Sunday, March 20, 2016

Crankitude

I get dismissed as either a crank or not enough of a crank, which makes me feel like I have just the right amount of crankitude (crankiness is taken, but also applies). But I'd like to put together a list of results and concepts where information equilibrium (IE) matches up with elementary economics and the writings of professional economists with real credentials.

Marginalism

At the heart of the IE framework is marginal thinking. The basic equation I use is a slight generalization of one that appears in Irving Fisher's thesis that comes from Jevons and Marshall. This can even be translated into marginal utility. If you can dismiss marginalism, then you can dismiss the IE framework.

Supply and demand

If you strip the IE model of its information theory interpretation, it is formally a theory of supply and demand.  If you think you can dismiss supply and demand, then you can dismiss the IE framework.

Basic principles of economics

The IE framework is not very different from textbook principles of economics.

Rational utility maximizing agents (but don't have to be)

Agents can (collectively) smooth consumption and have stable, transitive preferences. Agents don't undo gains. All of these things can fail as well (e.g. when not in equilibrium) -- so it doesn't exclude behavioral economics. As long as you are in a macro equilibrium ("macrofoundations"), rational agents can be used to explain perturbations around it.

Euler equation

IE can be used to arrive at the Euler equation, assuming equilibrium ("macrofoundations").

Asset pricing equation

You can obtain the asset pricing equation John Cochrane uses as the basis for his approach to economics. Again, assuming equilibrium ("macrofoundations").

The changing slope of the Phillips curve and secular stagnation

Essentially the IE model gives the same result (here or here) as a paper by Olivier Blanchard, Eugenio Cerutti, and Lawrence Summers. Also, there's secular stagnation.

The liquidity trap

The IE model can recover some of the basic properties of the liquidity trap. The underlying mechanism is different, but the outcome is the same. The IS-LM model is an approximation at low inflation. Generally, this blog agrees with Paul Krugman.

The impacts of monetary policy on interest rates

The model contains many of the basic effects that impact interest rates. The interest rate model is also consistent with e.g. this analysis (by John Cochrane) of interest rates and inflation.


3 comments:

  1. "I get dismissed as either a crank or not enough of a crank..."

    Goldilocks zone crankitude? Where are you with crackpottery?

    ReplyDelete
    Replies
    1. You don't show up here yet (if that's any consolation).

      Delete

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