You are here

Barabasi: "The market is nothing but a directed network"

This passage from Albert-Laszlo Barabasi's Linked is a bit long, but crucial to our understanding of the market, and thus the modeling we will be doing. Barabasi sees the market as a "directed network," with its participants--companies, firms, governments, etc.--as the nodes of this network (pp. 208-209).

"Despite the important role these interim alliances play in the economy, economic theory pays surprisingly little attention to networks. Until recently economists viewed the economy as a set of autonomous and anonymous individuals interacting through the price system only, a model often called the standard formal model of economics. The individual actions of companies and consumers were assumed to have little consequence on the state of the market. Instead the state of the economy was best captured by such aggregate quantities as employment, output, or inflation, ignoring the interrelated microbehavior responsible for these aggregate measures. Companies and corporations were seen as interacting not with each other but rather with "the market," a mythical entity that mediates all economic interactions.
"In reality, the market is nothing but a directed network. Companies, firms, corporations, financial institutions, governments, and all potential economic players are the nodes. Links quantify various interactions between these institutions, involving purchases and sales, joint research project, and so forth. The weight of the links captures the value of the transaction, and the direction points from the provider to the receiver. The structure and evolution of this weighted and directed network determine the outcome of all macroeconomic processes.
"As Walter W. Powell writes in Neither Market nor Heirarchy: Network Forms of Organization, "in markets the standard strategy is to drive the hardest possible bargain on the immediate exchange. In networks, the preferred option is often creating indebtedness and reliance over the long haul." Therefore, in a network economy, buyers and suppliers are not competitors but partners. The relationship between them is often very long lasting and stable.
"The stability of these links allows companies to concentrate on their core business. If these parternships break down, the effects can be severe. Mostof the time failures handicap only the partners of the broken link. Occasionally, however, they send ripples through the whole economy. As we will see next, macroeconomic failures can throw entire nations into deep financial disarray, while failures in corporate partnerships can severely damage the jewels of the new economy."

The models we are creating, are, in effect, maps of these directed networks, identifying the nodes and links, and strength of these links. Skye Bender-deMoll and Dan McFarland's SoNIA software would allow us to map out this network in a simplistic manner: it allows for a simple way of representing each of the nodes and links. I believe that SoNIA is too simplistic for our purposes, however--I will discuss this further in a later entry.