Notes on the Economics of Game Theory - Part II

Written by Sam Vaknin

Games, naturally, can consist of one player, two players and more than two players (n-players). They can be zero (or fixed) - sum (the sum of benefits is fixed and whatever gains made by one ofrepparttar players are lost byrepparttar 132673 others). They can be nonzero-sum (the amount of benefits to all players can increase or decrease). Games can be cooperative (where some ofrepparttar 132674 players or all of them form coalitions) or non-cooperative (competitive). For some ofrepparttar 132675 games,repparttar 132676 solutions are called Nash equilibria. They are sets of strategies constructed so that an agent which adopts them (and, as a result, secures a certain outcome) will have no incentive to switch over to other strategies (givenrepparttar 132677 strategies of all other players). Nash equilibria (solutions) arerepparttar 132678 most stable (it is whererepparttar 132679 system "settles down", to borrow from Chaos Theory) but they are not guaranteed to berepparttar 132680 most desirable. Considerrepparttar 132681 famous "Prisoners' Dilemma" in which both players play rationally and reachrepparttar 132682 Nash equilibrium only to discover that they could have done much better by collaborating (that is, by playing irrationally). Instead, they adoptrepparttar 132683 "Paretto-dominated", orrepparttar 132684 "Paretto-optimal", sub-optimal solution. Any outside interference withrepparttar 132685 game (for instance, legislation) will be construed as creating a NEW game, not as pushingrepparttar 132686 players to adopt a "Paretto-superior" solution.

The behaviour ofrepparttar 132687 players reveals to us their order of preferences. This is called "Preference Ordering" or "Revealed Preference Theory". Agents are faced with sets of possible states ofrepparttar 132688 world (=allocations of resources, to be more economically inclined). These are called "Bundles". In certain cases they can trade their bundles, swap them with others. The evidence of these swaps will inevitably reveal to usrepparttar 132689 order of priorities ofrepparttar 132690 agent. Allrepparttar 132691 bundles that enjoyrepparttar 132692 same ranking by a given agent are this agent's "Indifference Sets". The construction of an Ordinal Utility Function is, thus, made simple. The indifference sets are numbered from 1 to n. These ordinals do not revealrepparttar 132693 INTENSITY orrepparttar 132694 RELATIVE INTENSITY of a preference merely its location in a list. However, techniques are available to transformrepparttar 132695 ordinal utility function into a cardinal one.

The Distributive Justice of the Market - Part II

Written by Sam Vaknin

Philosophers tried to specify a "bundle" or "package" of goods, services, and intangibles (like information, or skills, or knowledge). Justice - though not necessarily happiness - is when everyone possesses an identical bundle. Happiness - though not necessarily justice - is when each one of us possesses a "bundle" which reflects his or her preferences, priorities, and predilections. None of us will be too happy with a standardized bundle, selected by a committee of philosophers - or bureaucrats, as wasrepparttar case under communism.

The market allows forrepparttar 132671 exchange of goods and services between holders of identical bundles. If I seek books, but detest oranges - I can swap them with someone in return for his books. That way both of us are rendered better off than underrepparttar 132672 strict egalitarian version.

Still, there is no guarantee that I will find my exact match - a person who is interested in swapping his books for my oranges. Illiquid, small, or imperfect markets thus inhibitrepparttar 132673 scope of these exchanges. Additionally, exchange participants have to agree on an index: how many books for how many oranges? This isrepparttar 132674 price of oranges in terms of books.

Money -repparttar 132675 obvious "index" - does not solve this problem, merely simplifies it and facilitates exchanges. It does not eliminaterepparttar 132676 necessity to negotiate an "exchange rate". It does not prevent market failures. In other words: money is not an index. It is merely a medium of exchange and a store of value. The index - as expressed in terms of money - isrepparttar 132677 underlying agreement regardingrepparttar 132678 values of resources in terms of other resources (i.e., their relative values).

The market - andrepparttar 132679 price mechanism - increase happiness and welfare by allowing people to alterrepparttar 132680 composition of their bundles. The invisible hand is just and benevolent. But money is imperfect. The aforementioned Rawles demonstrated (1971), that we need to combine money with other measures in order to place a value on intangibles.

The prevailing market theories postulate that everyone hasrepparttar 132681 same resources at some initial point (the "starting gate"). It is up to them to deploy these endowments and, thus, to ravage or increase their wealth. Whilerepparttar 132682 initial distribution is equal -repparttar 132683 end distribution depends on how wisely - or imprudently -repparttar 132684 initial distribution was used.

Egalitarian thinkers proposed to equate everyone's income in each time frame (e.g., annually). But identical incomes do not automatically yieldrepparttar 132685 same accrued wealth. The latter depends on howrepparttar 132686 income is used - saved, invested, or squandered. Relative disparities of wealth are bound to emerge, regardless ofrepparttar 132687 nature of income distribution.

Some say that excess wealth should be confiscated and redistributed. Progressive taxation andrepparttar 132688 welfare state aim to secure this outcome. Redistributive mechanisms resetrepparttar 132689 "wealth clock" periodically (atrepparttar 132690 end of every month, or fiscal year). In many countries,repparttar 132691 law dictates which portion of one's income must be saved and, by implication, how much can be consumed. This conflicts with basic rights likerepparttar 132692 freedom to make economic choices.

The legalized expropriation of income (i.e., taxes) is morally dubious. Anti-tax movements have sprung all overrepparttar 132693 world and their philosophy permeatesrepparttar 132694 ideology of political parties in many countries, not leastrepparttar 132695 USA. Taxes are punitive: they penalize enterprise, success, entrepreneurship, foresight, and risk assumption. Welfare, onrepparttar 132696 other hand, rewards dependence and parasitism.

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