tag:blogger.com,1999:blog-6837159629100463303.post329782153509723450..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: Money is that which is conserved via a symmetry principleJason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-6837159629100463303.post-71954023610009230962015-12-09T22:11:12.770-08:002015-12-09T22:11:12.770-08:00Jason, that was quite an update you left there!Jason, that was quite an update you left there!Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-62861846447317263612015-12-06T19:38:04.110-08:002015-12-06T19:38:04.110-08:00You said:
Irrespective of which definition of a...<br /><br />You said:<br /><br /><i><br /> Irrespective of which definition of a term like “money” is “correct” (whatever “correct” means here), we can’t have a serious debate about concepts for which we have different definitions.<br /></i><br /><br /><br />I agree! That's why I set up models and use empirical results to say which measure of money is "correct" (I personally don't care) ... and it turns out different measures have different uses. MB is connected to short term interest rates. M0 (MB without reserves) is connected to core inflation. MZM appears to be related to long term interest rates. M2 looks like a good measure for exchange rates.<br /><br /><br /><br /><br />You said:<br /><br /><i><br />Investment + Consumption = Consumption + Saving<br /></i><br /><br />I always thought a) this is a debate that only exists because the people involved are nerds in the same way people debate about what in Star Wars is "canon", b) this is a debate that only exists because the terms saving and investment have colloquial meanings, c) that this equation really means<br /><br />[not consumption] + Consumption = Consumption + [not consumption]<br /><br />Where you call the [not consumption] on one side "investment" and on the other "savings" because reasons, and d) this is the problem when people use the equals sign instead of ≡ or ≈ or forget time averages 〈S〉 = 〈I〉.<br /><br />My usual response is to bang my head on my desk. There is zero insight that comes out of any discussion of S = I.<br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-28348640725164025292015-12-06T19:37:54.249-08:002015-12-06T19:37:54.249-08:00Hi Jamie,
Sorry about your comments getting stuck...Hi Jamie,<br /><br />Sorry about your comments getting stuck in the spam folder -- I fished them out. I have some responses to a few things ...<br /><br /><br /><br />You said:<br /><br /><i><br />When Jason says of me<br /><br />“I think you've confused a symmetry transformation that is a property of equilibrium at an instant in time … with a non-equilibrium process”<br /><br />all he is saying is that my perspective of the economy is different from his perspective. <br /></i><br /><br />Not really -- the differential equation<br /><br />P = dD/dS = k D/S<br /><br />obeys a symmetry transformation D → a D, S → a S that leaves the equation unchanged, therefore the price P is unchanged. There is no different perspective about this. <br /><br />If you sell a sheep at P = €10 and then at P = €15, this has no bearing on the symmetry principle of the equation (and therefore no bearing on the conservation law I was discussing). In that case dD/dS and k D/S have different values -- they can't have different values under the symmetry transformation D → a D, S → a S. Under that transformation<br /><br />dD/dS → d(aD)/d(aS) = dD/dS<br /><br />k D/S → k (aD)/(aS) = k D/S<br /><br />therefore<br /><br />dD/dS = P → P<br /><br />There may be a difference in perspective about whether the equation is meaningful for economics (which I have no problem with), but the questions about profit and money being conserved under exchange are not germane to the symmetry principle/conservation law I was discussing in the post above.<br /><br /><br /><br /><br />You said:<br /><br /><i> When stock market prices go up, many people, including famous economists and Noah Smith, say that “money poured into the stock market”. However, that is an illusion as money is conserved under exchange. If one person buys a share for €1 then another must sell the share for €1.</i><br /><br />I am assuming that you mean the original share price was lower, like €0.50. If it was €1, then the market index wouldn't have gone up. If it was €0.50, then sale at €1 means €0.50 went into the valuation of the market (making the index go up) and €0.50 of cash (or whatever) went into the assets of the seller.<br /><br />The market in a sense 'created' €1 of value. That is €0.50 for the asset holder and €0.50 for the market -- actually more because there's more than a single share and that last bid-ask that was met now represents the current value of all existing shares. But this is what is meant by 'money pouring into the stock market'.<br /><br />The question at hand was where did this €1 come from (or valuations in general)? Your answer was:<br /><br /><i><br />There was no “extra” five pounds [or here €0.50]. It is an illusion. Money was conserved under exchange. No money was created and no money was destroyed.<br /></i><br /><br />I was under the impression that we were discussing where the extra value came from, not whether MZM went up. I agree that MZM, M1 or whatever measure didn't change. But the total valuation of assets changed, one person made €0.50 of capital gains that counts towards GDP.<br /><br />With the so-called representative agent, you can't really have that extra €0.50 of value because it comes from exchange. The representative agent can't make €0.50 by selling a €0.50 stock to himself for €1.<br /><br />And that is the problem with traditional economics ... profits and losses can't really arise without counterparties making mistakes, being 'irrational' ... or just existing at all. <br /><br />This is not an issue in the information framework. The information about a specific transaction (or any initial conditions) is lost as the economy returns to equilibrium. This is the exact same definition in thermodynamics: equilibrium means that the information about the initial conditions has been irrevocably lost (entropy increases).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-13019143858670717002015-12-06T10:08:00.269-08:002015-12-06T10:08:00.269-08:00Of course, there is left-wing bias too. The MMT p...Of course, there is left-wing bias too. The MMT people make use of accounting concepts so you might think that I approve of MMT. However, MMT uses the term<br /><br />Government = Treasury + Central Bank<br /><br />where most other economists, and non-economists, use the term<br /><br />Government = Treasury<br /><br />with Central Bank seen as a separate part of Public Sector.<br /><br />This seems an inoffensive difference. However, it leads directly to MMT saying things like “government spends money into existence” which sounds very odd to other people’s ears. This puts many people off MMT, and it must be obvious to the MMT people that this is the case, so why do the MMT people persist with this? The only logical answer is that they do it because they can then show that fiscal policy should be used everywhere. (Monetary policy become irrelevant if you ignore the central bank).<br /><br />There are lots of other examples e.g. “monetary policy” is not a policy. It is just a vague collective term for a group of policies which are never fully articulated but which, according to some, can cure all known economic problems. <br /><br />That reminds me. Scott Sumner uses the terms “policy stance”, “tight money” and “loose money” all the time. What does he mean by these terms? I have no idea. Neither does Scott.<br /><br />http://www.themoneyillusion.com/?p=25455<br /><br />I’d draw three conclusions from all of this. First, it’s impossible to represent economics as a serious subject if economists can’t even define their own basic terminology. <br /><br />Second, it may be that any set of definitions contains its own hidden political biases. When Marxists assume that the world is made up of “capitalists” and “workers”, there is a certain inevitability to their conclusions that all of the problems in the world can be attributed to this divide. <br /><br />Third, although I agree with a lot of the basic thinking in Steve’s posts, and although I think that we could have many interesting discussions, I disagree with his definition of “money”.<br /><br />Steve: ‘the [net] value of assets’ <br /><br />I think this mixes up two different things: money and assets / goods valued in terms of money. An example. Suppose that I have<br /><br />One house which I value at €500,000<br />One car which I value at €30,000<br />100 shares which I value at €100,000<br />€20,000 on deposit at the bank<br />€100 cash in my wallet.<br /><br />I would say that I have<br /><br />Physical assets (house and car) with estimated valuation of €530,000<br />Financial assets (shares) with estimated valuation of €100,000<br />Money (deposit and cash) with valuation of €20,100.<br /><br />My net worth is the total of these figures.<br /><br />I think that it is important to distinguish money (as it is valued in terms of itself and it is used to value everything else) from things that are valued in terms of money. I also think that it is useful to distinguish between physical and financial assets.<br /><br />My main problem with this taxonomy is whether government and corporate bonds should be defined as money or as financial assets. I suspect that they should be defined as money. However, that would have huge implications. For example, governments would increase the money supply when they created new bonds but central banks would not change the money supply when they swapped bonds for money. They would merely change the terms of the government loan (central banks return interest on their bonds to government so they make the loan interest free).<br /><br />The most important point here is to acknowledge the need to define terminology careful, and to use examples like my net worth example to clarify the definitions.<br /><br />Apologies again for the length of these comments but there is endless repetition of the same debates on this and other blogs. <br />Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-39161284004171221502015-12-06T10:07:07.358-08:002015-12-06T10:07:07.358-08:00Steve: “I'll ask you to provisionally adopt, f...Steve: “I'll ask you to provisionally adopt, for this paragraph, my def of money (short and imprecise form, ‘the [net] value of assets’)”<br /><br />Another observation from working in business and government is that the definitions of words, and the concepts behind them, are extremely significant in human communication, particularly in large collaborative teams where agreed terminology is vital. However, most people don’t think about this.<br /><br />Wittgenstein: “The limits of my language means the limits of my world” <br /><br />Economics is full of badly defined terminology. The majority of economic debates are based on badly understood terminology and badly articulated concepts. Irrespective of which definition of a term like “money” is “correct” (whatever “correct” means here), we can’t have a serious debate about concepts for which we have different definitions.<br /><br />Earlier this year, I read some posts on David Glasner’s blog about Keynes’ accounting identities. I like David’s blog. He has a different perspective from me. He writes about history and what specific economists said and did. I have little to add to his views so rarely comment. However, I did comment on his accounting identities posts.<br /><br />My management summary of David’s posts is that economists have been arguing about simple accounting identities for 80 years without making any progress. The interesting question for me is WHY does this happen?<br /><br />I asked David and his readers what economists mean SPECIFICALLY by the term “saving” in the identity<br /><br />Investment + Consumption = Consumption + Saving<br /><br />The answer I was given is that different economists have different definitions of “saving”. So we have an identity which is presumed to hold even if economists use their own definition of one of the terms!! Perhaps that explains 80 years of fruitless debate.<br /><br />I suspect that this happens because economists discuss concepts in the abstract and often seem to have no idea of how to tie the concepts explicitly to examples in the real world.<br /><br />Another example. Economists appear to think of all four terms in the Keynes’ identity above as though they represent “money”. In fact, you can use some simple examples in a toy economy to show that “investment” is not money. Investment is a valuation of something that is purchased with money.<br /><br />For example, if a car manufacturing business buys raw materials for five cars, labour for the manufacturing of five cars, and some overheads, and then manufactures five cars, then it has an investment in five cars. The valuation it places on the five cars is the thing that belongs in Keynes’ identity.<br /><br />This is, of course, why I = S. I represents a valuation of the cars. S represents the money that the car manufacturer spent on the car. The business’s spending became someone else’s income and, in the absence of any further spending, was added to their saving. (This assumes that the business values the cars based on the costs incurred in their manufacture, but that is standard practice).<br /><br />[I have a Google spreadsheet which shows how this works and explains some basic accounting concepts. If anyone is interested, I can publish the spreadsheet and provide a link].<br /><br />At least “saving” and “investment” are real things. Economists also use concepts which are just made-up. “Representative agents” don’t exist. However, the concept suggests that the economy is made up only of average people. Average people are not unequal to other average people. Average people don’t build up debt with other average people. This is my summary of a talk by Joseph Stiglitz I once listened to on YouTube. The use of the concept of “representative agents” in thinking about the economy basically precludes discussion of inequality and private-sector debt. Discussion of “representative agents” has a distinct right-wing bias.<br /><br />(continued)<br />Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-29506321596641509362015-12-06T09:59:05.701-08:002015-12-06T09:59:05.701-08:00Steve: “Where did that extra five pounds come from...Steve: “Where did that extra five pounds come from?”<br /><br />There was no “extra” five pounds. It is an illusion. Money was conserved under exchange. No money was created and no money was destroyed.<br /><br />When stock market prices go up, many people, including famous economists and Noah Smith, say that “money poured into the stock market”. However, that is an illusion as money is conserved under exchange. If one person buys a share for €1 then another must sell the share for €1. This is true irrespective of whether prices are going up or going down, or how many people are involved.<br /><br />As Paul Krugman says “one man’s spending is another man’s income”. In the stock market, “one man’s purchase is another man’s sale”. These statements are about the conservation of money under exchange.<br /><br />If you observe the stock market in any detail, you will see lots of bid prices and lots of ask prices. An ask price is just a price at which one particular seller is willing to sell his shares. A bid price is just a price at which one particular buyer is willing to buy shares. Different people may have wildly different bid prices and ask prices at any one moment based on different valuations of the underlying asset. The thing that is called the “stock price” is just the last price at which one bid price and one ask price were matched. Nothing more.<br /><br />Most people think of price as something concrete which is just accepted by all market participants. However, multiple bid prices and ask prices show that this is not true.<br /><br />The same model is true in prediction markets. Different people have very different views of the probability of an event occurring e.g. Hillary Clinton to become president in November 2016 (current probability 54% according to Betfair). Prediction markets have the equivalent of bid prices and ask prices. A bid price is the implied probability someone is willing to accept in order to bet in favour of an outcome. An ask price is the implied probability someone is willing to accept for betting against an outcome. In Betfair, the “current price” is normally thought of as the highest current ask price e.g. Clinton at 54%, although the last matched price is also available for inspection. This is because most people bet that an event will occur rather than that it won’t occur, so they are looking to place a bid to match with an existing ask price.<br /><br />Outside stock markets and prediction markets, haggling is the best approximation of the bid / ask divide. In some societies, haggling occurs for many products and services. In western societies, haggling occurs mostly for high value assets e.g. houses, works of art. However, there is nothing to prevent you from haggling for any product e.g. an expensive hi-fi system or even a tin of beans.<br /><br />Profit arises from a difference between valuations of the underlying assets, goods or services. There is nothing mysterious about this.<br /><br />Jason (in linked post on valuation of businesses): “The basic idea is that the market capitalization and the "book value" of companies in stock indicies (sic) has wildly diverged” <br /><br />The valuation of a business is just a price, like any other price. Only fools and economists think that stock markets have an accurate understanding of the value of a business. Any serious person who considers buying a business will conduct extensive due diligence. This is the purchaser’s way of validating the bid price. Similarly, prospective house purchasers conduct due diligence by appointing surveyors to inspect the property on their behalf. Due diligence may result in a change to the bid price or to an end to the deal.<br />Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-24794197307196721612015-12-06T09:53:12.992-08:002015-12-06T09:53:12.992-08:00Tom: "there appears to me to be a mismatch in...Tom: "there appears to me to be a mismatch in focus between the way you're looking at it and the way he's looking at it."<br /><br />Steve: “That is manifestly so. Vive la difference”<br /><br />Apologies in advance for the length of these comments but I think they are important in identifying what is wrong with almost all economic discussions.<br /><br />I agree completely with Steve’s point in the above quote. <br /><br />My background is in working in business and government, helping to solve operational problems. One of the most powerful insights into any human system, even one as small as a large business or government department, is that there are many different perspectives on the system, and that useful insights often come from unexpected places.<br /><br />For example, the personnel manager in a business will view the business through a lens of its people and organisational structure. The finance manager will view it through a lens of its costs and revenues. The CEO will have a broad but often shallow data-driven view. The shop floor worker will have a narrow but deep physical view of one part of the factory. The factory manager will think of the factory in great detail. The head office planner will think of the factory in terms of a couple of equations in a mathematical model. A customer will think of the business in terms of its products. <br /><br />Which of these people has the “correct” way of understanding and analysing the business? Even to ask this question shows that it is an absurd proposition. The reality is that each person has a valid perspective and that businesses succeed by blending many perspectives rather than relying on any one of them.<br /><br />This is also true at a macro level. If an alien visited earth and studied our societies, he would observe that most of our successful institutions blend many perspectives, and that these institutions are better than any alternatives which rely on a single perspective.<br /><br />Markets succeed best when suppliers are forced to compete for the attention of customers. Apple may have more specialist knowledge of the internal workings of tablet computers than anyone else. However, it doesn’t get to decide which tablet computers we buy. Everyone else in society is allowed to pass judgement on Apple’s computers. Even economists are allowed to buy tablet computers and pass judgement on Apple despite the fact that most of them may know little or nothing about computer design.<br /><br />Governments succeed best when politicians are forced to compete for the attention of voters. Barack Obama doesn’t get to pronounce himself president. Everyone else in society is allowed to pass judgement. Even physicists are allowed to vote despite the fact that most of them may know little or nothing about almost everything from foreign policy to agriculture subsidies.<br /><br />Lawyers are not allowed to pass judgement on their own arguments. Juries pass judgement on the arguments. Even people like me are allowed to sit on juries despite the fact that most of us may know little or nothing about the law.<br /><br />I would argue that the use of multiple perspectives to understand complex human systems and problems is the single most important underlying principle of social design.<br /><br />When Jason says of me<br /><br />“I think you've confused a symmetry transformation that is a property of equilibrium at an instant in time … with a non-equilibrium process”<br /><br />all he is saying is that my perspective of the economy is different from his perspective. I might equally say that he has confused a non-equilibrium process with a symmetry transformation (if I knew what a symmetry transformation was).<br />Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-65641929176032429732015-12-05T17:33:42.931-08:002015-12-05T17:33:42.931-08:00In case anybody's interested, here's a cal...In case anybody's interested, <a href="http://www.had2know.com/academics/integer-partition-calculator.html" rel="nofollow">here's a calculator for it.</a>Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-70369464867854234852015-12-05T16:39:36.453-08:002015-12-05T16:39:36.453-08:00Yes, k must be 2 in that case unless you change th...Yes, k must be 2 in that case unless you change the coefficient. I forgot the (k-1) piece in the initial writing and went back and put it in ...<br /><br />42 is the number of integer partitions of 10<br /><br />10 = 10<br />10 = 1 + 9<br />10 = 2 + 8, 1 + 1 + 8<br /><br />...<br /><br />etcJason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-23642171102402365812015-12-05T16:35:00.687-08:002015-12-05T16:35:00.687-08:00Jason, could you briefly tell us how you calculate...Jason, could you briefly tell us how you calculate 42 allocations with 10 sheep?Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-75957622195924533152015-12-05T16:28:45.782-08:002015-12-05T16:28:45.782-08:00Very interesting comment BTW! It makes it more con...Very interesting comment BTW! It makes it more concrete.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-36940888917410652502015-12-05T16:23:15.641-08:002015-12-05T16:23:15.641-08:00Jason, you write:
"10 € = (10 €) (k-1) (S/10...Jason, you write:<br /><br />"10 € = (10 €) (k-1) (S/10)ᵏ⁻¹ if S = 10"<br /><br />k = 2 there though, else it doesn't work, right? If we only know that k > 1, then it reduces to<br /><br />10 € = (10 €) (k-1) <br /><br />so k must be 2.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-26471094378878576532015-12-05T15:09:38.150-08:002015-12-05T15:09:38.150-08:00See below for the €5 ...See below for the €5 ...Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-40768401125193617982015-12-05T15:07:07.855-08:002015-12-05T15:07:07.855-08:00Note these are related:
Why you can't use acc...Note these are related:<br /><br />Why you can't use accounting to understand total value of a company<br /><a href="http://informationtransfereconomics.blogspot.com/2015/04/solving-dark-matter-problem.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2015/04/solving-dark-matter-problem.html</a><br /><br />Thermodynamic economic potentials (the entropy TS term), and macro is more than the sum of micro:<br /><a href="http://informationtransfereconomics.blogspot.com/2015/04/economic-potentials-or-how-to-define.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2015/04/economic-potentials-or-how-to-define.html</a><br /><a href="http://informationtransfereconomics.blogspot.com/2015/05/equilibrium-in-economic-potential.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2015/05/equilibrium-in-economic-potential.html</a><br /><a href="http://informationtransfereconomics.blogspot.com/2015/05/cobb-and-douglas-didnt-have-changing.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2015/05/cobb-and-douglas-didnt-have-changing.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-91804481744485879712015-12-05T15:01:51.585-08:002015-12-05T15:01:51.585-08:00II.
We are in information equilibrium:
I(D) = I(...II.<br /><br />We are in information equilibrium:<br /><br />I(D) = I(S)<br /><br />In this case the €15 and the €5 profit represent economic growth and/or inflation.<br /><br />The general equilibrium solution to the information equilibrium condition<br /><br />P = dD/dS = k D/S<br /><br />is<br /><br />log D ~ k log S<br /><br />log P ~ (k - 1) log S<br /><br />The k is called the information transfer index and represents a bit of that entropy piece. If k = 1, then there is no profit because<br /><br />log P ~ (k - 1) log S = 0<br /><br />So P ~ 1 (i.e. is constant). You always buy and sell sheep for €10. The existence of profit (in information equilibrium) depends on k > 1. For k > 1, the price of sheep increases with the supply because<br /><br />P ~ (k-1) (S/S0)ᵏ⁻¹<br /><br />so later transactions have higher prices. In the case that Jamie describes, if the total number of sheep when the first transaction happens is S0 = 10, then:<br /><br />10 € = (10 €) (k-1) (S/10)ᵏ⁻¹ if S = 10<br /><br />15 € = (10 €) (k-1) (S/10)ᵏ⁻¹ if S = 15 and k = 2<br /><br />15 € = (10 €) (k-1) (S/10)ᵏ⁻¹ if S = 90 and k = 1.5<br /><br />What has happened is that the extra information in the probability distribution of 15 sheep (or 90 sheep) relative to 10 sheep means there is more information in determining the allocation of a single sheep -- more information = higher price.<br /><br />Aside: there are 176 different allocations of 15 sheep versus 42 allocations of 10 sheep. Assuming a uniform distribution over the allocations, we need 7.5 bits to specify an allocation of 15 sheep versus 5.4 bits for 10 sheep.<br /><br />In this case (information equilibrium) the symmetry principle holds because:<br /><br />D → 2 D<br />S → 2 S, then<br /><br /><br />P = d(2D)/d(2S) = k (2D)/(2S)<br /><br />P = dD/dS = k D/S<br /><br />so the price is the same if you double demand and supply, Which means the measure of the information in the different allocations (the unit of account) has the same value.<br /><br />Note you have to be careful when doing this with the equations above ... since really:<br /><br />P = (k-1) (S/S0)ᵏ⁻¹<br /><br />and taking S → 2 S means S0 → 2 S0 so that<br /><br />P = (k-1) (2S/2S0)ᵏ⁻¹ = (k-1) (S/S0)ᵏ⁻¹Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-90450445976191475082015-12-05T14:21:16.299-08:002015-12-05T14:21:16.299-08:00Let's restate the core of the question of &quo...Let's restate the core of the question of "where the €5 came from"; Jamie said:<br /><br /><i><br />If I buy two sheep from you for €10 then both the sheep and the €10 are conserved.<br /><br />If I then sell the two sheep to a third party for €15 then both the sheep and the €15 are conserved.<br /><br />Nevertheless, I have made a profit of €5.<br /><br />... Price is not conserved, and one consequence of the non-conservation of price is that I can make a profit. Profit arises BECAUSE price is not conserved.<br /></i><br /><br />There are two possible scenarios here in terms of the information framework, but in a sense in both cases they come from something that does not exist at the micro level and can't be captured by accounting: entropy. <br /><br />If I add up all the energies of each atom in a gas, I don't actually get all the sources of potential energy (forces are potential energy gradients, or flows if you will). There is a term in the thermodynamic potential T*S (temperature times entropy). TS = 0 for each atom individually, and only collectively do they have a nonzero TS term. Entropy and information are intimately connected, so in the information framework, ecomomic output is all of the goods and services -- plus a bit from "economic entropy". That's where the €5 comes from and it can never be captured by accounting at the micro level.<br /><br />Here are the two specific mechanisms ... <br /><br />I.<br /><br />You are not in an (information) equilibrium (and markets aren't functioning well). Information equilibrium is the maximum entropy state, but we're not there. We have:<br /><br />I(D) > I(S)<br /><br />where D is demand for sheep and S is supply of sheep. This is non-ideal information transfer and information is lost in the market. In this case<br /><br />P1 < P2 < P*<br /><br />where P1 is the observed price €10 and, P2 is the observed price €15, and P* is the ideal price of say €40.<br /><br />In this case, there are sufficient sheep and demand (and Euros) to sustain this market at a price of €40, but something has gone wrong. I attribute this to "coordination", but bad coordination. Too many people are coordinating their plans to sell sheep (a market panic). In this case, any price P < P* can be realized (they're all part of the available state space). It takes less information to specify a market state where everyone is panicking than one where everyone's actions are unpredicatble.<br /><br />In this case, the symmetry/conservation law does not hold because I(D) > I(S); the symmetry/conservation law is a property of I(D) = I(S).<br /><br />So in this case, the €5 profit comes from pushing the market from I(D) > I(S) towards I(D) = I(S). When a market is ideal, all goods and services traded in it are worth more.<br /><br />Continued with II ...Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-43007447524458224892015-12-05T12:33:13.230-08:002015-12-05T12:33:13.230-08:00One thing about Jason: he's one of the most pa...One thing about Jason: he's one of the most patient and most willing-to-answer-questions macro bloggers out there. Like he wrote above: on any of his posts... going back to the very beginning. Don't be shy! (you'll see that Jason answered my questions this year -- two years after he originally wrote some of the posts!)Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-34744146542505380972015-12-05T10:57:01.957-08:002015-12-05T10:57:01.957-08:00Just to say my link was about the profit mystery. ...Just to say my link was about the profit mystery. The graph Jason discusses was just a stylized illustration to discuss that mystery.<br /><br />Still would love to hear discussion here:<br /><br />Where did that extra five pounds come from?Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-18379611626986363452015-12-05T08:03:46.318-08:002015-12-05T08:03:46.318-08:00"Pointing to more articles, btw, has limited ..."Pointing to more articles, btw, has limited value for me; the reading list is already very long -- will get to it as time and inclinations allow"<br /><br />Lol... I know how you feel, especially at first. Jason is a fountainhead of new posts. Just so you know, he has <a href="http://informationtransfereconomics.blogspot.com/2015/12/limit-cycles-versus-avalanches.html" rel="nofollow">yet another one up,</a> this time looking at Steve Keen's work (on your recommendation).Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-9113050924331291102015-12-05T06:11:28.094-08:002015-12-05T06:11:28.094-08:00Oops I meant Jamie and I. Jason feel free to edit ...Oops I meant Jamie and I. Jason feel free to edit that if you wish.Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-83805336110863949532015-12-05T06:10:30.567-08:002015-12-05T06:10:30.567-08:00re: Tom's (removed) comment:
"there app...re: Tom's (removed) comment: <br /><br />"there appears to me to be a mismatch in focus between the way you're looking at it and the way he's looking at it."<br /><br />That is manifestly so. Vive la difference. <br /><br />Unfortunately I am some ways from being able to say anything useful about Jason's paradigm. Will work on it. (Pointing to more articles, btw, has limited value for me; the reading list is already very long -- will get to it as time and inclinations allow...)<br /><br />Meanwhile, wondering if anyone sees interesting ways that Jason's paradigm informs/challenges/whatevers the "accounting view" within which Tom and I seem to be more comfortable and competent.Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-60941443911352391342015-12-05T03:15:11.352-08:002015-12-05T03:15:11.352-08:00Jason, Steve, Tom,
Thanks for your replies. I ha...Jason, Steve, Tom,<br /><br />Thanks for your replies. I have read them and want to comment further as this is an interesting area. I am particularly interested in Steve's comments. I will give a fuller reply tomorrow (UK time). Jamienoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-79800551800693049912015-12-04T17:07:25.338-08:002015-12-04T17:07:25.338-08:00Jamie & Steve,
I didn't see where Jason l...Jamie & Steve,<br /><br />I didn't see where Jason left a link to his latest post which addresses some of your questions. <a href="http://informationtransfereconomics.blogspot.com/2015/12/supply-demand-stock-flow.html" rel="nofollow">Here it is,</a> in case you missed it.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-47162658204894865512015-12-04T16:50:30.640-08:002015-12-04T16:50:30.640-08:00"I was trying to avoid being too weird to get..."I was trying to avoid being too weird to get published" Lol... yes, that may have earned you a place on the "crackpot watch" website... which makes me wonder... I wonder if any of the crackpots identified there actually don't deserve to be there?<br /><br />Steve & Jamie, I would recommend the following link in the right hand column:<br /><br /><a href="http://arxiv.org/abs/0905.0610" rel="nofollow">"General information transfer model (Fielitz and Borchardt)"</a><br /><br />It's under the heading "Information transfer economics for beginners." There's some good examples in there of using the principle of information equilibrium for physics problems (like to find an expression for gravitational force and to find the ideal gas law). There are several versions of the paper with different examples. The math doesn't go beyond basic calculus and probability theory. I found it helpful background knowledge while digesting Jason's paper.Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-36799351045148230362015-12-04T16:17:50.389-08:002015-12-04T16:17:50.389-08:00Quick one:
You said:
Next: correct. The "mo...Quick one:<br /><br />You said:<br /><br /><i>Next: correct. The "money stock," however defined and measured, has an at-best iffy correlation to prices/inflation. "Double the number of sheep, and the number of dollars, and price is unchanged" doesn't play out very well in the lab.</i><br /><br />I agree!<br /><br />But like how a thermodynamic macrostate breaks the underlying time symmetry of physics (the arrow of time), which allows useful energy to dissipate into heat, I think the conformal symmetry related to money is broken by the macroeconomy.<br /><br />In this ensemble of markets:<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2014/06/the-macroeconomic-partition-function.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2014/06/the-macroeconomic-partition-function.html</a><br /><br />The individual markets all obey the conformal symmetry (homogeneity of degree zero), but the macro state does not. The macrostate manifests as an apparent changing information transfer index ... and economic growth that is related to the second law of thermodynamics and the arrow of time:<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2015/11/internal-devaluation-and-fluctuation.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2015/11/internal-devaluation-and-fluctuation.html</a><br /><br />[I didn't state this stuff in terms of the symmetry principle in the preprint paper since I was trying to avoid being too weird to get published ....]Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.com