For centuries, humanity has been locked between capitalist market-based/decentralized and planned/centralized allocation of resources. The first requires a free competitive market which eventually leads to the emergence of a hierarchy and related inefficiencies — e.g., abuse of power, mark-ups, and market externalities. The second assigns market power directly to political institutions replicating all the above-mentioned hierarchical inefficiencies.
Is there a third way? Network theory says “yes”. The results here described are based on one of my papers, where you will be able to find the mathematical model and proof of this argument.
Optimal allocation strategy through Decentralised Coordination
Let us consider an economy with N agents, producing a value of aggregated supply equal to Y. How to redistribute resources in a way that is controlling for hierarchical inefficiencies?
Step 1. Assess the value of aggregated supply Y0. Who produces what? Which quantities at which price? At the very initial stage, the relative prices are guessed like a first-price bid auction.
Step 2. Allocate an initial amount of currency M0 equally to each member (M0/N).
Step 3. Every agent can choose only one trading partner to buy from; the receiving agent can only accept one trading partner to sell to. Every agent choosing the trading partner has also to choose the portion of the total budget (M0/N) to allocate.
Step 4. Repeat Step 3 as long as everyone has a budget to allocate. If someone exhausts her budget, go to Step 5. In this phase, free negotiations are allowed on prices and relative budget allocation.
Step 5. The exchange takes place.
Step 6. Assess the new aggregated supply Y1. If Y1 > (1-r)Y0, then the difference is equally redistributed as M1 = M0 + [Y1-(1-r)Y0], where r is the depreciation rate of aggregated supply. If Y1 <(1-r)Y0, then an equal amount is automatically and equally subtracted by all individual accounts. Restart from Step 3.
This procedure will guarantee an allocation of resources that will not contribute to the emergence of economic hierarchies and related economic inefficiencies.
The main obstacle to an optimal competitive economic network is connected to the emergence of deadlocks and gridlocks in the payment system, which is a problem connected to missing backward and forward linkages. This will require community investments in the creation of new economic activities or the re-allocation of existing resources. A participatory decision-making process could solve the issue, as far as all the members are aware of it and agreed upon a collective strategy to undertake in such scenarios. Developing the economic network following the topology above described will ensure a competitive environment and a fair distribution of resources.