Recent progress on formal and computational model for A. Smiths Invisible Hand paradigm

Abstract

The recent economic crisis has boosted a very strong demand for quite new tools to analyze and predict the behavior of quasi-free1 markets. The paper presents our effort to build a formal theory of A. Smith's Invisible Hand [5] paradigm (ASIH) and simulation model for a selected case. It proves that ASIH is not only an economic idea, which conflict on ways to govern [16], but something that really exists, for which formal a theory can be built. Moreover, ASIH can be measured [17], and in the future probably utilized for quasi-free market analysis and prediction. In advance, we want to state, that ASIH according to our theory, can generate both correct and incorrect decisions. For this, we use the theory of computational Collective Intelligence [18] and a molecular model of computations [1], [2]. Our theory assumes that ASIH is an unconscious meta-inference process spread on the platform of brains of agents. This meta-process is: distributed, parallel, and non-deterministic, and is run on a computational platform of market agents' brains. The ASIH inference process emerges spontaneously in certain circumstances and can vanish when market situation changes. Since the ASIH platform is made up of brains of agents, conclusions of this inference process affect the behavior of agents and therefore the behavior of the entire market. Our research unveils that ASIH is in fact a family of similar meta-processes; thus ASIHs for different economic eras are different because corresponding models of brains of market agents are different. The paper will present and explain, on the basis of a simulation model, a case of powerful ASIH response at the end of the 15th century due to a blockade (taxes and the Dardanelles sea-route cutoff) of spice trade by Turks and Arabs. ASIH also responded to the discovery of America, the emergence of a sailing route around Africa, the establishment of plantations (sugarcane, spices) and modern galleons2 technology. This case demonstrates how powerful and with far-reaching consequences, ASIH can be