The Structure of Economic Interaction: Individual and Collective Rationality

Economists do not like the idea of comparing the economy to an ants’ nest or to a bee-hive. They are no doubt convinced that such organizations are in some sense optimal but they are not convinced that the optimality is achieved in the same way as it is in an economy or market. Thus, if you ask most economists what is the basic question that concerns them they will probably answer that it is to understand what the equilibrium of the economy or market that interests them is like, and whether it entails an efficient use of resources. Yet there is a prior problem that intrigues many people when they first come to economics and which is posed by the behavior of social insects. It is that of explaining how the myriad of disparate individual economic activities, in a modern economy, come to be coordinated. Economic agents constantly interact with each other in different ways and for different purposes and somehow out of these individual interactions a certain coherence at the aggregate level develops. Disappointingly economics has rather little to say about this. The reason is that the basic paradigm in economic theory is one in which individuals take decisions in isolation, using only the information received through some general market signals, such as prices, to make their decisions. The standard model does not deny that agents interact but, as Samuelson said, they only do so through the price system. Indeed, a way of characterizing the efficient markets hypothesis so pervasive in the financial markets literature is to say that all information private and public is aggregated in the price system. Thus no agent has any interest in searching for information other than from prices. Direct interaction is not an integral part of market behavior according to this view.