[Martin Taylor 2007.11.11.23.01]
[From Bill Powers (2007.11.08.0656 MDT)]
Rick Marken (2007.11.07.2230) --
I think it would be appropriate to acknowledge the late Bill Williams' priority in analyzing the Giffen effect as a control process. In fact when he first approached me about PCT, it was to seek my help in constructing a working computer model of the Giffen Paradox, which we renamed the Giffen Effect once the model had explained it.
Following up this comment, there was a good discussion relating to a control theory of value and the Giffen effect on the ECACS forum in 2003-4 (there were quite a few other good discussions of PCT there, too). Here's what Bill Williams said in one message <http://ecacs.net/discus/messages/192/243.html>:
---------------Quote from Bill Williams------------
I am perhaps beginning in myself to see what has happened in the economics profession. After thinking about a problem that goes unsolved for a sufficient period of time a reluctance begins to develop to put any more effort into solving the problem. I am I think only part way to this sort of orrientation, but I think I can perceive in myself the sort of "Oh no! Not that question again!" sort of feeling.
Still your comments have provoked me to give some thought to the price-index issue once again. And, perhaps my thinking is has some useful content even if it doesn't quite solve the problem.
Suppose we take a person who has adjusted their expenditure to a static situation in which they distribute their income between the consumption of commodities at various prices. Suppose we use a control theory analysis to do this employing the technique I developed for a two commodity case. Suppose in this static situation we varied the consumer's income at some level of income the consumer could purchase a quantity of all the commodites that would satisfy the reference level for each commodity. At this point adding any more income to the consumer's budget would not increase their purchases. (I am assuming that the consumer is not involved in a contest of competitive display with a neighbor of the sort that Veblen considered in his notion of conspicious consumption.) Then we could experiment by increasing the prices of various goods in random combinations. Most of these random combinations of price changes would result in price quantity behaviors of the normal downward sloping demand curve type. However eventually it would be expected that Giffen good type behavior would be found. Finding price points at which the Giffen good (People should call it a Giffen commoddity but no on does.) becomes active because it identitifies a point at which a possible positive feedback effect might be generated. That is, when the price of the commodity-- the Giffen good is increased the consumer buys more of the product and this might result in a further price increase of the product-- a positive feedback loop.
So now we have a consumer for whom we have identified a combination of income and prices for which the consumer is experiencing no error at one end of the scale and various points were the consumer is experiencing a Giffen type effect as a result of a price increase. Now using a sufficiently sophisticated technique we could infer a control system that would simulate the consumer's behavior. At the point at which the consumer's budget allowed them to purchase a quantity of comodities that matched their reference level running the control system would generate no error. At any lower level budget errors would begin to be experienced, and these errors could be computed.
Supposing all this, which makes my head spin, we would have something like or close to what we pretend that we have now with the headonistic prices indexes. Plus, we would have identified points at which the consumer's behavior would in combination with some circumstances regarding supply generate unstable behavior in the market.
Could in princple something like this be done? Well, I could see that there would be a lot, a great lot of difficulties involved in actually carrying out such an experiment, inferring a control system and then calculating the consumer's error. Or, would one want some measure such as the consumer's error times the gain of the system? I'm not sure. Error times the gain might be a better measure of the consumer's conflict as a result of not having a sufficient budget to purchase the reference level of all the commodities.
So, taking the standpoint of a theorist with any resonsiblity for actually carrying out such a system, this is how one might per impossible construct a control theory price index.
If we removed the restriction against the interaction between consumer's errors as a result of conspicious consumption we might see that what ever the level of prices (however determined) and the consumers budget the error index for the consumer wouldn't change-- because it was being determined as a result of the competition for status by way of conspicious consumption. From an economists standpoint ( an economist adopting a control theory perspective ) if the main source of error for the consumer was the competitive display of conspicious consumption, then it might be reasonable to reduce the consumer's budget. The consumer would then consume less be feel no worse off because everyone else was consuming less.
In terms of policy this control theory type index is more interesting from a policy standpoint than is the hedonistic index. All the hedonistic index tells one is that consumers are better off if they have more income. And, I suppose if it actually worked it would be a way of judging the effects of various policies-- but it doesn't really do this. A control theory price index would tell policy maker about where the giffen points were located ( good to know if one is interested in a stable market ) and also indicate when conspicious consuption was dominating the situation- which would be good to know if one was setting taxes on goods that did not contribute to the genuine well being of a consumer.
As a policy measure we might want to institute what I might call economic integration. Rather than allowing the wealthy to live in gated communities in which the forces of conspicious consumption run without limit, we might compell the wealthy to live next to the impoverished. I can even forsee a slogan--"Unequall neighborhoods are inheriently discriminatory" -- which (no question) they are.
Somehow I don't see the National Science Foundation being eager, at least under the current administration, to fund, supposing it was possible, the development of a control theory counter part to orthodoxy's method of computing a price level.
Martin, you talk about computing a price index in terms of statistical mechanics. However, when I think about the implication of a control theory index what comes to my mind is political dynamics.
-----------------end of Bill Williams message-------
Incidentally, this quite serious conversation, along with others, was happening at a time when Bill was playing silly-buggers on CSGnet.
If you want to see more about Bill's last thoughts relating to the Giffen effect and other economic notions, go to <http://www.ecacs.net> and do a search for "Giffen effect". It's mentioned in 8 different threads, though some of them are branches off earlier ones. (For the newer CSGnet members, ECACS was designed as a forum rather than a mailing list for discussion PCT in a way that enabled the discussions to be kept active, so that a response six months or several years later could still be relevant.
I'm not sure whether you have to be registered on ECACS to do a search. You do, if you want to post, although nobody has for the last few years (which I think is a pity, as many of the CSGnet discussions would benefit from an ability to revisit them when someone has a new idea (or is a new participant and sees an old issue from a new direction).