The Architecture of Economic Systems: Hierarchies and Polyarchies

Abstract

We present some new ways of looking at economic systems. The aspect of human behavior which we emphasize is that individuals' judgments entail errors (they sometimes reject good projects and accept bad projects). The aspect of an economic system on which we focus is its architecture; that is, how the decision making units are organized together within a system, who gathers what information, and who communicates what with whom. The architecture of a system affects its performance not only because it influences the nature of errors which individuals make within the system, but also because it has a critical effect on the aggregation of individuals' errors. We analyze and compare the performance of two polar architectures, with decentralized (polyarchical) versus centralized (hierarchical) decision making authorities. Also, we discuss several extensions of our analysis.