Prices Re-valued as Information: Circuit Elements

The Price System as a “System of Telecommunications”......

A. Tustin: Economic “Control” Mechanisms: Economic Circuits......

“Passive” Economic Circuit Analogies......

Terms of the “Economic Circuit” Analogy......

Transistor ‘Gain’ and Value Addition......

Marx: Capital and Commodity Circuits......

References......

Prices Re-valued as Information: Circuit Elements

The Price System as a “System of Telecommunications”

F.A. von Hayek, one of the champions of the free market system, wrote a paper in 1945 on The Use of Knowledge in Society. It is worth concentrating on a few passages from this paper, since it summarises a vision of the role of markets – and of the price system in particular – as a “system of telecommunications”. These considerations serve as a prelude to a reading of a much less well-known author: Arnold Tustin wrote notes for his work The Mechanism of Economic Systems shortly after the publication of von Hayek’s highly readable paper. In the present context of emphasis on metaphors and analogies, his view of markets as essentially a system for communicating information is an excellent starting point. Von Hayek criticizes the tendency to construct centrally-planned economies, and emphasises the role of the individual:

“What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences and if we command complete knowledge of available means, the problem which remains is purely one of logic … This, however, is emphatically not the economic problem which society faces … The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” [von Hayek, p. 29]

In fact, von Hayek peremptorily dismisses the very idea of a “single mind” ever possessing all the necessary economic data necessary for exercising an “economic calculus” capable of assuring a rational economic order. In the light of recent progress in the power of information technology networks, it would be interesting to establish the extent to which von Hayek’s criticism is merely practical and empirical, as opposed to theoretical – or political. We shall see, in fact, that he concedes later a “conceptual possibility” for the “single mind” hypothesis. In any case, he goes on, significantly, to touch on the question of analogies between economic thought and natural scientific models:

“It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.” [von Hayek, p. 30]

Having spelled out the distinction between “scientific knowledge”, seen as a kind of public knowledge “in the sense of knowledge of general rules” – and “the knowledge of the particular circumstances of time and space”, seen as privately possessed, local knowledge, he is ready to introduce “the marvel” of the price system:

“The mere fact that there is one price for any commodity – or rather that local prices are connected in a manner determined by the cost of transport, etc. – brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.”

“We must look at the price system as such a mechanism for communicating information if we want to understand its real function – a function which, of course, it fulfils less perfectly as prices grow more rigid … The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action …” [von Hayek, p. 38]

The author has no qualms about the phrase “the right action”. Even if he has denied the economist a privileged role – as the ‘single mind’ observing and possibly planning the economy – it is taken as common sense that there is nevertheless a right action towards the realisation of which the individual participants have to be guided. No doubt this right action is simply that of the “correct” allocation of scarce resources. Given this absolutist position, with its certainty about the objective, final causes of economic behaviour, the price system will indeed appear marvellous. The historical materialist understanding of the price system is clearly foreign -–or repugnant – to von Hayek. His historical analysis is quite simple:

“… man has been able to develop that division of labour on which our civilization is based because he happened to stumble upon a method which made it possible.” [von Hayek, p40]

But to return to the previous quotation, which we consider to be central to the present discussion, von Hayek continues:

“… In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.” [von Hayek p. 38]

More than a metaphor. This is a strong statement. One wonders what von Hayek would make of present-day scenes of international stock exchanges, with operators watching banks of video-terminal “dials”, two or three telephones to hand … And the British engineer, Tustin must have had a similar metaphor in mind, when writing about “Control Mechanisms” for the economy.

Von Hayek reminds us, finally, of the political dimension of this discussion:

“… the problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dipense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.” [von Hayek, p. 39]

Gramsci, for one, would have appreciated the significance of von Hayek’s concepts of “freedom” and “free choice”. It is indispensable, in an advanced capitalist society, that crude force and “having to tell [the masses] what to do” be replaced by “inducements” to “do the desirable things”. It is also indispensable that those “desirable things” be beyond question: that they be common sense. The marvel is not that of man having “stumbled upon” the price system. The price system is one of the ways which a particular society has developed – in a very human, secular process – to govern the behaviour of its “participating individuals”. The marvel is that so little is required to “induce” these ignorant individuals – “how little the individual participants need to know” … “in order to be able to take the right action.”

As a more light-hearted, but pertinent comment on this concept of markets, or the price system, being essentially mechanisms for transmitting information, the following excerpt is taken from a highly recommended 1977 essay by Hammond on The Core and Equilibrium through the Looking Glass:

“Humpty Dumpty had a great fall

‘When I use a word,’ Humpty Dumpty said, ‘it means just what I choose it to mean – neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

(from Alice’s conversation with Humpty Dumpty, in Ch. VI, ‘Humpty Dumpty’ of Lewis Carroll, Through the Looking Glass.)

‘The definition which I want to adopt is the following: an economy is in equilibrium when it generates messages which do not cause agents to change the theories they hold or the policies which they pursue.’

(from p.25 of F.H. Hahn On the Notion of Equilibrium in Economics (An Inaugural Lecture), Cambridge University Press, 1973.)” [Hammond, p. 478]

This definition of equilibrium, significantly different from the Newtonian convention discussed earlier, has to be considered in the present context of electronic circuits and information systems. The metaphor, here, of an economy which generates messages, is to be taken very seriously indeed. The mathematical physicist, it must be said, has no problem about applying his or her analysis of systems of differential equations and stability conditions to mechanical or to electronic phenomena. They are analogous – in a mathematically formal sense.

Does the economist postulate a similar, formal mathematical analogy between mechanical or electronic systems and economic systems?

A 2000 working paper by Cloutier and Rowley, entitled ‘The Emergence of Simulation in Economic Theorizing and Challenges to Methodological Standards’ refers to three periods of interest, starting from the 1920’s: we shall take a closer look at what they call “the transitional period”:

… the transitional period of the 1950s and 1960s is associated with a revival of interest in nonlinear models and their practical representation, the arrival of new interests in cybernetics and adaptive processes, a short-lived development of feedback policies and modal synthesis which borrowed various practical (rather than `optimal') notions from control engineers.

The fact of this being “a short-lived development” is itself interesting. Presumably the emphasis on practical, numerical results – as opposed to a more philosophical and theoretical consideration of the metaphorical basis of such models – led to this approach being abandoned under the tidal wave of the “third period” of digital computing techniques.

A. Tustin: Economic “Control” Mechanisms: Economic Circuits

“The topic that I have attempted to explore is the usefulness of these notions of the engineer, about feeds-back, harmonic components and the like, in application to the analogous problems of economic fluctuation and economic regulation.” [Tustin, p. v]

Arnold Tustin prefaced his book on The Mechanism of Economic Systems with this succinct summary of intent. The book represents a significant pioneering work in a new field. The electronics era was coming of age, in the late 1940’s and early 1950’s – and the time was ripe for noting “the coincidences” between some of the more popularised Keynsian control proposals, and control theory in electronic engineering. We find, for example, the following in a 1973 conference on Dynamic Modeling and Control of National Economies:

“Economic Model for Stabilization:

After the economic depression in the 1930’s Keynes argued that the capitalistic economy cannot guarantee a happy and stable situation in which everyone is employed (i.e. full employment) [sic] and that such an economy is constantly walking on a tightrope between inflation and recession, and between high degrees of unemployment. Therefore the government economic policy (control variable) must operate in such a way so as to guarantee stability in the system. Keynes’ prescriptions were in effect calling for the analysis of the economic system as a control system with government economic policies as the control. It was Arnold Tustin (1955), a British Electrical Engineer, who showed that in its simplest form the Keynesian system is analogous to a partially self-exciting generator and that many variations of Keynesian theory can be formulated as direct analogs of electrical systems. Tustin’s work as well as that of A.W. Phillips later, generated an increasing interest in the application of control system theory to the problem of stability of economic systems.” [Narasimham]

Tustin himself prefaces his book by declaring that the original notes were written in 1946 – although he does not refer to von Hayek’s 1945 paper – and that the fact of its having been published as late as 1953 is justified by his belief that:

“ … the analysis of engineering systems and the understanding of economic structure have advanced since then, and the time is now more ripe to bring these topics into a potentially fruitful marriage … The ‘theory of control systems’ in engineering is now a well-developed subject, making use of some remarkably powerful concepts and methods of analysis, especially in relation to problems of stabilization and the prevention of unwanted oscillations.” [Tustin, p. v]

He considers the analogy to be of practical importance, and explicitly raises

“… the consideration of a further possibility, namely that of constructing physical systems that are analogues of the economic system, and of observing and recording their behaviour.” [Tustin, p. v]

It is also interesting to note his final acknowledgement:

“I have been fortunate … to have had the advice and assistance of professional economists … a particular debt to Dr. F.H. Hahn … who read the first draft and made many valuable suggestions.

The University of Birmingham ARNOLD TUSTIN

September 1953.” [Tustin, p. v]

Let us now focus on Tustin’s comments about …

“ … the remarkable analogy that exists between economic systems and certain physical systems.”

He states his political position fairly clearly:

“The nature of the instability of an unregulated free-enterprise system is only now beginning to be clearly understood. Perhaps the degree of understanding already attained ensures that the grosser shortcomings have gone for ever, and to that extent the conflict between Capitalism and Communism is about issues that belong to the past. It may now be too late. The gods must smile to note how different the state of the world might have been if the progress of economic thought of the last twenty years had been advanced by even ten years.”

“The possibility of a stable economic life with full utilization of our resources is still not sufficiently assured, and it is extremely important that it should be so assured, and that the whole world should accept this as a fact.”

“The work that is being done in econometrics is massive, and undaunted by mathematical difficulties, but it appears, at any rate as viewed from outside, to be unclear as to its aim.”

…

“The striking parallel between the economic models that are currently under discussion and some engineering systems suggests the hope that in some way the rapid progress in the development of the theory and practice of automatic control in the world of engineering may contribute to the solution of the economic problems.” [Tustin, p. 1]

While not wishing to dwell on the algebraic details, it is interesting to read a short extract from Keynes’ work, alongside that of Tustin:

“… Let us define, then, dCw/dYw as the marginal propensity to consume. This quantity is of considerable importance, because it tells us how the next increment of output will have to be divided between consumption and investment. For Yw = Cw + Iw , where Cw and Iw are the increments of consumption and investment; so that we can write

Yw = k Iw where 1 – 1/k is equal to the marginal propensity to consume.”

“Let us call k the investment multiplier.” [Keynes, p. 115]

Tustin chooses his k from the following description of an electrical generator:

“An electrical generator that is partly but not wholly self-exciting satisfies relationships identical in form with those of Keynes’ model. The feed-back is the excitation produced by the self-exciting winding if unit resultant excitation is applied to the generator. Let this ratio be k, which is positive and constant over the range of linear behaviour. Then if the separate excitation is A the resultant or total excitation is A. (1 / 1-k).”

“The separate excitation of the dynamo corresponds with the independently determined investment in the economic model, and the total excitation with income. Perhaps in this electrical age, the conventional metaphor of ‘priming the pump’ might be dropped in favour of ‘exciting the dynamo’.” [Tustin, p. 8]

…

“… simulators set up the required system of interdependences, usually between electrical potentials or voltages as variables, by means of valve-amplifiers and electrical networks. Since the voltage across a capacitance is proportional to the integral of a current, that across an inductance to the first derivative of a current, and that across a resistor to the current itself, it is possible to arrange a network of electrical elements, with amplifiers and feeds-back where necessary, so that a given linear differential equation is caused to relate an ’output’ voltage to an ’input’ voltage. Thus a given linear system of interdependences can be simulated, either directly or in any convenient transformation. If non-linear relationships are required there is no universally applicable simple device, but there do exist a great variety of non-linear elements with non-linear characteristics that are known and to some extent; adjustable. These include non-linear resistors ... and the characteristic curves of thermionic valves, of rectifiers and discharge vessels and of magnetic materials. Limits may be set by the use of neon tubes that become conducting when a certain voltage is exceeded, or by relays, and so on.”

We may note in passing that subsequent development of transistor theory, and the technological revolution associated with their manufacture and integration in increasingly miniaturised and sophisticated applications, would immediately recommend the transistor as a privileged member of this class of non-linear devices. The following use of language, in fact, reminds one of the ’region of operation’ of a transistor:

”Once a full-employment policy has been adopted ... the economic ’system’ just on that account is significantly different. Its equilibrium position has been shifted to a rising curve of trend close to and following the employment ceiling. The conditions of stability about this new level are radically different because the region of operation is now within the less flexible and sharply non-linear range of employment saturation.”

This paves the way for a consideration of economies or more limited economic realities, such as shop floors being ’saturated’, or ’bottoming out’. This imagery is fairly immediate, for the electronics engineer. We shall see that the analogy may be developed, when we consider quantum mechanics, in the light of models of electrons moving in ’potential wells’, for example. Behaviour near the energy ’ceiling’, at which electrons escape from orbits around a nucleus, is different from that at more ’stable’ energy levels. Tustin was clearly not entirely ignorant of such phenomena:

”The writer, who as an engineer has spent most of his life in factories, is inclined to look at the basis for investment from a technological point of view... Consider ... the class of industrial investments only... ”The situation is one of entrepreneurs and boards of directors considering, from time to time, various ’possibilities of investment’, such as extra lathes or looms, an extension to a factory, a venture in some completely new product, and so on. It is helpful to think of these ’opportunities for investment’ as existing, in a given situation, in great number and variety, whether they are at that moment under active consideration or not. When any such possibility is considered it is assessed in respect of ’expected profitability’. One may conveniently think of all possibilities of investment as ’quanta’ that can be placed in a schedule of small ranges of expected profitability according to these assessments. The placement of a given ’opportunity for investment’ on this schedule has some ’margin of uncertainty’ (a curious analogy with the case of the quanta of physics).”