Emperors of the network economy

This week news emerged that senior managers at large corporations (FTSE100) gave themselves an average pay rise of 55%. (Today there was a response by an executive that this pay rise was “only” 23%…) This followed earlier news that investment bankers have increased their bonuses to record levels as they face record profits. These tremendous increases of salary sums occur in a depressed economy in which both capital providers and regular workers do not get any returns; instead they are squeezed in the current economic climate with little real pay increases and no returns on (pension) investments during the last decade. It is a phenomenon that has emerged within the last 20 years and has resulted into an income distribution that is more unequal and skewed than anytime during the last 90 years. So, what are we looking at?

I believe that during the last thirty years there has emerged a brand new form of economy, the network or managerial economy. Capitalism that emerged after the industrial revolution got its name from the fact that capital providers and entrepreneurs were the most powerful class in the economy. Capitalism matured through the hardships of the first half of the 20th century into a more balanced and cooperative form. It was as if we learned to control and regulate excessive market power exercised by capital providers. This control was most signified by the absence of any serious financial panics between 1929 and 2008.

But since 1980 we are witnessing another revolution, namely the emergence of a new form of economy founded on network infrastructures. It is mainly based on the rise of the financial sector as universal middlemen of all economic interaction; it is an age of managers, positioning themselves in crucial structural middleman positions in the complex networks that have emerged in the global economy. Managers act as the emperors of these networks and reap excessive from these positions, resulting into huge profits. And as in classical 19th century capitalism it results into stark inequalities and unfairness.

The financial panic of 2008 was the first crisis of the new network economy and signifies the trouble ahead. We need to learn to control and regulate these new networks before we can ease the situation again and move to a more functional and fair economy. This might take a while, in particular since we do not truly understand the network economy yet.

Analyzing partial cooperation in economic behavior

I have posted a new working paper with Subhadip Chakrabarti and Emiliya Lazarova (Both from Queen’s University Belfast) on the game theory page. This paper addresses the question of how groups of decision makers cooperate and make decisions. To that end we modify the standard Nash equilibrium concept to capture such cooperative behavior. Existence theorems and applications are discussed in the paper.