Friday, April 17, 2015

There's no natural constituency for information equilibrium

An impasse to the uptake of the information equilibrium framework is that it has no natural constituency. I allude to this in this Socratic dialog (and present a list of things that go against the grain here as well as what the approach says about common topics in the econoblogosphere here), but I thought I'd talk more about it as I said in the previous post.

• It is a new approach

This would upset the "macro works fine" people like Paul Krugman.

• It gives credence to a lot of economic orthodoxy

This would upset the so-called heterodox people such as MMT and post-Keynesians as well as macro reform people who thought the 2008 financial crisis should up-end economists apple cart. These pieces by Munchau and Coppola are in the latter vein.

• It is a very simple theoretical framework

This would upset anyone who assumes macroeconomies are complex (pretty much everyone).

• It says that the quantity theory of money (and 'monetarist' economics) is a good approximation in particular limits

This would upset the people who aren't monetarists.

• It says the IS-LM model is a good approximation in particular limits  (along with 'Keynesian' economics) 

This would upset most economists who aren't Paul Krugman, Brad DeLong or Mark Thoma. Even they think of the IS-LM model as an aid to explanation rather than a real model. Here's Simon Wren-Lewis extolling the virtues of a new macro textbook that gets rid of the LM curve. (Not that the information transfer model couldn't reconstruct the newer diagram based model in the text.)

• There is no specific role for expectations

This would upset pretty much any economist, but particularly market monetarists like Scott Sumner and Nick Rowe. You can construct them (here, here), however they seem to be the same as other market forces.

• There is no specific need of microfoundations until you see market failures

This would upset both the "even wrong microfoundations are useful" like Stephen Williamson and the agent based model people which unfortunately includes most econo-physicists (see also here for a great round-up). 

• There is no representative agent

This would upset the people who use representative agents to get around the SMD theorem, i.e. everyone not named Alan Kirman [pdf].

• There is no micro reason for some macro effects

This would upset the "story" people who need to hear a plausible story to believe in a particular model -- something said by both Paul Krugman and Scott Sumner.

• It is a mathematical, axiomatic approach (in the style of Newtonian mechanics)

This would upset the people who refer back to the old writings to figure out what Keynes (or Hayek or Hume or Ricardo or ...) "really meant" (Krugman's 'Talmudic scholars') as well as the people who think there's too much math (or the wrong kind of math) in economics.


Basically, there is something for everyone to dislike! ... blog posts taken individually can alienate left and right, reform and status quo.

Of course, if you're doing something different you're going to ruffle at least a few feathers. And having pieces that different sides dislike also means you have pieces that different side like ... at least one commenter (Ben Kloester) referred to this as allowing "your model to be all things to all people".

I do hope that the multi-faceted nature gives some assurance that this approach isn't ideological.


  1. This made me smile. The problem you face is that you are selling a technique rather than a solution to a problem. From experience, that’s next to impossible.

    The biggest challenge in selling any professional service technique is identifying a potential client:

    who has a problem with which you can help AND
    who recognises that they cannot solve the problem themselves AND
    who trusts you sufficiently to let you help them solve their problem AND
    who (in a commercial environment at least) can afford to pay for your services.

    You also need to understand your competition. Who else is selling to the same market and why is your solution better than theirs?

    As far as I can see mainstream economists are your competition but I’m not clear whom you see as your potential clients or what you are trying to sell them.

    I should add that, following their loss of credibility due to the crisis, mainstream macroeconomists face a very similar problem. Much of the economics blogosphere is merely an endless discussion of models and the constituent parts of models. Nobody in the real world cares whether economists have a model called DSGE or WXYZ. The only interesting question for non-economists is what benefits can macroeconomists provide to the rest of society?

    The nuclear question for all macroeconomists (and aspiring macroeconomists) would ask what difference it would make to the rest of society if the entire macroeconomics profession was abducted by aliens? It’s not at all clear. Without macroeconomists, the rest of us would be unable to forecast major recessions; we would be unable to decide on ‘scientific’ policies to recover from major recessions and would argue for policies based on our prior political preferences; occasionally we would do something really stupid like deregulating the banking system and causing it to collapse on top of us, or we might set up a European-wide currency which causes 50% youth unemployment in Spain. However, that’s what we do anyway even with the ‘help’ of macroeconomists.

    I’m not suggesting that there are no benefits to macroeconomics. However, I am asking for specifics on what the benefits are and how we would recognise whether we were achieving those benefits. If you (or anyone else) had compelling answers to these questions then the problems you itemise in this post would either disappear or become irrelevant.

    1. Hi Jamie,

      Truthfully, I'd have to say my "potential clients" really consists of just me since I do this stuff for fun.

      Political actors will do what they want to do regardless of the advice they are given -- in fact, they seek out advice that confirms their decisions rather than informs them. In some sense we never actually get to see the efficacy of macroeconomics as a discipline because the world they work with is entirely political -- not like engineering where there is a physical reality that can't be argued with.

      But in thinking about what you said, I am wondering if the best possible outcome would be a way to remove politics from the field. In the framework, things generally are random and meaningless and there is little impact on the economy as a whole from various policies. You can tax the wealthy at a 70% MTR or 10% MTR and it won't have much impact on NGDP. Therefore, you should consider policies based on things other than the economy. Do they help people in poverty? Do they make people's lives easier?

      Actually, one of the best things for the economy in this framework would be if everyone stopped talking about the economy. It is this social aspect that seems to provide the coordination that causes recessions.

    2. There’s nothing wrong with doing something just for fun or just for the challenge! I’m sure that a lot of innovation comes from people pursuing things that they enjoy. I’d add a few points.

      One of my favourite videos about macroeconomics is a video by Hans Rosling showing the progress of 200 countries over 200 years on a chart of income versus lifespan (using 120,000 numbers).

      This suggests to me that, maybe, although in the long run we are all dead, it is also true that in the long run macroeconomic benefits will probably be shared by everyone. The rate at which specific new technologies are developed may be unpredictable. The impact of specific new technologies may be unpredictable. The rate at which these technologies spread around the globe might be unpredictable. However, in the long run, it is likely that useful technologies will spread out like the atoms in your diagrams.

      Specific political or macroeconomic decisions can probably make a marginal difference to this and democracy probably allows us to avoid persevering with the worst ideas. However, I suspect that such decisions are often just as random as all the other atoms in your models. Each decision is taken in unique circumstances. A ‘correct’ political / macroeconomic decision in the gold standard world of the 1910s might be a ‘wrong’ decision in the more globalised 2010s. At minimum, we probably need several century’s of data before we can assess different decisions ‘scientifically’ in a way that would be persuasive to people of different political outlooks.

      In the meantime, the best we can probably hope for is some rules of thumb on minimising risk e.g. don’t link your currency to gold; don’t borrow money in a foreign currency; don’t cut government spending when the rest of the economy is in the doldrums. I agree that we should focus on policies which make people’s lives better and also policies which are proven to work in other countries.

  2. Seems to me that one of the big problems is that no one really understands economics- therefore it is easily framed as a political problem by those with an ideological axe to grind. That's why I continue to be optimistic about applications of information equilibrium to economics, as a fairly straightforward interpretation of economics that (hopefully) can lead to improved insights.

    1. Hi Todd,

      I'm still optimistic too! I think the information equilibrium approach is far simpler ... it's probably just me, but I feel like it's a Copernican view that may be less detailed and accurate (as it was at the time) versus a very accurate but complicated Ptolemaic view.

  3. You can turn all your "This would upset..." comments inside out, and say for each "This would mollify (or gratify)..." I don't know the landscape well enough to do it myself, but I'd very much like to see how that list looks.

    Your response to Jamie about politics is kinda true but also kinda false. Sure politicians do what they want, but changing their environment changes what they want, and also who gets to be a powerful politician.

    So if you want to change policy, you change the environment. Basically you find enough agents (groups or individuals) who think their interests are served by your message to make politicians want the implied policies.

    This happens all the time. Hillary Clinton doesn't want the same things now that she did in the 1990s. Romney didn't want the same things during his run for president that he did when he was governor of Massachusetts.

    If you can clearly articulate what ways your approach would produce better policy / management than the mainstream approach, then you can start to work on how to sell it.


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