Tuesday, April 12, 2016

Is information equilibrium disruptive?

Matthew Yglesias has a good article at Vox on how Tesla is not really disruptive in the true sense of the term. In reading the very good definition of disruptive, I thought -- hey isn't information equilibrium disruptive to economic theory? Here's Yglesias:
The core idea of disruptive innovation is that successful companies tend to become obsessed with getting better and better at serving their existing high-margin customers. 
Those customers provide the profits, so they get studied closely and provided with more and more services and features to ensure their continued loyalty. Eventually a new competing product comes into the marketplace that is generally cheaper, simpler, and, in an abstract sense, inferior. This is the disruptor. What makes it disruptive is that even though the incumbent company could, technically, copy the disruptive new product, it can't bring itself to actually do so, because that would involve undercutting its existing profit margins. 
Instead, the tendency is for the incumbent to reassure itself, accurately, that the new product simply does not meet the needs of the most valuable customers and to continue focusing on them. 
The problem for incumbents is that over time the new disruptive product tends to get better and better, eating away at a bigger and bigger share of the incumbent's market share. At the same time, because the disruptive new product was designed from the beginning to be cheaper, simpler, and lower-margin it manages to enlarge the market far beyond its previous size.
Let's tell a story of disruption in the free market of ideas.

Economic theory is obsessed with better serving their high status customers: the political elite. To that end, they've gotten very good at producing models that seem very rigorous and serve their interests from banks (controlling the economy via monetary policy) to politicians (fiscal policy that involves giveaways to corporations or people depending on the political persuasion).

A new "competing" theory (information equilibrium) enters the marketplace of ideas that is simpler and in an abstract sense inferior to existing economic models. In the information transfer framework there literally is just one equation, it considers most macro aggregate movements to be noise, and it gives up on understanding economic agents.

Of course economics Phd's could take easily take it up, but that could undercut their existing status relationships and institutions.

Since the information equilibrium model is so easy to use (again, literally one equation), it enlarges the market of people capable of performing economic analyses. Where previously you needed a Phd in economics to set up a DSGE model (unless you are John Handley), now any high school graduate with a bit of calculus can join in.

So is it disruptive? Well, information equilibrium hasn't disrupted anything yet. Will it be disruptive? Maybe!

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