Platt Perspective on Business and Technology

Open markets, captive markets and the assumptions of supply and demand dynamics 5

Posted in macroeconomics by Timothy Platt on October 9, 2015

This is the fifth installment to a brief series on underlying assumptions as they arise and play out in economic systems, and in production and marketplace systems (see Macroeconomics and Business 2, postings 230 and loosely following for Parts 1-4.)

I have been discussing a variety of basic parameters in the two most recent postings to this series, that serve to shape business decisions and resulting actions as pursued by differing stakeholders, (see Part 3 and Part 4.) And I focused on timing issues in a stakeholder context in those installments, and particularly in Part 4. Then at the end of that posting I stated that I would turn here to consider friction in these systems and both for how it arises and for what it causes when it does.

This series addresses economic theory and its real world consequences as observed on a macro level and as a matter of macroeconomic theory and practice. I have also been posting to a series where I focus on a more microeconomic perspective to this, with: Innovation, Disruptive Innovation and Market Volatility (see Macroeconomics and Business, posting 173 and loosely following for its Parts 1-5 and Macroeconomics and Business 2, posting 203 and loosely following for its Parts 6-16, and particularly see its Part 15, Part 16 and Part 17 where I raise the issues of friction in that series’ context.)

I begin this posting by raising a point from there as to what friction is in an economic context, which I reword here for purposes of this discussion:

• Real world business and marketplace systems are in practice, shaped by intent and planning, but also by the unintended and the unanticipated. And that critically importantly includes communication mismatches, and differences in knowledge and understanding among stakeholders, and delays and uncertainties at all levels and for all participants who would carry out those plans or be affected by them.
• Real world business and marketplace systems are shaped very significantly by uncertainty as consequentially arises from all of those factors and considerations, and those factors collectively create and comprise both individual business and overall economic friction.

What does this mean in a more macroeconomic context? I begin addressing that question by turning to a perhaps analogous physical systems model, where friction per se (in the form of electrical resistance) empirically disappears: a superconducting state.

A physicist would most likely approach the processes of superconductivity in terms of Cooper pair electrons and theoretical models such as the Bardeen Cooper Schrieffer (BCS) theory and I have to admit, the details of this phenomenon as it arises on a microscopic level are fascinating. But for purposes of this discussion, I note that as an object drops in temperature, the average kinetic energy: the average energy tied up in keeping its atoms and molecules vibrating and in physical motion drops and drops. And at sufficiently low temperatures this loss of active systems energy impacts upon the electrons in those objects that participate in electrical conduction too. At a low enough temperature everything slows down and at absolute zero temperature, essentially everything would stop as well, and completely. Superconductivity represents a fundamentally new state of matter and of how it behaves, that emerges when an object that can make this transition reaches a low enough temperature, and suddenly friction such as electrical resistance disappears for it. For purposes of this discussion, this is all about reducing speed, and the momentum that maintains it.

Now let’s consider frictionless economic systems as they might at least in principle empirically arise, and what would qualify as a counterpart to speed and speed reduction there. And I begin addressing that by positing what might be considered a corresponding transition point to that of an object becoming a superconductor, involving the flow of information as the key type of economic constituent component in motion:

• An economic system transitions into being frictionless when all of the business operations and other monetizable value transferring processes that collectively comprise it essentially all take place at a slow enough rate in comparison to the rate of transfer of information concerning those processes, so as to eliminate differences in actionable knowledge, and the uncertainties that that creates, and across the spectrum of involved stakeholders and actors in those systems.
• If everyone involved in an economic system can know everything they need to know, and with consistent accurate clarity so as to make effective informed decisions, and before they have to make those decisions, that system can be viewed as having become essentially frictionless.

On the one hand, modern communications and information processing systems are tremendously accelerating the speed of information flow that can be available to all such participants. And on the other hand, the speed of business and economic transactions has been accelerating too. And in this high speed, essentially entirely automated algorithmic trading, where for example stocks are literally traded in milliseconds, only represents one face to this business and economic systems acceleration. If there were no proprietarily held information of actionable consequence in business or larger economic contexts, and if there were no proprietarily held higher speed lanes for acquiring needed marketplace data and for triggering transactions on the basis of that, the realized level of friction in these systems could be encompassed by what amount to race results as transaction speeds, and business and marketplace intelligence speeds compete with each other to arrive first and at each of an ongoing flood of transaction decision points that collectively comprise the marketplace and the economy. Proprietarily held and individually developed and protected knowledge and insight, as well as preconceptions and unexamined assumptions on the part of differing stakeholders and actors in these systems guarantee, however, that real world marketplace and economic systems can never become truly frictionless.

And this discussion of economic friction per se brings me to an area of discussion that I noted at the end of Part 4, as a topic I would at least begin to address here:

• “And I will take a game theoretic approach to business strategy in that, where friction and its attending uncertainties can be and often are the driving factors determining which strategies (e.g. win-win or zero-sum oriented), differing stakeholders would seek to employ in pursuing their own goals.”

And in keeping with the flow of discussion of Part 4 of this series, I also stated that I would discuss this, in terms of timing. I am going to delve into those issues in my next series installment, based on this installment’s discussion of friction. Then after considering those issues I am going to discuss how politicians market economic and economics-based agendas when they campaign for office, and how that translates into legislation and enacted law, and into marketplace and economic realities. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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