tag:blogger.com,1999:blog-6837159629100463303.post2806738960594819425..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: The price adjustment equation and information equilibriumJason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-6837159629100463303.post-6845370139135590552017-04-22T11:19:13.715-07:002017-04-22T11:19:13.715-07:00I think this is another case where the "maxim...I think this is another case where the "maximum entropy" view helps. The price adjustment equation that I derived from information equilibrium above does not hold for a single firm or good, but only over an ensemble of goods or, say, a whole industry. Individual firms might not change their price at all. However, the <b><i>average</i></b> cost of a "smart phone" (Android/iOS) will adjust based on global supply and demand.<br /><br />I am not sure, but I think Ian's example has one corn firm and one iron firm. The information equilibrium picture would have one corn industry (with many firms) and one iron industry (again, with many firms).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-67943495650320377242017-04-22T11:13:52.309-07:002017-04-22T11:13:52.309-07:00Also, I always refer to the temporal picture if I&...Also, I always refer to the temporal picture if I'm ever asked about how I know information flows from "demand" to "supply" (which tells us things like the observed price being less than the "ideal" price instead of greater). Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-16008849514793390842017-04-22T11:10:57.389-07:002017-04-22T11:10:57.389-07:00I haven't abandoned it at all. It just has lim...I haven't abandoned it at all. It just has limited consequences for the mathematics since I generally deal with continuous time so it is infinitesimally in the future.<br /><br />You're probably right, though, in terms of explaining things. It probably makes much more sense for most people to think of the "demand distribution" as the "future distribution of supply" that can sometimes be in error (non-ideal information transfer).<br /><br />I think that picture helps understand the "expectations operators $E_{t}$" (as I discuss <a href="http://informationtransfereconomics.blogspot.com/2016/08/dsge-part-3-stochastic-interlude.html" rel="nofollow">here</a>).<br /><br />In a sense, you can think of this as an example akin to the "<a href="https://en.wikipedia.org/wiki/Heisenberg_picture" rel="nofollow">Heisenberg picture</a>" vs "<a href="https://en.wikipedia.org/wiki/Schr%C3%B6dinger_picture" rel="nofollow">Schrodinger picture</a>" in quantum mechanics. Both representations are equally valid. The first attributes the time dependence to the quantum operators, the second to the quantum states. Both are actually equivalent (just like the temporal flow of info vs "spatial" flow of info), but sometimes one is more intuitive than the other. You are saying the temporal one is more intuitive, and I think you've convinced me that is probably true.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-71711745626155148392017-04-18T04:46:39.645-07:002017-04-18T04:46:39.645-07:00Yes, we have talked about information transfer fro...Yes, we have talked about information transfer from the future previously but my perception is that you have abandonded that idea.<br /><br />If I were marketing ITE I would put information transfer from the future right at the heart of the matter. Markets are not perfect because they rely on forecasting the future and we can never know the future apart from extremely simple systems such as planets orbiting stars.<br /><br />That is why risk and uncertainty should also be central to economics. They arise because we can't forecast the future accurately. Nevertheless, we must make decisions without knowing the future. That is why capitalism values the people who are prepared to make decisions about the future and accept the ensuing risk.Jamiehttps://www.blogger.com/profile/03489060325921337036noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-55627530419501434662017-04-10T15:35:15.691-07:002017-04-10T15:35:15.691-07:00A quick note before a more detailed response; the ...A quick note before a more detailed response; the information equilibrium model can easily be interpreted as information transfer from the future to the present:<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2014/12/how-money-transfers-information-from.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2014/12/how-money-transfers-information-from.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-41889519678187093322017-04-10T09:32:14.758-07:002017-04-10T09:32:14.758-07:00Second, I don’t agree with Ian’s view of price adj...Second, I don’t agree with Ian’s view of price adjustment which is what you are exploring in detail here. Ian identifies the problem himself when he says (in the Twitter quote): “One of the problems when specifying dynamic adjustment is there are too many reasonable equational forms”.<br /><br />When economists talk about a business’s expectations, they mostly mean its demand forecast. The demand forecast drives supply. However, businesses also expect that their own expectations will be wrong. Hence, they expect that they will have to adjust their plans as they are being implemented. One of the key characteristics of effective businesses is their agility in dealing with unexpected events. These events could be anything e.g. a fire at a factory; a supply problem with raw materials; a new product from a competitor; as well as a deviation from forecast demand.<br /><br />Businesses can react to operational problems in many ways and over different timescales.<br /><br />Some businesses will indeed adjust prices to deal with unexpected inventory issues. For example, hotels will normally reduce the price of tonight’s non-booked rooms as they will not be able to sell tonight’s rooms tomorrow for any price at all. Airlines also cannot sell a seat for today’s flights tomorrow. However, they tend to overbook flights to compensate, and have various techniques for solving the resulting inventory issues.<br /><br />http://www.cnbc.com/2017/04/10/video-surfaces-of-man-being-dragged-from-overbooked-united-flight.html<br /><br />In these cases, unsold inventory immediately becomes waste so adjusting the price, as suggested by Ian, or paying passengers to take another flight, can be viable options. However, reducing price below cost means taking a loss, so it is always a last resort and viable only as an exception.<br /><br />Other businesses will adjust future production. When Apple introduces a new product, demand may be very high. However, Apple does not increase the price until demand reduces to supply. Instead it increases production and fulfils all demand, albeit with a time delay.<br /><br />Yet further businesses re-engineer their entire business models to deliver product only where there is actual demand. This prevents inventory problems from arising at all. Typically, this happens in markets where the product is expensive and / or customised e.g. cars, where unsold inventory represents a very high unwanted cost and risk. Make-to-order processes often depend on sophisticated computer systems which integrate the whole supply chain, so this is a good example of how businesses evolve more sophisticated mechanisms over time for dealing with unexpected events.<br /><br />The problem with including this type of realistic logic in a mathematical model is that the model would need to be very complex to approximate reality. Even then, it would need to change as businesses evolve more sophisticated adjustment mechanisms. This is the same problem as with the Post-Keynesian stock-flow consistent models, where realism also results in complex and fragile models. On the other hand, including some adjustment processes, but not others, would be arbitrary but neither simple nor realistic. <br /><br />I prefer your simple approach to forecasting as it avoids these problems. Ian’s material (and mine) is better at identifying underlying logic and complexities. It is too complex to model mathematically for macro forecasting. On the other hand, I think it is better in terms of using underlying logic to explain economics to non-specialists, to link micro and macro, and to suggest possible policy proposals.<br />Jamiehttps://www.blogger.com/profile/03489060325921337036noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-8022857589605613492017-04-10T09:29:14.730-07:002017-04-10T09:29:14.730-07:00Very interesting as always. I’ve been reading Ian...Very interesting as always. I’ve been reading Ian Wright’s blog and I hoped that you would comment on what he has been writing. I have two main comments which I think are relevant to your blog: one where I agree with Ian, and one where I prefer your approach to forecasting.<br /><br />First, I agree with Ian’s focus on what he calls ‘historical time’. In GDP-related markets, decisions on supply and demand are taken at different times. Capitalism mostly requires suppliers (entrepreneurs) to make decisions to build factories (strategic supply decisions) and deliver products to the market (operational supply decisions) BEFORE the demand appears in the market. That’s why risk is one of the most important factors in capitalism and why entrepreneurs demand profit as compensation for taking risk. Actual demand mostly just matches against the supply that has already been produced e.g. you cannot refuel your car at a service station unless the supplier has already completed all the processes required to get the fuel to the pump.<br /><br />This time imbalance forces suppliers to adopt a process in each planning cycle as follows:<br /><br />Forecast demand (often using a mathematical model)<br /><br />Plan supply (based on demand forecast, often with another mathematical model)<br /><br />Deliver actual supply (based on supply plan)<br /><br />Match demand (based on actual demand and actual supply).<br /><br />Suppliers can then assess their effectiveness in meeting their own supply plans by comparing planned supply and actual supply. More importantly for you, they can assess their effectiveness at forecasting demand by comparing forecast demand and actual demand. <br /><br />It is more intuitive to me to see your information transfer concept in terms of forecast demand and actual demand i.e. the information transfer is from the future to the present. I have said this before but I think it is also consistent with what Ian is saying.<br /><br />This also makes it easier to think about information transfer in asset markets and so-called prediction markets. In those markets, the same people often form both supply and demand, so it doesn’t make sense to me to think about information transfer between demand and supply. However, the participants in these markets are also trying to forecast the future e.g. the future profitability of a business or the winner of a sports event.<br /><br />In all these markets, information transfer is from the future to the present, and is imperfect as unexpected events happen all the time. <br /><br />I think this is also consistent with my limited understanding of the Generative Adversarial Networks material, where the generated distribution is the forecast demand, and the real distribution is the actual demand. It’s also consistent with the slide pack I published last year based on Marx / Keynes / macro circuits.<br /><br />The prime reason I would identify as a Keynesian (if I had to give myself one of these labels) is that Keynes talked about economics as a participant in markets rather than as an observer. He tried to understand the essential mechanics of the economy as it unfolds in historical time rather than via backward-looking summary totals where historical time, risk and uncertainty are abolished as in, say, Market Monetarism. <br /><br />(Cont’d)<br />Jamiehttps://www.blogger.com/profile/03489060325921337036noreply@blogger.com