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Network theory

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.

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Of networks and hubs

In his book Linked , Albert-Laszlo Barabasi stresses the importance of hubs--the most prominent nodes--in networks. In a social network, these are the highly connected individuals who keep the network together; in a food economy such as Grinnell's or Fairfield's these are the large businesses that dominate the market. Barabasi discusses how scale-free networks--those networks that are not random and have some nodes that are much more important than others--are at once robust against failure and vulnerable to attack. They are robust against internal failure because they can function without the small nodes that are disproportionately affected by such failure, but are vulnerable to an attack aimed at the hubs of the network.

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