Blog 8: Social Systems - The Game of Evolution

On Thursday the 13th of November in our social systems class our group came up with potentially the most groundbreaking "evolutionary game". The goal of this blog is to outline the instructions of the game, giving you the ability to take part in the fun.  

According to Boons : "Darwin’s crucial insight was that the extent to which these new characteristics spread through a population depends on whether they ‘fit’ with the environment in which the organisms live" (Boon 2009). This game emulates evolution by following the development of the "car" which "fits" the envionmental changes, continuing through evolution.  Boon's developed an evolutionary account of the strategic perspectives of firms, which he specified three crucial parts of any evolutionary mechanism.

1) Evolutionary account based in the occurrence of variety.
2) Specify the analogy of the biological mechanism of reproduction. 
3) Selection mechanisms are specified.

I have attempted to include these three aspects of the evolutionary mechanism in my game.  

" The Automobile Evolution" 

This is a simple game which can be played with unlimited player, and takes about 5 minutes. One die is neccessary for this game, not multiple dice. The goal of the game is to stay in the game the longest, by having the car which can withstand evolutionary changes. 

Firstly, to determine who may start the game the die will be rolled by each player. The player with the highest no. begins the game. 

In the first round: each player will roll the die in order to determine which car they will be allocated. 

Rolling a one  (1)   : Diesal  Car 

Rolling a two  (2)  : Bio-mass Car

Rolling a three(3)  : Electric Car 
Rolling a four (4)   :Hybrid Car
Rolling a five  (5)  :Hydrogen Car
Rolling a six   (6)  :Petroleum Car 

In the second round: each play will roll the die to determine the evolutionary scenario 

Rolling a one  (1): Scenario - plugin electricity car chargers cause too many injuries- deeming the use of them illegal- players with electric or hybrid car  have to leave the game.

Rolling a two  (2) :  Scenario- oil shortage leads to the ban of Petroleum use for automobiles - players with petroleum cars are out of the game. 

Rolling a three(3) :  Scenario - After many explosions due to hydrogen storage, there is a ban on the use of hydrogen cars- layers with electric or hybrid car  have to leave the game.

Rolling a four (4): Scenario - Research evidence suggests that Diesal exhaust is related to Lung Cancer - players with  diesal cars are out of the game.

Rolling a five  (5) : Scenario - Due to lack of Food availabilty Bio-Mass fuels are banned- players with  Bio-Mass cars are out of the game.

Rolling a six   (6) : Scenario- Technology improvements allow the player to improve the sustainablity of the player's car- players process to the next evolutionary round.

In the third round: the remaining players will play "scissors, paper, rock", those that loss players. Rock represesents ("competative advantage") which trumps scissors (consumer preference), Paper represents ("marketing") trumps Rock ("competative advantage").  If there are only two players left after the second round, they can skip the third and fourth round. 

In the fourth round: Due to "a race to the bottom approach" to the competitive automobile industry, all car manufacturers go "bankrupt". The government can only save one of the remaining manufacturers (players), but decides to undertake a referendum in order to allow the tax-payers to choice which one will survive. Every participant of the game may vote for what they perceive to be the most sustainable car available.

    The aim of the game is  to "Survive"!

References

1) Boons, F.A. 2009. An evolutionary approach towards the strategic perspectives of firms, chapter 8 in: Creating ecological value. Cheltenham: Edward Elgar. 

Blog 6: Social Systems- Game Harvest: Tragedy of the Commons

The "Fishing Game" which was introduced to us in our social systems class attempts to challenge our understanding of the logic and consequences of social situations, and introduce us to the concept of "the Tragedy of the Commons". The core issue revolves around property rights, including both the formal and informal rules regarding the use, ownership, and transfer of property. Property ownership generally provides incentives for people to take into consideration the consequences of their actions regarding the property itself.  This is considered necessary due to the scarcity of certain resources. We were asked to understand the incentives that influence our decisions and explore what incentives would ensure sensible use of the resources, which in this case were fish. 

The students chose to continue harvesting the fish because they were afraid someone else would take the fish if they let them remain.  In this scenario the fish were the common good which is non-excludable, which means that there is a finite amount of the resource available and that it is therefore easily overexploited. Even though it was in their interest to sustain the fish populations they still over-fished which resulted in the depletion of the fish stock. I believe the saying "Don't Hate the Player, Hate the Game" fits well in this situation. The problem was not the students but the rules of the game. The rules of the game are:

·         Each round is one year. Each team decides how many fish they want to catch. Write down this number and put it in your boat

·         Facilitator takes boats and gives fish randomly to teams until they are gone. Rest of teams receive nothing

·         You get back your boat and harvest. Write down your profit

·         The sea starts with the maximum number of fish: 50. Each year, the remaining fish are able to produce one new fish, with a maximum of 50.

                                                               .

Additional Rules of the Game

*Well defined, divisible and defendable property rights. This would established by allocating fishing permits. Each group would be given fishing permits at the start of the game giving them the right to harvest a particular amount of fish. This could be traded to other groups for existing fish in the risk of getting more or less fish in the future. 

*Negotiation time a start and middle of the game. Communication is vital in such undertakings, therefore if time would be allocated at the beginning and middle of the game for groups to discuss their plans outcomes would become more favorable to all players.

Tragedy of the Commons and Externalities

If property ownership is not clearly defined, divisible and defendable misuse of the property is likely to occur. The tragedy of the commons is a social dilemma where private ownership creates incentives that reward the efficient use of property and the conservation of resources for use in the future, public ownership tends to create incentives for overuse. This social dilemma is in fact a prisoner’s dilemma. Thus, negative externalities can be reversed by giving ownership of the problem. Hardin claimed that coercion could be a good way of creating self-restraint as long as it is mutually agreed upon by those affected. By owning the problem rational players will look for the best solution for both parties to benefit, in this case through fishing permits. Thus complete self-organization is not possible.

References
1) Hardin, G. 1968. The Tragedy of the Commons, Science pp. 1243-1248. 

2) Ostrom, E. (2008). Tragedy of the Commons. The New Palgrave Dictionary of Economics, 3573-3576.

3) Hardin, G. (1998). Extensions of" The Tragedy of the Commons". Science, 280(5364), 682-683.

Blog 5: Social Systems - Regional Networks

Global Biomimicry Network

I choose the global biomimicry network "Biomimicry 3.8" as a case-study because it is relevant to our field of Industrial Ecology, and is a good example of self-organization. The regional network comprises of bodies that focus on the application of biomimicry. Biomimicry is the conscious emulation of nature’s design principle. By harnessing local resources and expertise the regional network connects with government officials and planners from all sectors to forward the movement for the use of biomimicry. The Biomimicry 3.8 regional network is encouraging the connection of networks of biomimicry leaders, experts, students and citizens who apply the concept of emulating nature.

The organization has helped more than 250 clients and partners redesign carpets, furniture, manufacturing processes, airplanes, and even entire cities, all in nature’s sustainable image [1]. In collaboration with its network partners Biomimicry 3.8 has reached of millions people through the media. Janine Benyus popularized the term biomimicry, in her book which escalated interest and sparked the movement that eventually created this regional network. In 2010, the hybrid social enterprise comprised of a for-profit Corporation and a not-for-profit corporation under a single brand and integrated management strategy.  The cooperative is managed through a self-governance mechanism. Based on the concepts of self-organization and co-evolution which we have discussed in class. The different existing relationships and interactions that actors engage in make a social network.

Global Biomimicry Network

We can analyze the ways in which the Biomimicry regional networks emerged and evolved. According  to Boon "self-organization is the process of ‘spontaneous’ coordination that is exemplified by the pure market such as shown in Adam Smith’s metaphor of the invisible hand" (2008). Actors within the Global network choose to share ideas in order to minimize transaction costs (Gordon & McCann, 2000). Biomimcry 3.8 characteristics of a social network. These types of networks are characterized by inter-actor trust and its ability to collectively undertake risky operations and pursue mutually beneficial goals (Gordon & McCann, 2000).

       

                 

                         
While it may be considered a cooperative a regional network, the partners are not positioned close enough to one another to for the organization to coordinate things such as closing material loops with other industries. In 2010 the Biomimicry Group united with the Biomimicry Institute under a shared brand, and in 2014 the two entities decided to revert to the original model of dual brands in order to more effectively achieve their missions. The Biomimicry Group consults clients such as Nike, Johnson & Johnson, Shell, and Colgate Palmolive. In 2008, the Biomimicry Group entered into a strategic alliance with one of the world’s largest architectural firms.

Through planning and coordination, the local firms and government. In terms of information sharing for example, members were able to track substance exchanges, waste quantities, and other crucial developments.  Moreover, a centralized management system that oversaw. The joint investments in technology and information systems kept actors updated about the flows of by-products and allowed the system to quickly adapt to any uncertainties.

References

1) Boons, F.A. 2008. Self-Organization and Sustainability: The Emergence of a Regional Industrial Ecology, Emergence: Complexity and Organization.      
2)       Gordon, I. and McCann, P. 2000. Industrial Clusters: Complexes, Agglomeration and/or Social Networks? Urban Studies 37(3): 513–532.

Blog 4: Social Systems - Policy and Management

I enjoyed watching the documentary: "A Decent Factory". This documentary took place in 2004 in both Finland and China, where auditors undertook an ethical assessment in an attempt to address some of Nokia's ethical concerns towards its suppliers. The documentary highlighted how little communication was actually taking place between Nokia and its suppliers? This happened to be my strongest concern, which does not lie only with Nokia alone but with many multi-national corporations. I find it somewhat ironic being that Nokia's mission statement is: "connecting people".  

Legitimacy

In the documentary both Nokia and one its suppliers are faced with legitimacy challenges. Legitimacy tends to be referred to the activities of a firm that satisfy the socially constructed norms and values in which the take place. According to DiMaggio and Powell, businesses are constantly striving for institutional legitimacy (1983). Furthermore industries tend to reach congruence as they evolve (DiMaggio and Powell 1983). This can be caused by coercive, mimetic or normative mechanisms (DiMaggio and Powell 1983). In the case of Nokia and its supplier they strive for legitimacy in very different ways. Multinational corporations such as Nokia are constantly in the spotlight which forces them to strive even more than other businesses for legitimacy. A core issue is the socially constructed norms and values which are culturally dependent, therefore differing from country to country. The supplier in China has a different approach to achieving legitimacy than Nokia in Finland does, because they exist in different social systems.

Nokia

Nokia is based in Finland which subjects it to different norms and values, forcing Nokia to require its suppliers to work practices that would be considered ethical in Finland. Also being a multinational it has many stakeholders that all have their own expectations on how the company is required to deal with its social responsibilities. Because it is a multinational corporation it is forced to comply with all laws and regulations of each country it does business with. According to Prakash corporations make further steps than is legally required from them in order to become socially responsible in order to achieve legitimacy (2001).

Supplier

While it may not directly appear to be so the supplier is also striving for legitimacy. The supplier is in a process of coercive isomorphism. The supplier does attempt to take Nokia's request and its recommendation seriously. Otherwise it would have rejected Nokia's request to be documented on. In any case the supplier should be complying with labor legislation and the Chinese authority’s conditions. This coercive power comes from Nokia. However the supplier is a German company, therefore there are deeper underlying issues. The supplier is faced with the dilemma that in order to remain competitive, they must be able to keep cost relatively low while at the same time complying to the regulations and expectations of Nokia and the Chinese government. It appeared from the documentary that the coercive power from Nokia was greater than that of the Chinese authorities. Management from the supplier openly admitted to not adhering to the rules and regulations of China. Thus, you may assume that financial coercion is more effective than legal coercion.

Supplier
While it may not directly appear to be so the supplier is also striving for legitimacy. The supplier is in a process of coercive isomorphism. The supplier does attempt to take Nokia's request and its recommendation seriously. Otherwise it would have rejected Nokia's request to be documented on. In any case the supplier should be complying with labor legislation and the Chinese authority’s conditions. This coercive power comes from Nokia. However the supplier is a German company, therefore there are deeper underlying issues. The supplier is faced with the dilemma that in order to remain competitive, they must be able to keep cost relatively low while at the same time complying to the regulations and expectations of Nokia and the Chinese government. It appeared from the documentary that the coercive power from Nokia was greater than that of the Chinese authorities. Management from the supplier openly admitted to not adhering to the rules and regulations of China. Thus, you may assume that financial coercion is more effective than legal coercion.

Nokia’s approach in dealing with its social sustainability views to their supplier was ineffective. While it appeared that Nokia had made a sincere attempt to address some ethical issues it failed to make clear guidelines on their expectations as a company. Repeatedly throughout the inspection the auditors made many vague remarks, "we believe that is too much" or "that does not sound right". It is easy to make such remarks, however they tend to have very little influence. I feel that it is unfair to expect the supplier to react to such remarks because they are difficult to implement. Nokia's dominant position as the word leader of mobile telephones gives the company significant power to influence its supply chain. I believe that Nokia should have thought more about what it expects from its suppliers before undertaking in such audits. For example, the maximum amount of hours a worker may work per day or how much living space one is required to be given. Clearer guidelines would make it easier for auditors to implement effective advice and change the supplier's practices.                                                                         .                                                                                                                                                                                                                           

Alternative Coordination Mechanisms 

It is clear that there not yet has been an effective incentive for the factories to actively change their current practices, there are there are four possible forms of coordination mechanisms offered.

•           Self-organization: emerging patterns in social actors interaction

•           Self-governance: interaction based on certain rules implemented, enforced and monitored

•           Private interest government: intersection of private and public actors, the latter setting goals to be met and threatening with formulating rules.

•           Government: External control entity sets the rules. The mechanisms discussed above; coercive and normative pressure

It might be necessary for Nokia to be the party to initiate and to financially facilitate the transition of the current factory practices to its desired system.

·                     One effective mechanism for Nokia to implement its standards would be a legally-binding contract for all its suppliers. Nokia could specify its standards to the supplier and if they are not met, Nokia would have the legal right to withdraw its contract with the supplier. This would surely deter the supplier from deviated from the guidelines set by Nokia.

·         Another effective mechanism would be better communication between the supplier and Nokia. There could be monthly conference calls and quarterly visits by not only auditors but also from management. This would insure more collaboration and effective policy.

Nokia could possibly change towards a more self-governance coordination mechanism. Within this category of self-organization Nokia could enforce its own standards, rules and a code of conduct. Any violation could result in action such as contract termination. As long as these rules are communicated clearly to the supplier, Nokia could improve its coercive power. In fact both Nokia and its supplier would be categorized as using coercive isomorphism.  Both Investors and pressure groups are pressuring Nokia to incorporate more socially sustainable practices and its suppliers. That being said if the supplier is aware that Nokia would not be able to find an alternative supplier who actually meets its requirements, they don´t have to fear Nokia threatening to terminate their supply contract. Thus, by mimicking each other Chinese factories became a mimicking isomorphous organizational mechanism. Furthermore due to the low skill levels in the workers it the supplier maybe also influenced from normative pressure. External control by a The Chinese government is also involved, setting rules for working conditions. However it fails in monitoring and sanctioning mechanisms. As a result these rules are totally disregarded by the factory, proving that more government is not an effective mechanism.  In order to improve the situation I already indicated self-governance would allow for effectively change in Chinese factories.

References 

1)    DiMaggio, P. and Powell, W. 1983. The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, American Sociological Review, 48(2): 147-160

2) Prakash, A. 2001. Why do firms adopt beyond-compliance environmental policies? Business Strategy and the Environment 10(5): 286-299.

Blog 3: Social Systems - Social-Ecological System (SES)

Water is an essential ingredient for human existence, and it is also a common pool good known for its non-excludability. Currently the world faces a significant challenge in ensuring water security. Unless collaborative action is taken the gap between the demand and supply of water will widen, creating detrimental social and economic repercussions. By 2030 the livelihood of one-third of world’s population will be seriously affected by water scarcity if there are no serious changes in usage patterns (Berrang-Ford & Paterson 2011). Most of these people will be in developing countries. This blog will use bottled water as an example of a Social-Ecological System (SES) with Ostrom’s analysis of frameworks. While I am not an active agent in this SES I do buy bottled water daily, therefore partaking in the system. The resource system includes all the world's fresh water reserves. Ostrom's framework will be used in order to analyze how likely self-organization is.  Ostrom's framework will also be used to evaluate the sustainability of the bottled water production.  

Nestlé's Peter Brabeck believes that water scarcity is perhaps the biggest threat facing humanity [2]. The surprising answer led him to step back from his role as chief executive to devote more time to his water crusade, and taking a lead in the development of the Water Resources Group (WRG), which is seeking to bring governments, business and civil society together to find solutions. Ostrom’s framework of analyzing social-ecological systems (SESs) might help in creating an optimal system that could overcome the many economic, environmental and social challenges around bottled water. The studies of SES include some central societal concerns equity and human wellbeing that have traditionally received little attention.

Self-organization is one of the defining properties of complex systems. The basic idea is that open systems will reorganize at critical points of instability. However progress appears to not be enough, given that global demand is expected to outstrip supply by up to 30% within the next 17 years [2]. While water is the paramount issue, it also needs to be seen in relationship to the two other key challenges humanity is facing, namely food and energy security. We are using more water, rather than less, to produce our food and energy. This is why, if we cannot fix the water issue, we will not be able to have food or energy security. That's where the nexus is established. Brabeck is convinced we need to go back to a holistic view of the world, because our tendency to specialize has meant we have lost sight of the big picture. Because of the multi-disciplinary complexity of these systems, Ostrom describes a general framework for analyzing the sustainability of social-ecological systems where each of these aspects will be taken into account .Water is freely available but has a limited quantity. Her framework consists of several subsystems of an SES. Resources systems describes in which ecological system the activity takes place.

Recently a documentary film, Bottled Life, accused Nestlé of extracting ground water for its bottled brands at the expense of local communities, often in poor countries. While the company refused to take part in the film, it did post online a rebuttal of the allegations. Brabeck responded by asserting that it is important to be less emotional and more analytical about the issues, although he acknowledges that pressure from civil society groups forced Nestlé to recognize that a company cannot create value for its shareholders if it doesn't create value for society in parallel. This is exactly in line with Friedman’s proposition “the business of doing business is to make profit”. In other words let business do what business is good at doing, efficiently producing products that society needs and desires. While water might be a human right under the U.N mandate, it does not mean that it gives everybody free reign to the water supply. This human right is the five liters of water we need for our daily hydration and the 25 liters we need for minimum hygiene. This amount of water is the primary responsibility of every government to make available to every citizen of this world, but this amount of water accounts for 1.5% of the total water which is for all human usage [2]. The issue in the 98.5% of the water we are using, which is for everything else, is not a human right and because we treat it as one. It is used in an irresponsible manner, and although it is the most precious resource we have. This is because we don't want to put a monetary value to water. If there is something that doesn't have a value, its human behavior that we use it in an irresponsible manner. Concerning the Governance System water is arranged dependent on what region in the world ranging from self-governance/organization in a decentralized way. In conclusion, privatizing and further decentralizing the fresh water supply is appears to not be such a crazy idea particularly when taking into accounts the predictions.  The balance between a natural resource and its self-organized users, is not yet the end of the story.

The role of business, governments and NGOs

If the challenge of water scarcity is to be met, businesses need to be included in the process of resolving the water scarcity problem.  The governance system has to be remodeled to include businesses in the creative entrepreneurial activity, including many stakeholders to play a part in managing and setting rules for the use of the precious resource. It is for the industry cheaper to set out its own rules than implementing law given from the top down. Businesses do not need to hide behind a philanthropic agenda but to build water stewardship into the heart of their business strategies. Cross-sector partnerships need to be professionalized and institutionalized so that they do not fall apart as individuals move on. Strong regulation and centralization is not the answer. Friedman would be a strong advocate of decentralization and privatization the water industry, making it profitable for businesses to compete in offering us our most important life resource.

References

1)       Berrang-Ford, L & Paterson, J. 2011. Are we adapting to climate change? Global environmental change, 21(1), 25-33.

2)       Nestlé's Peter Brabeck: our attitude towards water needs to change

http://www.theguardian.com/sustainable-business/nestle-peter-brabeck-attitude-water-change-stewardship

3)       Davos 2013: water scarcity is 'second most important world risk'

http://www.theguardian.com/sustainable-business/davos-water-scarcity-second-important-world-risk

Blog 2: Social Systems - Policy and Management

This blog explores the recent news regarding the U.S Federal Reserve's decision to hold interest rates at their current historic low levels (from October 2014). I believe that the world’s monetary system, like all political economic systems, is driven by bounded rationality. The models of bounded rationality, which were proposed by Herbert A. Simon, attempt to provide more sophisticated explanations of those of traditional macroeconomic policy. I agree with the premise that the concept of bounded rationality has improved our knowledge of economic theory. Low interest rate policies by the U.S. Federal Reserve between 2001 and 2004 are believed to have aggravated the 2007 housing bubble [5]. In 2007 the housing bubble burst as subprime mortgages began to default at more than expected rates, which also happened to coincide with the rising of the interest rate. In order to assess the rationality of the U.S Federal Reserve’s recent decision to hold interest rates at their current level both the bounded rationality and rational actor models will be used in the analysis.                                                    

                                                     

 

                                                           U.S Federal Reserve

Rational Choice

The rational decision-making model assumes that decisions from organizations such as the Federal Reserve are made from the assumption that the individual has coherent stable preferences. Therefore the actor will choose, among the alternatives available, the one with the greatest utility. According to the rational choice model, actions are rational if they meet three requirements. (i) The action must be optimal, given the beliefs. (ii) The beliefs must be as well supported as possible. (iii) The Evidence must be the result of an optimal investment in information gathering (Elster 2007). Under the assumption that the U.S Federal Reserve is fully rational, the decision to hold interest rates at the current levels is no surprise. The less than optimistic economic forecast in Europe and the slowing growth in China was enough to stop them from increasing the interest rates. The decision has alleviated investor's fears of higher cost for capital, which has caused an increase in investment sediment and currency stability which is what is expected from the Fed. This has an apparent positive spill-over effect to the rest of the economy.

The Federal Reserve's responsibilities:

1) Creating conditions in the economy in pursuit of full employment and stable prices.

2) Supervising and regulating banks

3) Maintaining the stability of the financial system and containing systemic risk

4) Providing certain financial services and overseeing the U.S’s payments systems

The U.S Federal Reserve believes it has a responsibility to keep a stable currency, therefore controlling the interest rate paid on capital to banking institutions. It bases its assessment on basic rational assumptions including: inflation higher than 3% has a negative effect on the economy and deflation has a negative effect on the economy, higher interest rates will stimulate savings which would slow down growth in the economy and lower interest rates will stimulate spending speeding up growth in the economy. These are very simple assumptions which formulate decisions that affect the world’s economy. However critics and economist suggest that these assumptions are arbitrary and hold no real weight in reality. The rational choice theorist assumes that subjective beliefs and non-material values are not important in taking into account with decision-making. 

Bounded Rationality  

The bounded rationality premise is based on two positions - unbounded utility maximization and anti-rationality (Simon 1956). Bounded rationality is a critique of the rational choice model (Simon 1956).  Bounded rationality involves the idea that humans take reasoning shortcuts that may lead to suboptimal decision making. Simon highlights the fact that most people are only partly rational, and are irrational in the remaining part of their actions. Jones suggests that economic agents such as the U.S Federal Reserve use heuristics to make decisions rather than a strict rigid rule of optimization (2001). They do this because of the complexity of the financial markets, and their inability to process and compute the expected utility of every alternative action. The U.S Federal Reserve is faced with concurrent economic activities and limitations in solving complex economic problems, and in processing information.  Jones highlights that even organizations' such as the U.S Federal Reserve have limitations due to human making decision making (2003). Jones identifies six feature of behavioral choice that apply for organizations.

Organizational memory: the rules and regulations of organizations that specify what actions they take at what points. 

Agenda setting: Organizational capacities that help categorizing and prioritizing features from the world.

Parallel processing: By decentralizing, delegating organizations can process different inputs in a parallel fashion. 

Serial processing: only if previously prepared solutions stemming from organizational routines are judged as inadequate, new solutions are sought. 

Emotional contagion: emotions are an element in moving from parallel to serial processing.

Identification: People identify emotionally as well as cognitively with the organizations they participate in. 

As an organizational actor, the U.S Federal Reserve's decision-making process can also be described by using the features of behavioral choice that are defined by Jones. The U.S Federal Reserve under the guidance of Alan Greenspan was part of the cause of the last housing bubble which lead to the 2008 economic crisis. During the period prior to the housing bubble, the Federal Reserve did not choose to increase rates because inflation was considered relatively low. However it measured inflation only by the cost of consumer products, not the cost of housing for example (Organizational memory). Thus the Federal Reserve saw no need to significantly increase interest rates. However the Federal Reserve did not read the writing on the wall, the sudden increase in oil and export of manufacturing jobs lead to a decrease in product demand, while at the same time the artificially low interest rates pushed house prices to all-time highs (Agenda Setting). The Fed choose to continue to use its old fashion calculations and assumptions for new external changes such as the increase of cheap Chinese products, free-trade agreements and political unrest in other parts of the world. Was the U.S Federal Reserve only seeking a satisficing solution instead of an optimal one given that it only had limited information available, finite time and limited cognitive capacity? While intended rationality played a role in the decision-making the U.S Federal Reserve it intended to find a solution that would be optimal.

Whichever model is assumed, the U.S Federal Reserve should ask what the models indicate for macroeconomic policy. It is self-evident that there are limits on knowledge within the U.S Federal Reserve. Put simply, any analysis of human organizational systems inevitably involves a degrees of subjectivity. Bounded rationality implicates the idea that humans take reasoning shortcuts that may lead to less than optimal decision making. Simon points out that most people are only partly rational, and are irrational in the remaining part of their actions (1956). According to Simon, bounded rational agents experience limitations in solving complex problems (1956). Thus organizations such as the U.S Federal Reserve could be viewed as economic agents which use trial and error to make decisions rather than a strict rigid rule of optimization. This is because of the complexity of the monetary policy, and its inability to process and compute the expected utility of every alternative action. The paradoxical conclusion is that it may not matter what monetary institutions such as the Federal Reserve do or what rules they implement – as long as something is done. Any new framework gives agents a reason to abandon their irrational fears gives them a chance to regain hope.

References

1) Elster, J. 2007. Explaining Social Behavior – More Nuts and Bolts for the Social Sciences, p191. 

2) Jones, B. 2003. Bounded rationality and political science, Journal of Public Administration Research and Theory

3) Jones, B. 2001. Politics and the Architecture of Choice: Bounded Rationality and Governance, University of Chicago.

4) Janet Yellen's Fed Decision:  https://www.youtube.com/watch?v=He8UgdC6qas                                        5) US markets cheer Federal Reserve minutes:  http://www.bbc.com/news/business-29546501 

6) Simon, Herbert. 1956. “Rational choice and the structure of the environment” pp 131-137. 

     Friedman's Proposition Revisited

After long discussions with fellow students and colleagues, as well as research into the articles my overall opinion on the statement: “the business of business is to increase its profits” has not changed fundamentally from my Ex Ante position. In fact the article from Milton Friedman and the documentary “Not Business as Usual” has only reinforced my position towards the proposition.  The article from Friedman highlighted the importance of the social responsibility of business to increase its profits. Friedman argues in his article that managers of profitable companies have a responsibility towards the stakeholders of the company. In the documentary, all the people owned their own companies.  What was noticeable in the documentary was that none of these companies were willing to sacrifice their profits for performing social responsibilities. On the contrary, they used the media and word of mouth as a tool to maximize their profits and patronage, strengthening their image.

In taking into account the articles from Simon and Jones, there are valid criticisms towards Friedman’s assumptions about rationality. The article from Jones offered an overview about the differences in bounded rationality and full rationality and the implications. In my opinion Friedman makes a compelling argument by claiming that managers should always maximize profits, however he presupposes that actors know how to maximize profits and are aware of all the opportunities.  Friedman proposes that businesses should in the legal boundaries pursue profit, however the short-term focus should not undermine long-term gains. This is the basis for the Utilitarian ethical theory, which requires businesses to weigh all outcomes, not just short term economic gains. According to Friedman, an appropriate ethical standard for every business is a commitment to compete for voluntary consumers in the free market and to refrain from seeking privileges from government. Friedman claims if businesses follow these standards they will create favorable social outcomes. The documentary clearly showed successful business models, maximizing their profits by contributing, or seemingly contributing to society. However in my opinion there was no real diversion from the proposition that a company should maximize their profits. In other words it was the same story told in a different light.   

                                

References

1) John Stuart Mill: Traditional and Revisionist Interpretations
http:// www.econlib.org/library/Essays/LtrLbrty/gryMTR2.html   

2) Technology versus Nature: What is Natural?
http://lamar.colostate.edu/~hrolston/Technol-vs-Nature-Aberdeen.pdf
3) Nature Vs Nurture Arguments by John Stuart Mill
http://www.studymode.com/essays/Essay-1508131.html 

The business of business is to increase its profits

The business of business is to increase its profits

I agree with Milton Friedman’s argument that businesses have more obligations to stockholders than to social and political causes. According to Friedman, the core responsibility of businesses is to make as much profit as possible. I believe that Friedman’s argument is very convincing and holds stern logic. Managers of businesses should not have the right to spend other people’s money on his/her own personal, social or political goals. Friedman claims that businesses are obliged to follow laws, rules, and regulations which already incorporate social protection mechanisms. Thus, the government has the responsibility to set clear guidelines for businesses and effective enforcement mechanisms. Friedman highlights the point that if businesses operate in violation of the moral standards and expectations that are generally accepted in its society, they runs the risk of losing business, which would decrease profit (1970). I believe this is an effective conceptual tool that should deter any business that wants to remain in the market undertaking in "unethical practices".

Friedman proposes that businesses should in the legal boundaries pursue profit, however the short-term focus should not undermine long-term gains. This is the basis for the Utilitarian ethical theory, which requires businesses to weigh all outcomes, not just short term economic gains. Furthermore a competitive market would lead to a Pareto optimal allocation of resources, where no changes can make actors better off without making someone worse off. Therefore, competitive markets lead to an efficient allocation of resources (Jones 2003). According to Friedman, an appropriate ethical standard for every business is a commitment to compete for voluntary consumers in the free market and to refrain from seeking privileges from government. Friedman claims if businesses follow these standards they will create favorable social outcomes.  

Ultimately, we the consumers need to take more responsibility for our own decisions. We should not rely on government organizations, businesses or even friends and family to make decisions for us. That being said, the concept from Simon of bounded rationality could limit this idea. In economics, perfect information is mentioned in many theoretical concepts and models, however in reality consumers are not often privileged with perfect information (Simon 1978). Therefore the consumer is left trying to make decisions without the full knowledge of all the processes taken place in the production of the product. The lack of transparency and the cost of gathering and processing the information which Simon mentions are elements that weaken Friedman's theory somewhat (1978). However these elements do not dismiss his theory all together but rather open it to be expanded upon. In any case, with great freedom comes great responsibility. Thus, use it with care. Educate yourself on the practices of businesses that you rely on for your everyday needs. It is important to note that keep business is undertaken by humans, which are not purely rational beings.   

References
1) Friedman, M. 1970. The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine .
2) Simon, H. 1978. Rational decision-making in business organizations, Nobel Memorial Lecture, 8 December, 1978.
3) Jones, B. 2003. Bounded rationality and political science, Journal of Public  Administration Research and Theory.