Did Adam Smith Need “Re-Vision”?

Ideal Money:

The long-term trend of the value of any index of prices will depend, sometimes predictably, on the choice of the composition of that index.  It is a coincidental fact that the inherent nature of mining and mining technology makes it possible for the prices of certain commodities that are produced as a result of the devotion of labor and capital to the effort of mining to increase less (or decrease more) than might be expected.  There is a “dimension paradox”: Agricultural products are produced by using the two-dimensional resource of the earth surface, so the “disappearing frontier” creates a limitation. In contrast, some mining, particularly for elemental metals, can essentially be done in three dimensions, although, of course, there are increasing costs for deep digging. So, really there is lots and lots of gold, silver, platinum, tungsten, and so forth out there and more can be found by digging deeper.

From Nick Szabo, Transportation, divergence, and the industrial revolution:

Metcalfe’s Law states that a value of a network is proportional to the square of the number of its nodes.  In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed.  The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation.  Combine this  with Metcalfe’s Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables.  This formalizes Adam Smith’s observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

The “Blonde Scene” is often used as an example for what is NOT a Nash equilibrium:

…the economic explanation in the bar scene is wrong! The scene that was just described is NOT a Nash equilibrium. A Nash equilibrium occurs when economic decision-makers choose the best possible strategy, taking into account the decisions of others. The scene in the film cannot be a Nash equilibrium since if no one goes for the blonde, each of the friends best strategy – given what their friends is doing – is to go for the blonde! Therefore, as soon as one guy decides to go after the blonde, the agreement not to pursue her falls apart and chaos reigns! Oops. Director Ron Howard took a few liberties to try to simplify Nash’s discovery.



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