Prices Re-valued as Information: Circuit Elements *

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:

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:

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 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:

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

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:

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:

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 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

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:

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:

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

It is also interesting to note his final acknowledgement:

Let us now focus on Tustin’s comments about …

He states his political position fairly clearly:

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

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

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:

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:

This aspect of such analogies will be considered in greater detail in subsequent sections, culminating in a discussion of ’portfolio management’. In conclusion, Tustin’s real contribution should be considered to be within the tradition of Fisher, in the sense of modelling economic phenomena:

"Passive" Economic Circuit Analogies

In this same period of rapid development of electronics, other writers noted the same analogy. The following examples are taken from papers cited by Tustin.

This, in the course of a 1950 paper by Morehouse, Strotz and Horwitz in Econometrica, which opens with a clear proposal to model, literally, inventory oscillations with an "analog-computer":

The circuit diagram they use illustrates the point in a very immediate way:

In another paper published by Enke (1951) in Econometric, entitled "Equilibrium Among Spatially Separated Markets: Solution by Electric Analogue", we find:

We may note in passing that the "expensive equipment" referred to is by now a thing of the past, and the term "analogue computer" would bring a smile to the face of any present day computer scientist. Instead, digital computers do indeed approximate solutions through iterative methods which few, today, consider particularly "laborious". Thus the ANALOGY has been all but completely lost from view, in favour of the number-crunching approach.

A year later, in "Electrical Engineering", we find "An Electronic Analogue for an Economic System" by J.M. Smith and H.F. Erdley:

Indeed, little seems NOT to have been included. They make the illuminating observation that:

We could consider the following very simplistic circuit suggested by the familiar phenomenon of a household which receives its income in monthly ’impulses’:

Income is consumed by immediate, inelastic spending on necessities, and delayed, elastic spending on luxuries, with intermediate saving. The ’reactance’ to changes on luxury spending, modelled by an inductive element, simulates the phenomenon of ’habit’, or economic inertia. The ’saving’ capacity is here seen as mere hoarding: in fact the closed circuit is highly unrealistic in the sense that ’no man is an island’: real saving implies the purchase of a debt, which eventually has to be coupled to an investment circuit; the two consumption elements are necessarily coupled to other economic circuit elements, as input-incomes for the productive sectors. The point, however, is to illustrate a certain type of behaviour, taking account of the elementary ’conservation’ properties, whereby nothing is created or destroyed, and the problem of distribution appears both non-trivial and plausible. The analogy appears to ‘make sense’, at an intuitive level.

In the macroeconomics of national economies, the various ’sectors’ – denominated conventionally "wage-goods", "luxury-goods", "services", "capital-goods"; "private" and "public" – suggest more or less integrated circuits, in the context of "controls" which aim at integrating these sub-circuits into a coherent system, interfacing with similar national-economic circuits, through coupling systems representing trade, international financial functions, exchange controls, etc.

The traditional concept of cost accounting becomes that of energy accounting, guaranteed by basic Kirchoff-type conservation laws, for closed circuits:

Terms of the "Economic Circuit" Analogy

These extracts, from authors who were writing in what may be considered the early days of the information technology revolution – together with our own simple example – share the common characteristic of seeing in elementary circuit electronics the possibility to model various economic phenomena physically. What appears to be missing is a careful consideration of the basis for such an analogy: we do not find references to a Fisher-style tabulation of the terms of the analogy, in which one would expect to trace the structural correspondences. Let us attempt to construct such a table:

This table is intended as a basis for further elaboration: some of the term-by-term correspondences are more immediate than others; some are taken from the previously cited works, while others are presented as potentially useful extensions. Little or no significance can be attached to the coincidence in the use of "Q", or "q", as the conventional algebraic representation of the elementary object of both electronics (electronic charge) and economics (quantity of a given commodity). Nevertheless, this fundamental metaphysical, or ideological, fetishism for objects, or ’things in motion’, is clearly common to the classical Newtonian mechanic vision of the world. The concept of process, action, and wholeness is secondary, in this type of representation.

Given this ’suggestive’ term-by-term correspondence, one should proceed to consider the structural relationships implied by the analogy. In purely mathematical terms, this would mean simply postulating sets of differential and integral equations for the two fields, having similar forms, in particular with respect to their time-dependencies. This kind of ’rigorous mathematical approach’ will be postponed, however, since our immediate concern is with the analogy as an essentially HUMAN tool for visualizing the relatively complex: (economics, in this case); in terms of the relatively simple and well-developed: (electronics, in the late twentieth century). Thus we will simply note, for completeness, the prevalent ideology which places all the emphasis on ’making economics scientific’ (Smith and Erdley, 1952):

One has the impression of reading a disciple of Fisher, and potential follower of Popper.

Returning to the central theme of this essay, we may ask if it makes sense, in this phase of capitalism, to ask for the circuit diagrams of the economy? Does it make sense to think of an electronic engineer becoming an economic engineer?

The danger is clearly that of reinforcing the idea of The Economy being somehow an external system, to be controlled by a caste of white-coated scientific ’experts’. The footnote to the previously-cited 1973 paper entitled "Macroeconomic Modeling: A Critical Appraisal" should ring an alarm bell:

"We", who?

The problem is that the analogy does appear to make sense, and suggests a number of fairly immediate areas of application. In the microeconomics of a single productive enterprise, for example, the physical flows of material through warehouses, work-centers, assembly lines, and distribution channels – is seen from the economic point of view as a process of value-addition, traditionally considered with the tools of industrial accounting. One could imagine this process modelled by relatively simple circuit elements, taking account of not only the physical flows, but more generally the economic transformations implied by the consumption of resources, including those of a financial nature, and especially that of labour-power. The traditional ’optimisation’ problem, of maximising profits over some chosen time span, and assuring ’stability’ in terms of growth and integration in external markets, would be seen as that of controlling the overall "gain" of a power amplifier stage.

Transistor ‘Gain’ and Value Addition

The history of technological development in electronics may be divided into two periods: pre- and post- transistor. The transistor, or ’transfer resistor’, as it was originally conceived, is an ’active’ device, in that it can transform small variations in one part of a circuit into relatively large variations, or qualitative changes, in another part. One of its more immediately appreciated uses is that of power amplification; the following circuit elements illustrate a relatively familiar configuration, which may also serve to suggest the economic analogy with productive transformation, characterised by value addition.

Put simply, if we set up the circuit correctly, a small increase in the input current, i_B , fed into the transistor (represented by the circle), causes a corresponding increase in the current i_C , on ’the other side’ of the transistor. This increase in current occurs regardless of the presence of a LOAD resistor, R_L , on the output side – and since the POWER generated by current flowing through a resistor is expressed by the formula:

Power = current x current x resistance, or P = I² R

It is clear that the increase in current means a relatively large increase in power, on the output side.

By way of illustration, one might consider the following sketch as a basis for modelling a productive manufacturing cell, from the point of view of value addition.

The ’point of production’ is seen as analogous to a field effect transistor (FET), vhereby small changes in the ’control’ signal lead to relatively large changes in the (material) flow through the device. In particular, the concept of "saturation" of the device (or machine) carries over.

Extending the analogy, one can consider changes in market conditions, applied to the ’control’ signal, switching the cell ON or OFF; in the sense of scheduling production of a given item for the cell, if the ‘market potential’ (price structure) is favourable.

This transistor analogy requires a more detailed development. The basic idea of power gain and of value addition, however, must be considered a guide-line for such an analogy. The micro mechanism of electronics, by which majority and minority charge carriers are manipulated in active semi-conductor devices, may suggest corresponding mechanisms in microeconomics. In particular, one is reminded of the capitalist mechanism by which value-creating labour power, used in productive circuits, is manipulated as a variable independent of the value flows created by this input variable. The original term ’TRANSFER resistor’ may prove to be useful: in capitalist production, value is transferred from labour to the owners of capital.

Marx: Capital and Commodity Circuits

The ultimate source and sink of the energy powering every such circuit is labour, on the labour-theory of value. As Keynes emphasises:

Thus consumption, the reproduction and production of labour-power, appears as the ’bottom line’, or the final resistor-to-earth, in the economic battery whose ’top line’, or power source, is clearly that of labour itself. In fact Marx used the term ’circuit’ in a more than casual way in Volume 1 of Capital ("The Currency of Money"):

Given the embryonic state of electronic theory, or rather, the lack of an accepted atomic theory, this formulation appears all the more remarkable. We recognize the early model of electronics, whereby free electrons flow in one direction, ‘holes’ in the silicon lattice structure ‘flow’ in the opposite direction. When Marx asks:

We could comment that this is rather like asking how much free electronic charge, q, expressed in Coulombs, a given closed circuit contains – or ‘absorbs’. The following sentence reminds us that in electronic circuits we are rarely interested in "the quantity of the circulating medium" – i.e. electronic charge. In practice we consider currents (rates of flow of charge) and voltages – voltage differences, to be precise – as "a measure" of electromagnetic forces (emf).

Marx is working towards a "general law". "The velocity of the currency of money" is analogous to electronic current. Fisher would reformulate the following, mathematically, some years later -–but we are here interested in the metaphor of currency, circulation and circuits:

The fundamental equation of electronics familiar to any schoolchild, V = IR, expresses the simple ‘conservation’ relationship between flows (current) and levels (voltages) in a closed circuit. Marx seems to be saying something similar, here:

In electronics, the resistance R of a circuit depends on the physical characteristics of the conducting medium: the material, it’s thickness (geometrical characteristics) and the temperature. The equivalent in economics – in an economic circuit – is that of the particular characteristics of the commodities circulating ‘against’ money.

The other basic ‘passive’ element of electronic circuits, capacitance C, may be intuitively recognized as saving – or more simply, as "hoarding":

Marx ends this section with a poetic paragraph which uses the terms attraction and repulsion, expansion and contraction, ebbs and flows – strengthening the metaphor of circulation, and reinforcing our analogy. A physics student knows very well that this ‘capacitance’ factor gives rise to the ‘ebbs and flows’ of harmonic factors – in turn analogous to mechanical "vibrations and waves" phenomena.

One does not have to be familiar with the details of book two of Marx’s Capital to realize that the metaphor of circulation and circuits continues to be fundamental to his thinking. The title is The Process of Circulation of Capital and the first chapter, for example, is "The Circuit of Money-Capital".

His insistence on a sort of algebraic representation of "circuits" as M – C … P … C’ – M’ etc. instead of a more graphical representation of "circuit diagrams" reflects the language and conventions of his time. The underlying imagery remains striking. Certainly his use of the energy metaphor is more apparent, when he emphasises the processes of transformation – from money-capital to commodity-capital to productive-capital and so on, notably at the beginning of chapter 6 on The Costs of Circulation:

"More heat than light", we may comment, with Philip Mirowski. Indeed, in electronic circuits electrical energy is also transformed into heat and light by resistances.

References

Cloutier L.M., Rowley, R. (2000) ‘The Emergence of Simulation in Economic Theorizing and Challenges to Methodological Standards’ (working paper)

Enke S. (1951), 'Equilibrium among spatially separated markets: solutions by electric analogue', Econometrica Jan. 1951, 40-47.

Hammond P.J. (1977), ‘The core and equilibrium through the looking-glass’, Australian Economic Papers, 1977, pp. 211-18 (in Price Theory (2^nd ed.), edited Harry Townsend (1980) Penguin Books)

Hayek von F. (1945), 'The Use of Knowledge in Society’, Reprinted from the American Economic Review, XXXV, No. 4; September, 1945, 519-30.

Keynes J.M. (1936). The General Theory of Employment, Interest and Money from the 1973 edition of the Collected Writings of John Maynard Keynes, Vol. 7 - The General Theory, edited by Donald Moggridge, London: Macmillan for the Royal Economic Society

Marx K. (1867). Capital

Mirowski P. (1989) More Heat Than Light: Economics as Social Physics, New York: Cambridge University Press. (French translation: Paris: Economica, 1998.)

Morehouse N.F., R.H. Strotz and S.J. Horowitz (1950), "An Electro-Analog Method for Investigating Problems in Economic Dynamics: Inventory Oscillations", Econometrica, 18(4): 313-28.

Smith J.M., Erdley H.F. (1952), ‘An electronic Analogue for an economic system’, Electrical Engineering Apr 1952

Tustin A. 1953. The Mechanism of Economic Systems – An approach to the problem of economic stabilisation from the point of view of control system engineering. London: Heinemann Ltd.