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An entropic framework for modeling economies

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  • Caticha, Ariel
  • Golan, Amos

Abstract

We develop an information-theoretic framework for economic modeling. This framework is based on principles of entropic inference that are designed for reasoning on the basis of incomplete information. We take the point of view of an external observer who has access to limited information about broad macroscopic economic features. We view this framework as complementary to more traditional methods. The economy is modeled as a collection of agents about whom we make no assumptions of rationality (in the sense of maximizing utility or profit). States of statistical equilibrium are introduced as those macrostates that maximize entropy subject to the relevant information codified into constraints. The basic assumption is that this information refers to supply and demand and is expressed in the form of the expected values of certain quantities (such as inputs, resources, goods, production functions, utility functions and budgets). The notion of economic entropy is introduced. It provides a measure of the uniformity of the distribution of goods and resources. It captures both the welfare state of the economy as well as the characteristics of the market (say, monopolistic, concentrated or competitive). Prices, which turn out to be the Lagrange multipliers, are endogenously generated by the economy. Further studies include the equilibrium between two economies and the conditions for stability. As an example, the case of the nonlinear economy that arises from linear production and utility functions is treated in some detail.

Suggested Citation

  • Caticha, Ariel & Golan, Amos, 2014. "An entropic framework for modeling economies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 408(C), pages 149-163.
  • Handle: RePEc:eee:phsmap:v:408:y:2014:i:c:p:149-163
    DOI: 10.1016/j.physa.2014.04.016
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    References listed on IDEAS

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    1. Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
    2. Eric Smith & Duncan Foley & Benjamin Good, 2013. "Unhedgeable shocks and statistical economic equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 187-235, January.
    3. Anand Banerjee & Victor M. Yakovenko, 2009. "Universal patterns of inequality," Papers 0912.4898, arXiv.org, revised Apr 2010.
    4. Smith, Eric & Foley, Duncan K., 2008. "Classical thermodynamics and economic general equilibrium theory," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 7-65, January.
    5. Alexis Toda, 2010. "Existence of a statistical equilibrium for an economy with endogenous offer sets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(3), pages 379-415, December.
    6. Golan, Amos, 2008. "Information and Entropy Econometrics — A Review and Synthesis," Foundations and Trends(R) in Econometrics, now publishers, vol. 2(1–2), pages 1-145, February.
    7. Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.
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