Two

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
o 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.

o 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.

o 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
o Decentralization in Organizations
o 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.

o 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 feasability 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*.


  MAN IN SOCIETY