That is the title of a paper (pdf) by Dr. Raja Kali, an economics professor at University of Arkansas. I just came back from his talk in the lecture series Why Math, our math club Pi Mu Epsilon organizes this semester. The talk pointed out some fascinating aspects about how social interraction affect the success of an economy. The main idea was that applying random graph theory to the social interractions between individuals, a society can fit in two models.
1. A relational model, where individuals cluster up and have a few connections. The best example would be a system where each point of a graph can reach at the maximum length of 2. A real life example would be Afghanistan or most of the 3rd world societies where there is trade only within each social, ethnical or religious cluster. In fact Dr Kali said that there is a strong correlation between underdeveloped countries and a relational model of social interaction.
2.A small world model, where a few points are randomly connected to other points that are far away. It turns out that this is the predominant model for most of the succesful economies. It also applies to systems like the internet, oil pipelines, electricity grids, telecommunications, etc. Small world refers to the fact that any two points on this kind of graph, or individuals in a world, are connected to one another in very few steps.
The next step was to graft on top of this model the idea of the prisoner's dillema, one of the basic concepts in game theory. This comes as no surprise because economical interraction and any kind of business decision can be looked at as a game. It turns out that the main deterrent from having a long distance (outside of the comfort circle) business relation is the possibility of being cheated. In a modern society, the legal system is very well put in place and therefore electronic commerce, or global businesses are a viable thing to do. This increases the interconnectedness of the system, it makes it a "smaller world" and this leads to a better economy altogether.
But how can a relational economy be transformed into complex, small-world economy? If we want to transform Afghanistan, a country with no infrastracture and a lot of social tension into an American model, where in similar conditions, very different ethnic groups decided to collaborate and develop a complex economy, what should the first and most effective step be? Should we start with creating institutions like police, administration and judicial system to make sure that long distance connections are not too high of a risk? Or maybe we should pay more attention to the institutions of information, like schools, that promote the formation of such long distance relationships. Applying the mathematical model, Kali's result is that if the starting material is a very backward relational society, then creating police is the best thing to start with. If we want to improve an already rather complex system then investing in information is the way to go.
If you had the patience to read all the way to here it may seem obvious how this can be related to the Romanian economy. I have my theory that what ex-communist countries lack the most is effective communication. People are not open to each other and don't know how to send their ideas around concisely. Also there is a serious lack of trust, because 45 years of repression made you think twice whether to trust your next door neighbor or not. So now it is clear and mathematically proven: for the Romanian economy to get out of the hole, the first step is to strenghten the legal system and the police. I assume that this is what the new administration is set on doing anyway, so maybe things are not so bad after all.
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