New economics: now with all new unfounded assumptions!

Not sure the traditional economics is charitably represented here, but I for one don't see the difference between assuming column A and assuming column B. If I had my druthers, we'd go with column C. Chart modified from Eric Beinhocker's chart reproduced at Evonomics.

One of the more maddening things about the public discourse on economics is that it seems a large fraction of it is based on simply exchanging one set of theoretical assumptions for another [1]. The force multiplier of annoyance is the fact that these theoretical assumptions assume things you should be using your theory to understand. If I was to write this as symbolic logic, we'd have:

p
∴p ∎

The above table is reproduced (and greatly enhanced by the addition of a fifth third column) from this article at Evonomics, but the problem runs the gamut from assuming complexity and nonlinearity (here, here, here or here) to assuming things about monetary policy (e.g. here) to assuming what a recession is (e.g. here).

Really the assumptions in the table above, or about complexity, or about recessions are models that should be constructed from more fundamental assumptions. Those fundamental assumptions should follow the admittedly subjective rule of being arguably self-evident. For one thing, they should not include assumptions about human behavior!

An example from physics might be illuminating. What are the underlying assumptions of classical physics? That continuous motion exists and it doesn't matter where it happens in space. In more technical language, we assume calculus and space translation invariance (aka conservation of momentum). Newton expressed these in terms of the time derivative of momentum, but the basic story is calculus plus momentum. Newton did not assume what matter is made of, how the solar system worked, or Kepler's laws.

Can we construct a comparable assumption for economics? In the sense that physics is the study of motion, economics is the study of exchange and prices. And prices would be irrelevant if everything that was wanted ("supply") was in the possession (i.e. in the same location in time and space) of the wanting entity ("demand") and things never changed. Therefore we can assume (at a minimum) that when the instances of supply and instances of demand match, we have a scale invariance (a subset of conformal symmetry, see here or here) between supply and demand that leaves prices invariant. Additionally, we can assume prices should only change if supply and/or demand change. 

The information transfer approach takes the statement "instances of supply and instances of demand match" and makes it probabilistic (probability distributions of supply events and demand events match and we have a large number of events), allowing us to talk about the information entropy of those distributions and deriving an equation (here or in my paper) that holds in general that is consistent with that conformal symmetry:

$$
p \equiv \frac{dD}{dS} \leq k \; \frac{D}{S}
$$

Analogous to the way Newton defined force (a concept people vaguely intuited), we're defining price (a concept in my opinion people have only vaguely intuited) as the LHS of the equation. We call equality "information equilibrium".

Now it is possible to make other assumptions about economics. Another strong contender is that economics is the study of strategic decisions over a set of options made by people who have one kind of stuff and people who have another kind of stuff. That would lead to game theory, but the "strategic decisions" component does make some assumptions about human behavior (i.e. that we make strategic decisions).

The information transfer approach may not be correct. Economics may not really be about matching supply with demand. However, it at least makes the kind of assumptions you should be making [2] -- and doesn't assume the answers to questions about the impacts of policy, institutions, individual behavior or recessions that should be the focus of economics.

...

Footnotes:

[1] This just makes me think of this quote from Ghostbusters II:

Dana: Okay, but after dinner, don't put any of those old cheap moves on me. It's different now.Peter Venkman: Oh, no! I have all NEW cheap moves.

[2] This aspect is closely related to the fact that you can understand the different "schools" of economics in terms of extra assumptions beyond the information equilibrium assumptions.