The 10 Immutable Laws of Nanoeconomics

by Venkat on October 1, 2008

I am about to go all Hammurabi on you and deliver unto you a 10-law summary model of the economy that is taking shape around you at a frenetic pace today: the nanoneconomy. I call it that because its fundamental behavior is determined by the behavior of the human individual rather than the firm (the practical unit of analysis in microeconomics). Many of the dominant themes of this blog — virtual geography (aka globalization) the future of economics, the changing nature of work, and the role of the individual in the economy, all came together for me last week as I pondered the lessons of the political-economy (I love that archaic term) train wreck that is the US Congress’ bailout plan for Wall Street (and Main Street, we are being told). Let me transcribe my tablets for you. For fun, I am calling these laws immutable, but I hope some of you treat this as a mutable blog-meme discussion of the economy, and propose your own amendments.

Nanoeconomics Defined

Microeconomics is supposed to study economics at the level of individual actors ranging from individuals to firms, operating under varying conditions of supply, demand, information perfectness and bounded, biased rationality. Macroeconomics is supposed to study obscure, black-magical constructs such as money, inflation and unemployment that are thought to characterize and influence the economy at large.

This double-barreled scheme is erected on a single-point religious axiom we’ll call “Trust The Free Market.”

This conceptual scheme no longer works, because the cultural atom-smasher that is the Internet is creating unprecedented levels of information perfectness, particularly where the information concerns the social graph — which Brad Fitzpatrick defines as the “global mapping of everybody and how they are related.” Note the definite article, THE social graph, just as in THE Internet.

It is becoming clear that as the economy at large becomes an information economy, the social graph is its most fundamental element. In fact:

Nanoeconomics is the study of the economic behavior of the social graph.

Nanoeconomics adds a third perspective to the micro and macro of traditional economic study, and is based on the same religious axiom. It acknowledges that the economic behavior of real humans in the real globalized society is insufficiently explained by microeconomics, and requires understanding of the behavior of the social graph.

There is also a pragmatic reason to define a study of economics at a new level of granularity today — we have the instruments today to study it. The microscope added the cellular biology subdiscipline to biology, and the electron microscope allowed microbiology to emerge. I suppose the mapping of the human genome should turn genetics into nanobiology. Similarly, every new generation of telescope technology added a new subdiscipline to astronomy. Why should economics be any different?

Enough with justification. Let’s get on with characterizing nanoeconomics.

I am not an economist, so I’ll just outline how to think around the definition of nanoeconomy by proposing some amateurish beta re-definitions of basic economic concepts:

  • The Firm is a labeling of the social graph using a set of roles. Traditionally the labels have been employees, customers, potential customers, non-customers and shareholders. In nanoneconomics, the labeling is refined to include roles such as consultant, free-agent, prosumer, social-cost payer and the like.
  • The Corporation is the subgraph of the social graph corresponding to a legally-defined subset of the labels that define the associated firm (for example, employees and shareholders by a traditional definition). At any given time the clarity of the boundary of the corporation is a function of the clarity of the legal status of labeled individuals (fuzzy set, if you must get geeky).
  • An Agent is a node in the social graph that has the authority to participate in a transaction (as buyer or seller) on behalf of any firm of which it is a part.
  • A Free Agent is a firm whose associated corporation has a size of one.

If I were smarter and more trained in economics than I am, I could extend this paper-napkin codification of nanoeconomics to concepts like The Market, The Law, Wealth, Capital and Money.

If you want to refine this, some hints based on what I was unable to figure out. It seems to me that a fundamental theory of nanoeconomics ought to define an “extended social graph” where firms and corporations are added as extra virtual nodes to which individuals can connect via “membership” links. It also seems to me that the definitions of wealth and capital should work with the notions of relational capital (a term I like better than network capital) and environmental capital in addition to traditional constructs like monetary and social capital, and track the associated capital flows. Finally, it seems to me that the social graph should be expanded to include socially-aware artificially intelligent programs that are economically active. An auction-bidding program hooked to a bank account is an economic actor distinct from whoever unleashed it.

But I’ll let more talented and meticulous people work out those notions. I am dangerously out on a limb here as it is.

Now for the immutable laws. Alright, I am being rhetorical like I said. Falsifiable conjectures, shall we say?

The 10 Immutable Laws of Nanoeconomics

Each of these laws may be prefaced with the phrase: as the visibility of the social graph tends to 100%. So these laws are in a sense asymptotic, evolutionary laws. Remember, we are talking about increasing perfectness of information, not perfect information. Even if the global visibility of the social graph does reach 100% (i.e. every one of the 6 billion people on the planet gets on Facebook) we won’t be at perfect information. And by the way, I define 100% social graph visibility as “anyone can find out as much about anybody else that the other person wants them to know.”

As the visibility of the social graph tends to 100%…

  1. The median size of a corporation in the economy tends to 1
  2. Transaction costs — search, negotiation and monitoring costs — drop to 0
  3. The median size of transactions tends to the smallest defined unit (1 cent in the United States). Evidence: consider the amount of money flowing through the economy in penny-sized amounts through Google AdSense/AdWords.
  4. All forms of capital are unified in monetary capital, i.e. the money economy accurately captures and values social, relational and environmental capital as well. The money economy becomes the “real” economy.
  5. The economic survivability of an agent becomes directly proportionate to his/her accumulated relational capital in the social graph
  6. An agent will become a free agent when his/her accumulated relational capital exceeds the total capital he/she can access via affiliation with any firm. Complex idea, think about it.
  7. The society of firms tends to its evolutionary end state of a democracy of firms. Traditional economics implicitly assumes that the social contract as it applies to firms is weak enough that the result is only slightly removed from an anarchic state-of-nature political arrangement among firms, even if the underlying social graph is democratic. This is why individual human citizens of democracies suspect that the influence of corporations on governance works in fundamentally undemocratic ways. Note though, that this influence is legitimate in a consent-of-the-governed sense. Corporations (unlike organized crime syndicates) are legal entities similar to human citizens, in that they have rights in return for the abilities they give up via the social contract. In theory, the CEOs of today are supposed to be more principled than the Robber Barons of 100 years ago. These rights will eventually include the equivalent of legitimized voting rights in place of the ad hoc lobbying structures of today.
  8. The society of nations tends to its evolutionary end state of a global inter-national democracy (note the hyphen). All comments made for the democracy of firms within a nation apply, mutatis mutandis. I don’t know how to analyze multi-national corporations, let alone the hybrid mish-mash of intra-national corporations, multi-national corporations and nations.
  9. The value-at-commoditization of all matured products and services tends to zero, and the organization of production of these economic goods switches to purely cooperative forms of organization of labor (including industry-standard bodies, open source and government-monopolized). Not that maturation may happen instantly at launch for many categories (the point of Chris Anderson’s Free arguments).
  10. All products and services within the competitive economy (pre-commoditization) derive all their (non-zero) market value from either data, or fashion. This principle is suggested by the idea that data (eg. Google’s data from search behavior or Amazon’s data fueling its recommendation engine) is the only sustainable competitive advantage. I add fashion because that is the other true differentiator: purely arbitrary aesthetic elements of economic value.

Let the tomatoes be thrown. I submit that this is a better mental model to have of the economy than whatever the hell is the operating model in Washington and Wall Street right now.

Venkat December 17, 2008 at 1:36 pm

Businessweek has a similarly themed speculative economics article, sourced from GigaOm, called the 10 laws of Cloudonomics.

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