Formal and Computational Model for A. Smith’s Invisible Hand Paradigm

Abstract

We present probably the first formal theory of A. Smith’s Invisible Hand paradigm (ASIH). It proves that it is not only an idea, that is often conflicting with established governing methods, but something real, for which a formal theory can be built. This should allow for the creation of new tools for market analysis and prediction. It claims, that a market has another dimension of computational nature, which itself is a complete programmable computer; however quite different from a digital computer. There, unconscious meta-inference process of ASIH is spread on the platform of brains of agents and the structure of a market. This process is: unconscious, distributed, parallel, non-deterministic with properties of chaotic systems. A given thread of ASIH emerges spontaneously in certain market circumstances and can vanish when the market situation changes. Since this computer is made up of brains of agents, conclusions of this inference process affect the behavior of agents and therefore the behavior of the entire market. For a description of ASIH, a molecular model of computations must be used. Our theory shows that ASIH is much more “universal” than expected, and is not only restricted to market optimization and stabilization, but can also act as a “discoverer” of new technologies, (technical market optimization). Also rules of social behavior can be discovered (social market optimization). ASIH can be considered as Collective Intelligence (CI) of a market, similarly to Collective Intelligence of an ant hill.