Tuesday, November 25, 2014

Abstract and notes for Ignite Seattle talk

If there's a bright center of the econoblogosphere, you're at the blog that it's farthest from. I thought I'd try and do some outreach by submitting a talk to Ignite Seattle; this post is the draft abstract/outline along with some graphics to be used in the presentation. If you have any comments, let me know!


The graph that could transform economics

In 1912, Henry Norris Russell presented a graph of star color (temperature) versus luminosity at a Royal Astronomical Society meeting that inspired Arthur Eddington to come up with a theory of how stars worked while being ignorant of what made them shine -- in fact, the traditional thinking at the time was decidedly wrong. [See more here]

I've put together a graph of economic growth versus the amount of printed money based on a theory that assumes we have no idea how supply and demand works and it shows universal behavior in economies across the world. It's based on information entropy from information theory. This theory has deep implications for economic policy, and could transform how the field of economics is practiced.

Contrary to traditional economic thinking, prices in the market place do not communicate information about droughts, harvests or quality, but rather confirm that supply and demand have matched up ignorance of those factors on either side of a transaction. And this modesty -- admitting ignorance about human behavior or what factors boost economic growth -- leads us to question traditional economic thinking on subjects from Seattle's new minimum wage to how to deal with the aftermath of the financial crisis.

Information entropy and transactions. From my post here.


Outline -- talk will be based on these posts (a series of sub-minute summaries to fit within  the 5-minute limit):
I'll probably show this graph because it's awesome:


  1. Very cool and I continue to be a fan. However, I am struck that the second graph on prices above shows that the U.S. at least is rather far from your model historically. I still can't help thinking that M0 is the best measure you have for information transfer capacity of the economy, but that it is not quite what is truly going on.

    1. Hi Todd,

      If you're referring to the price level vs M0 graph above, in the model, that graph actually has a much higher variance than the NGDP vs M0 graph as seen here:


      The black dashed lines are averages (expectation values) over economies made of random markets assuming growth rates are uniformly distributed. The calculation is not intended to be a precision model, but rather an illustration of how such a simple model can incorporate the "essential economics" ... I'd still use the US model to describe the U.S. And the Japan model to describe Japan.

      If you are referring to the curve at the bottom of the post, the spikes in inflation match up with the oil crises in the 1970s which represents "coordination" so the market isn't behaving like a random ensemble of markets. In the information transfer model, that is a separate mechanism from trend inflation.

      And it's definitely true M0 doesn't capture everything ... I(S) = I(D) doesn't capture everything and sometimes I(S) < I(D) which seems to characterize market failures, financial crises and recessions.


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