Networks and communication

What explicit attention to networks may contribute to the progress of economic analysis is shown in Guido Fioretti's brief but very interesting "The small world of business relationships." As far as the Internet economy is concerned, its main hypothesis goes against the grain of the majority of the other contributions. According to Fioretti, we may expect there to be a structural invariant across the boundary of the Internet economy. As economists have begun to recognize, after Herbert Simon drew their attention to the boundaries of rationality, the human brain has only a limited capacity of handling complexity. One of the implications is that we can handle only a limited number of social connections. That we nevertheless succeed in communicating and interacting with many others, often at great distances, is due to the structure of the networks of which we are part. What Miller and Stiegler call hubs may link many short-range networks that are thus integrated into what Hayek in 1945 called a system of telecommunications. Hayek used this expression to characterize the price system, but Granovetter and his followers have convincingly shown that all human relationships may be described in these terms. Fioretti gives a number of examples of what disconnections in such networks may lead to. To many economists the most surprising one will be Keynesian underemployment equilibrium: it is the consequence of a loop in the information network that causes economic agents to keep repeating the same behavior. That this link has not been noticed before is due to an almost general blindness of economists to the fact that in order to model interactive behavior one must specify the interaction structure.14 What they implicitly assume instead is that every economic agent can interact with any other agent. The worst manifestation of this neglect are analyses based on representative individuals. As the author observes, this assumption implies the absence of institutions.

Does this mean that Fioretti thinks the Internet has not changed anything? No! It has liberated us from the interaction constraints imposed by our physical location. Information and communication technologies make distance, or characteristic path length, which together with the degree of clustering is the crucial parameter of networks, less relevant. This is the feature on which Miller and Stiegler base their proposal. Fioretti sketches a research agenda to put his hypothesis to the test. He ends by hinting at the possibility that our cognitive constraints put an upper limit to the number of technologies that may be combined, which in its turn regulates the number of links that may evolve between firms. There is a parallel with biological evolution, where the positive or negative contribution of a particular gene to the overall fitness of the organism is dependent on the number of other genes it affects. The idea of an optimal level of interaction between genes merits a critical elaboration in the direction of economic systems.

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