene before me, so the Fortran programmer can be completely unaware of memory addressing.

Something similar happens in economics.  We employ a high-level language for much of our economic planning and thinking.  This high-level language embodies assumptions about lower-level economic processes (or institutions) which we take for granted.  Let me highlight just one of these taken-for-granted processes.

Peaceful voluntary trade.  We assume that we can carry some valuable commodity such as cash to a marketplace or trading post, and there meet another person who will give us some valuable good in exchange.  We assume this exchange will go on peacefully and only under terms to which both parties have agreed.

  

Of course it is reasonable for us to assume the existence of peaceful voluntary trade, because it is almost always available for us.  We do not need to think about it.  Instead, we can apply our mental energy to other problems, problems on which we have a chance of improving the outcome.  Peaceful voluntary trade is so certain that is has become transparent to us.

Nonetheless, to develop this website’s thesis, I hope to develop models which will call our attention back to peaceful voluntary trade and other essential institutions of which we may have lost sight.  If I can discover such models, they will help us to describe limits of higher-level economic models, models which build on assumptions of perfect (transparent) underlying institutions.

Let me conclude with an assertion that peaceful voluntary trade is a BIG DEAL.  Our ancestors in the most primitive circumstances probably did not enjoy peaceful voluntary trade.  If humans find themselves without peaceful voluntary trade, these humans are poor, probably not much above hunter-gatherer status.

The ability of humans to improve their situation through specialization, taking advantage of locally available skills or resources, builds upon peaceful voluntary trade.  The wealth of nations, Adam Smith’s lesson of specialization in production of pins, builds upon peaceful voluntary trade.  Peaceful voluntary trade is a big deal which it will serve us to see, to probe.  But as yet I do not think we have the instruments (or models) to sense and measure its important parameters.

Our wealth probably depends upon incentives faced by others

I thank anonymous commenter "ak" for excellent questions, questions both searching and leading.  I also thank ak for flattering me by assuming that my thesis is true.  In the first question ak assumes that the bulk of wealth we possess exists in habits and expectations.

If my thesis is true, then it is not a problem.  Or at least I believe it is not a problem for me or for the human race in general.  Wealth is a blessing after all wherever it comes from.  But I suspect that difficulties may follow from an assumption made by many governments, that wealth can be transferred by command from one holder to another.  I do not know.  I hope to learn more.

If our wealth depends upon the expected behavior of other people, we need to ask why other people might behave as we expect.  I would assume that other people choose day by day what to do as they live.  So, if we are to be correct in our expectations for the behavior of other people, we may need to understand their incentives.

Given the education I have received thus far in economics, I have the impression that economists have not yet answered the questions I am trying to ask.  But as yet I am clumsy at wording my questions.