Wednesday, March 23, 2016

Information transfer as a common language for economics, part II

On my previous postCameron Murray linked me to something else he's written on how to teach pluralism in economics. In it he has a chart comparing different schools of economics. I'd like to first answer the headings for the IT framework. However, I'll come back and explain how the IT framework is a bit more general than these schools and you can represent each within it.

First, the IT framework answers to the chart questions:
The economy is made up of ... 
Information
(e.g. the information entropy of the state space of potential allocations)
Information transfer channels
(i.e. markets) 
Individuals are ... 
Complex
Potential for rationality to be emergent
The mechanism by which the economy explores the state space 
The world is ... 
Certain if markets are large and ideal
Uncertain markets are small and/or non-ideal/poorly designed
(i.e. do not transfer information) 
The most important domain of the economy is ... 
Model dependent 
Economies change through ... 
Exploration of and invention of new areas of state space 
Policy recommendations ... 
Model dependent, but generally:
Subsidize/allow individual exploration of state space
(e.g. minimum income, unemployment insurance, school, health insurance ... or could be interpreted as less regulation letting individuals explore state space)
Markets contain potential for "bad coordination" (panics)
(i.e. need government to mitigate using "good coordination")
Now here are the ways the IT framework can encompass the various schools ...
Classical: Essentially ideal information transfer in large markets. Could use the emergent rationality above. Interference in the market creates bad coordinations. 
Neoclassical: Essentially ideal information transfer in mesoscale markets (so that there is rare non-ideal information transfer, but potentially large fluctuations/uncertainty  due to smaller markets). Could use the emergent rationality above. Interference in the market creates bad coordinations or good coordinations. 
Marxist: Marxist economics is basically classical economics, but with a different view of the market solution to the allocation problem. The market allocation is bad, so replace with a different algorithm
Developmentalist: This school just focuses on the exploration of the state space (development). Allows for government interventions to create good coordinations. 
Austrian: Essentially ideal information transfer in mesoscale markets (so that there is are potentially large fluctuations/uncertainty due to smaller markets). Could use the emergent rationality above. Interference in the market creates bad coordinations. 
Schumpeterian: Non-rational entrepreneurship is one way to describe state space exploration. Complex world means that IT framework can be used to construct an approximation of the economy. 
Keynesian: Information transfer (ideal and non-ideal) in mesoscale markets (so that there are potentially large fluctuations/uncertainty  due to smaller markets). Could use the emergent rationality above as an approximation in equilibrium. Interference in the market necessary to create good coordinations. 
Institutionalist: Institutions set up the specific information transfer channels. Institutions can affect ideal or non-ideal information transfer as well as good and bad coordinations. 
Behavioralist: The emergent rationality is an approximation, but in most interesting cases it does not apply. Non-ideal information transfer dominates because of human behavior. IT framework more a way to show how far we are from rationality by illustrating the ideal case.
...


I also wanted to reproduce part of my reply to Cameron because I think it helps describe the IT framework:
FWIW, in the IT framework, those variables [in the models] represent probability distributions over some domain ... e.g. space, time. You have equilibrium when e.g. the spatial probability distribution of 'demand events' for X is equal to the spatial probability distribution of 'supply events' of X -- and there are a large number of units of X (so that the probability distribution comes close to being the actual distribution). In that case, the information required to construct both distributions is equal I(Pd(X)) = I(Ps(X))
Since the whole thing simplifies if you talk about uniform distributions, you can think of e.g. NGDP as the total number of 'demand events' (measured in e.g. dollars). When uniformly distributed (not true, but works to leading order), the information in a string of 'demand events' drawn from that distribution is just proportional to the number of events ... I(Pd(D)) ~ NGDP
However, since this definition is pretty malleable, it could easily fit distributions of property rights, accounts, etc. you discuss in your follow-up. 
For example, I've used it for the distribution of price states in a time series. The distribution over nominal interest rate states is equal to the distribution over "the price of money", which is proportional to velocity in this very basic model. 
The IT framework is just one example of a possible way to address this issue, but I agree that more needs to be done in this regard.
Also, my comment I used the term demand event which I think is much better than demand widget. When a demand event and a supply event meet, you have a transaction event.

2 comments:

  1. "...I used the term demand event which I think is much better than demand widget."

    +10

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  2. I don't think that non-ideal information transfer dominates in behavioral economics. Sure, behavioral economics can deal with panics and such, and that may be why some economists like it. But in general the lack of rationality means unpredictability, which effectively means randomness en masse. By contrast, it is supposedly rational economic agents who tend to think the same way and act the same way. Every time you point out that the IT approach trumps game theory, I see that as a plus for behavioral economics. :)

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