My current view of economic constraint theory (this is part II)

General Constraint Theory

version 0.1
date: 07 Feb 2010, Finland

"A short (451 words) essay on how the constraints theory affect information technology
and financial markets. Constraint theory is based on neurological mechanisms of an individual,
propagated into group, organizational, and macroeconomic level."
(copyright, Jukka Paulin 2010, Finland)

Free to cite and use in any research deemed appropiate

What is the article about?

Constraints can be thought of as abstract or physical phenomena, having a function-like value which is based on time, and these contraints have an effect on everyday life. Constraints are very important tool in both decision-making and economic forecast. Since forecast is essential to the succesful trader in analytics, constraint theory is of utmost importance. A trader is the person who controls
the machines making decisions about our money. In Short (TM).

The human body is a fine tuned mechanism, or engine, which comprises of many levels.
From the neuroscience theory, we are made of cells, which form organs. The brain is
a special organ that signals the rest of the body. The brain has approximately 10
billion neurons, which are simple “calculators”, doing summing of signal, and propagating
it along into outgoing dendrites; these are turned into axons, which are the input to
another group of neurons. And so the cycle goes on and on: the brain is said to compute.

Warning: the text may appear to be a bit on the heavy side. It is
my view on some of the points that are underlying economic activity
in micro- and macrolevels

This is no definitive text about economics nor about human physiology. Consider
this amateur science. My best bet on some the incentives and mechanisms that underlie
the human activity and its traits in the stock markets.

So, basically microlevel action on the stock market is based on our sensory
perception combined with decision making. But this microlevel, individual activity
manifests in the behaviour of individuals on an organization;
thus further on, in the organizational behaviour, outcomes, and rituals
and true, new breakthroughs in new venture development.

Economics Basics: Scarcity, markets, valuation

Scarcity is the fact that not all can have everything. Markets are the places
(either physical, or virtual) where goods are traded. Valuation is the
appraisal process of defining a going price to a good or a service in a given

Economics is based on some sort of constraint theory. The tricky part of course
is, that we do not fully know, nor probably will ever know exactly the essence
nor structure of this theory.

We can only move towards a more clear picture. There are unfortunately no
truths carved in stone. If I were to make a claim that this is the
truth, then my text would be out of date by the time that a new iPod or iSomething
appears on the market.

The limits create scarcity, which is the fact that there is a limit to what can
be produced and how many units of work it takes. Thus scarcity in turn creates
markets and valuation of things.

In micro- and macroeconomic terms we talk about PPF, or Production Possibility
Frontier: the set of possible states that can be reached in our “fan” of all
selection outcomes. We can then use values and logic to judge – calculate
points to these outcomes, and select a path that most likely will achieve the

The problem is uncertainty. And the motivational problem affecting every
individual, household, community, party and any other organization. We never
have a unified vision, which is actually good – it’s diversity.

One could say that an ideal situation would be abundance of everything
for everyone, but on a second thought this would implicate some
sort of catastrophy for the global environment. There has been a global test
laboratory of this philosophy: it’s called Communism, and ultimately failed.
Whether it was due to the competition with capitalism, I cannot tell, but
i think Communism had a basic flaw in making people passive and thus nothing
moved forward.

But capitalism and globalization of the pattern of spending has its
problems too; just imagine, how would the Earth carry the pollution of 6 billion (and
counting up quite fast..) people, if everyone had two to three cars, a big
house with year-round warming consuming a good stock of energy; add to that
another house for holidays, a pile of electronic gadgets from cellular phones
to purely entertaining devices, ever bigger TV screens, louder audio equipment.
Everyone traveled 4-6 times abroad with a petrol consuming jet aircraft. Things
would probably be quite bad soon.

Our destiny lies in the hands of people. Both those manufacting these
technologies, marketing them, and making decisions about what – in a
global level – is Good or Bad. This requires sensitivity to attitude
changes, persuasion skills, and good understanding of solid physics.

The direction of sensitive economics thus has to be towards simplicity and a
sort of equilibrium between what we can achieve if we turn our “work-volume to
maximum” and between what’s a “nice level”.

Economics as purely a scientific discipline does not have
normative message – it only tries to explain phenomena which have
been observed and are either quantifiable or can be qualitatively
described. I try to obey this quantitative tradition of research
as highly as possible.

What is Service?

A service is an immaterial “good”, a procedure of work which can be
bought. Services are exceptional compared to ordinary material goods,
in that they cannot be stocked: you can produce service “on-line”,
at the moment the customer wants it. There are a lot of service and complete
service industries: from clothing, washing, maintenance, selling, luxury experiences,
accomodation, you name it! Ice-cream booth in your neighbourhood park is selling
both products and a service along with it. The video rental outlet is doing a service.
The cab company produce transportation services.

The service is tied to a place, unless we’re talking about a
digital service. If you go to a
car repair shop, and ask for the repairing of your Ford’s engine,
they inspect the car and engine, ask you a bunch of questions about
what exactly you want them to do; you in turn ask the mechanic how
many dollars you are expected to pay, and how long it takes for you
to get your car back.

Utility: is my television more useful than a rifle? Depends.

Utility is the personal valuation of a commodity, in a certain context
and period of time. Utility is different for different persons and organizations.

The utility value of a commodity depends on the context (situation)
in where the utility is consumed and also heavily depends on the
preferences of the owner.

The utility of an extra beer (or a pain-killer, depending on your
personality) at 4.30AM when you’re having the headache of a lifetime
is much greater than the utility of the same beer at another time,
when you wouldn’t be especially interested in drinking.

Example: rifle vs. television

If you are living in a city in a country that is not at war with any
other nation, the utility of a television is probably greater than the
utility of rifles and other arms, because the TV can entertain people
and show the latest news, soccer championship results et cetera. Rifles
have only the risk-bearing effect; someone might take one and shoot
people at random.

Rifles become useful when the nation is under attack. In addition to
the willpower to defend the borders against foreign invaders, the
technological level of arms and the tactical and strategic skills of
the soldiers and leaders determine the outcome of battles. You can manage the war
without a television, but the rifles become a necessity. (Ok, a pun;
the TV is today’s media weapon!)

Today the modern battlefield does depend heavily on telecommunications as
part of intelligence, and propaganda via radio, TV, and the Internet,
but that is another story.

When the living standards of a family increase, usually time itself
becomes the most valuable (and scarce) commodity. In this kind of
situation, services become very valuable. The family can invest
money in exchange for more free time, since somebody else can do
some of tasks. This requires simple coordination: the client should
specify to the service provider what it is exactly that is required.

Foundations for successful service industry

A civilized service economy requires these fundamental things:
– effective communications about the services (marketing)
– trust in service providers
– monetary independence in that households can afford the service
– a fiscal policy that encourages people to buy services instead of
making things themselves

Value depends on scarcity

If we had an abundance of gold, its value (measured in
price per weight unit) would go down. It might even turn into
negative side — think of waste! But these valuations are really
tricky; waste can have positive value, if you can use the waste
as raw resources and produce something which can be sold.
– in addition to general market valuation, there’s the
personal valuation of things: people are very different in
the perception of status quo.
-> drive
-> satisfaction
-> worry

Constraints have a large impact on society. I’m limiting
the viewpoint into economic constraints, and at present moment
I can only offer a rudimentary theory since I don’t have the
necessary analytical skills in mathematics to present a
concise theory.

Contraints limit (or enable) certain things to happen. Individuals
as well as companies feel the effects of contraints:
the concrete situation can be as simple as when you don’t
have enough light, you can’t read a book. In Africa where common
electricity is not readily available, the time to read books is quite
limited; there are other factors which also set limits to education:
lack of funding, lack of tradition and valuation of education,
lack of equipment used in education.

Constraints are also
time-based: a certain raw material or skill may be physically available,
but it can be put into action only at a specific time. When a company
orders some goods, it usually takes days to weeks before the goods
are in active use: handling the order, placing an internal order in
the provider system, producing (Just in time), packaging, shipping
and receiving the goods all takes time and effort.

Review of economical milestones from 1800s to 2000s

Industrial revolution: steam engines, railroads, spinning jennies,
international trade, specialization of labor, management advances,
information technology.

Steam engines were a revolution of their own. From the experiments
(check sources) with steam, one observed that water can be heated
and the expanded 1600-fold volume of 1 unit of water can push
an object at an extremely persistent force away from the pressure.
If combined with the idea of a piston, the steam can convert the
energy included in the steam into physical work: movement.

The movement can be made perpetual, ie. back-and-forth, and converted
further into a round movement. This idea saw the birth of
spinning Jennies used in Great Britain, and also the common
railroads. Now that engines could be used to produce a surplus of
wool, and railroads used to transfer the increased amount
economically, efficiently and in time to far away places, the
formula for a nation heading towards riches was ready.

When a nation has a surplus in a commodity, it’s wise to start
exporting and thus convert the commodity into (foreign) currency.

With the currency the nation achieves the benefits of importing,
thus increasing the pallette of possibilities. In our previous
example, Great Britain could exchange wool and textiles to
those commodities that were scarce and sought after.

In addition to plain exporting and getting currency, a tradition
of trade creates alliances, partnerships and transfers knowledge.

The fallacy of New Economy

During the 1990s there was a concept of “The New Economy”, partly
fueled by revolutionary digital advancements (and practically fueled by
a lot of hype). In The New Economy it was predicted that the value of
companies and thus stocks can go on rising practically forever.

The digital tools and markets were supposed
to change the economics so that productivity could go up without limits.
By virtualizing the products (thus decreasing the productions costs
of additional units) and using digital tools to maximize the effectiveness
of the internal precesses related to marketing, sales, and development,
the atmosphere was such that any company with 2 or more techno wizards could
create a product which would penetrate the global markets.

Constraints in microeconomics: a company functioning

If a company does not have enough money and other resources,
it can’t function well. The company will perish because of
competition between companies which have a similar clientele
and products, and some of the companies have an advantage over
others in product quality, brand value, or other aspects which
drive the demand and thus revenue.

Value of information and the creation of thinking: Education

Information is an intangible commodity, which is created in several ways.
Education, research, but also personal and communal experiences create
information which can be diffused into the use of masses by telecommunications, books,
and personal interaction. Information thus is not equivalent to wisdom or intelligence.
Information is basically the stream of little bits, that put up wisdom if properly

Education is the most traditional way of transferring information and
knowledge to the masses. The educational system varies between nations,
but most have a strict program of education available for children.

Information is “poured” into the brains of pupils, and then there are
both exercises and examinations which test how well the individual has
recorded and understood this information. Education tests the conceptual
abilities, memory, motivation and social skills of a pupil.

Information as an abstract tool has at least three kinds of value:
1. a direct value of information is in reducing the materials (generally,
effort) needed to achieve something
2. trade value: information (knowledge) has value as means of trade
3. latent value: information may be combined to create novel applications

Example: The Finnish elementary schooling

For example in Finland, every citizen is schooled at least for 9 years
in the elementary school, during which everyone is expected to learn several things:
– The arabic number system, ie. the digits 0 through 9 and larger numbers
constructed by combining these basic digits
– Mathematics (algebra) and also a little bit of symbolic algebra and
probability mathematics (basics of statistics)
– Physics: the knowledge of the physical contruction and interaction of objects
– Chemistry: the most important elements (Carbon, Hydrogen, Oxygen, and so on)
and their chemical reactions with each other
– Biology: the knowledge regarding the nature, animals, and how the ecosystems
– Geography: the names of nations, their differences and characteristics,
basic knowledge of political systems and the influence of different religions
– Language: the meaning of words, the grammar (rules of combining words and creating
sentences), writing of essays
– Foreign languages: in Finland the most common foreign languages studied are
English, Swedish, and German. French, Spanish and Russian are also often teached.
Every citizen schooled in the elementary grades 1 through 9 learn at least English and
Swedish. Finland is a bilingual country, with Finnish and Swedish both being
the official languages.
– History
– Religion
– Arts: painting and music
– Physical education
– Health education
– Psychology
– Computers
– Woodworking and technical working
– Philosophy
– Astronomy
– other specialized fields which can be studied especially after the elementary
school in gymnastics (high schools) and trade schools and universities

Time, planning, sharing, criticism, openness

Modifiable by planning
Planning requires both experience and knowledge. Knowledge narrows
down the amount of quessing and bad choices, and thus makes
it possible to produce a good with less mental and physical
Sharing of time is a decision, which is not purely rational
The decision of how one’s time is shared also affects other people
because they are on the receiving end of the product

Some variables are inter-related, eg. time can be traded for money
By buying services, you can save time and at the same instance you are
creating economic well-being for another individual. The so-called
service economy is predicted to follow the post-industrial information

Since service economy is largely based on the correct timing of
delivery, it requires good planning and information dissemination system.
Modern service-oriented companies use IT tools to both plan, inform,
market, and design the commodity itself.

-health <– time <– money feedback into some aspects of possibility to utilize
a certain skill (eg. if you have strong physical constitution, it
enables the individual to act in certain professions)


Spending patterns can be made more rational
Working creates better income

Two types of constraints: hard, soft

-hard constraint is based on physics and cannot be in itself avoided
-soft constraint is “negotiatable”, and may be based on psychology
more than hard facts
-an example of a hard constraint? What about a soft constraint?

Lack of constraints – where would that lead?

– addiction
– negative side affects
– example: Roman empire falls because the ruling class had a seemingly
infinite power and they were corrupt by the lifestyle and lost
all credibility in the eyes of the people

=> we come to the conclusion that there’s an optimum level

The machine theory of economics: getting towards producing
more with less. Optimizing constantly, looking for alternatives,
building higher abstractions (especially true in computer systems).

Examples of situations where constraints set the information value

Let’s take an example of risk-reducing planning. It takes some effort
(time) to produce information which diminishes the risks associated
with a certain set of actions. Risk is present in various fields of
human activity. In fact, if there was no risk at all, there probably
wouldn’t be insurance companies either.

Examples of risk-reducing planning are abundant:
When you’re going to bowling with friends, and the place is one
you’ve never visited before, it’s a good idea to take a look at the
map and plan your route. By spending some time beforehand you
reduce the risk of driving aimlessly and spending much more time
then, trying to find the place.

One of the best practical examples of situations where information
becomes really valuable is the IT administration. Computers have
grown to become very useful general-purpose machines, where
all kinds of information can be handled and they are plain essential
for the functioning of a modern workplace. Yet at the same time these
seemingly effective beasts have become more specific, complex, and
quite complex to manage effectively when there are many computers
for a single administrator. Take an average situation, where
a sysadmin (as they’re called in common parlance) administers a
group of 20 computers. These 20 computers have a lot of software
installed; both essential software called the operating system,
and then there is usually a bunch of applications which are
task-specific. It is not merely enough to get this software installed
once; then starts the constant tinkering with updates, upgrades,
hotfixes, you name it. There is a whole new language for the words
which describe all kinds of updates that the software may have after
the initial installation.

Nowadays you can easily buy components which are completely useless
in your specific computer setup. And people are probably becoming less
interested in the details. Yet it is these details that define the
outcome of the effectiveness which is squeezed from the office computers.
If the machines have an uneven distribution of essential resources like
memory (RAM), processing power, and devices, the total sum of utility
is less than when the computers have been properly budgeted and

Value of information is the difference between outcomes

V = E – U (value equals the difference between
E = educated action, and
U = uneducated action)

* how to count for network externality? A tool that creates
a silo-mentality is not as useful as a more open tool (one
* creativity theory might place value for the unexpected outcome
so that the equation above may not measure absolutely the Value
– an unexpected outcome, which might prove to be a commercially
very valuable, might never have born through the ordinary
linear process of maximizing Value

Information value can be defined as the difference in outcome
between an action done without the information and an action done
when using the information. In theory the value difference can be
calculated easily, but in practise it requires a careful method and
creating a “ceteris paribus” (all other variables unchanged) situation
in which the effect of other, distorting variables, can be neglected.

Information by definition narrows down the number of possibilities
which would have to be brute-forced (attempted) in order to know
for sure the outcome. Information is power: if you know a route
from A to B, you can save time and use the saved time to increase
your productivity or satisfaction.

Basic metrics for computer administration

– work hours per administrator
– number of employees in the company (‘users’)
– average user daily usage of computer systems {0..24}
– salary per hour
– power usage (W)
– investment in hardware (eur/year)
– price of kiloWattHour of energy (average on a yearly basis)
– operating system brand and model distribution ( a
list of the format Brand,marketshare ie. {Win7,0.1/Linux,0.9} )

– solved cases
– information-creation power created by the admin
– knowledge created by the solved case
(has future value)
Knowledge should be somehow distilled from “signal noise”, ie
the digital meaningless output of the process. part of the knowledge
is truly useful, some of it is garbage and temporary in nature
– change in connection possibility (by adding a messaging tool
the admin created possibilities for the user to connect better)
– is there a value calculated for diversifying the platform
This reduces risk of dependance on a single supplier, but
makes management more arduous
– subjective experience of users
– like in acoustics, you can’t tell how people feel the benefits
of technology unless you measure these feelings
– the “new gadget excitement” is a phenomena which will show
in the initial polls, but might fade away very quickly after
the enthusiasm wades

Further reading

Thomas Sowell, economics professor and wise man

Einstein, for clarity of thought

John Forbes Nash, for ingenuity

My contact information

jukka.paulin (at)
mention ‘blogspot: economic contraint theory’
Thank you for listening!

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