Digital markets

[Phil Agre <pagre () weber ucsd edu>]

The following article provides an exceptionally clear account of computerized
high finance centered on so-called "derivative products".  These are (among
other things) ways of buying and selling debt streams with given properties.
For example, a company in need of short-term cash might exchange a bundle of
30-year home mortgages (which provide money with high reliability but at low
rates of return and over a long period) in favor of a bundle of junk bonds
(which provide money with lower reliability but at higher rates of return and
on a variety of schedules).

  Robert Lenzner and William Heuslein, How derivatives are transforming Wall
  Street, Forbes 151(7), 29 March 1993, pages 62-72.

This is Forbes, though, so the critical perspective is pretty much missing.
For that you might turn to a new book by a New York Times reporter:

  Joel Kurtzman, The Death of Money, New York: Simon and Schuster, 1993.

This is a wide-eyed account of how the truly gigantic international flows of
cash, greatly facilitated by computers and telecommunications, are changing
economic institutions and theories.  For example, he interviews mathematicians
and physicists who engage in high-powered zaitech (financial engineering) for
Wall Street companies.

I'm not entirely comfortable with the book.  I don't think it's successful 
in its argument that a radical change in the very nature of money is making
neoclassical economics obsolete.  (Neoclassical economics may be obsolete
anyway, of course, but that's another topic.)  For example, he places an awful
lot of weight on the end of the gold standard.  And regular economists will
argue that most fancy zaitech is just arbitrage, which (they say) simply makes
markets function more efficiently.

His main arguments for a computer-based risk to society are based on
observations about market volatility and a critique of "speculation".  On the
topic of market volatility, you'll have to read his argument about the 1987
stock market crash and see for yourself.  And he really doesn't give us enough
information to form any very novel opinions on the common view that rapid,
quantitative investment decisions, by focusing on short-term fluctuations,
ignore and thus undermine market "fundamentals".  Nonetheless, I do recommend
the book as an introduction to the people and numbers.  He also cites some of
the more technical literature.

On a related topic, I cannot recommend highly enough the following book:

  Stanley M. Davis, Future Perfect, Reading, MA: Addison-Wesley, 1987.

Davis is a management consultant who sees an amazing future in which computer
and telecommunications technology, among other things, changes the nature 
of many products and markets through dramatically more rapid and specific
responses to changing customer needs.  

The book is hard going and downright weird in places, but it's full of
remarkable speculations.  For example, he suggests that businesses try as 
much as possible to separate the "material" and "information" dimensions of 
a product, combining them as close to the customer as possible.  The idea 
is that information (a) can be moved much faster than physical materials and
(b) is much more amenable to rapid and highly specific customization, and so
therefore should be processed in a centralized way, whereas physical materials
should be distributed as widely as possible to minimize delivery times.  

What does this mean in practice?  You'll have to hire a management consultant
to help you figure that out.

Phil Agre, UCSD