Friday, September 1, 2017

Another good point: economics vs sociology

Another of @unlearningecon's good points is this:
Concerned your separation of econ and sociology amounts to 'econ works except when it doesn't, which is what you criticise in mainstream
My response to this is that I've identified a particular mechanism (correlations in state space, which cause agents to not fully explore it), so it's not as vague. The general idea was speculative in the book (I explicitly said it was), and I also made the specific speculative claim that these correlations are caused by social factors. This last part may or may not be true: there may well be "economic" reasons for correlations that don't depend on our human nature.

But another reason I probably fell down on defending this particular claim (or making it more specific) is that it is based on the mathematics of information transfer and I haven't come up with a really good explanation that doesn't rely on math. That basically means I don't understand it very well, and that's true: hence the speculation.

The idea is basically that economics is "information equilibrium" (IE) and sociology explains "non-ideal information transfer" (NIIT) (definitions here). However, IE bounds the system dynamics even if you have NIIT (via some math). The result is that sociology should cause economics to fail in a specific way. I addressed this specific question in a FAQ on my blog:
But mindless atoms don't panic ... 
While information equilibrium treats agents effectively as random "mindless atoms" (but really treats them as so complex they look random), the information transfer framework is more general. If agents didn't spontaneously correlate in state space due to human behavior (e.g. panic, groupthink), then the information transfer framework reduces to something that looks like boring standard thermodynamics. However, they do in fact panic. In terms of thermodynamics, this means that the information transfer framework is like thermodynamics, but missing a second law of thermodynamics. The "mindless atoms" will occasionally panic and huddle in a corner of the room and you have non-ideal information transfer as opposed to information equilibrium. 
There is less the information transfer framework can say about scenarios where we have non-ideal information transfer, but it still could be used to put bounds on economic variables. 
Wait. Isn't this just saying sometimes your theory applies and sometimes it doesn't? 
Yes, but in a particular way. For example, the effect of correlations (panic, groupthink) is generally negative on prices. 
Additionally, empirical data appears to show that information equilibrium is a decent description of macroeconomic variables except for a sparse subset (i.e. most of the time). That sparse subset seems to correspond to recessions. Since human behavior is one of the ways the system can fail to be in information equilibrium, this is good evidence that information equilibrium fails in exactly the way the more general information transfer framework says it should. 
In a very deep way, one can think of information equilibrium being a good approximation in the same way the Efficient Market Hypothesis (EMH) is sometimes a good approximation. Failures of the EMH seem to be correlations due to human behavior.

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