Jason Smith — In the right frame, economies radically simplify

More thoughts on economic methodology. First a framework is needed and then theories can be constructed and tested in that framework. The simplest frame and most economical theory that explains the data sufficiently to be useful is preferred.

A framework involving complexity is not necessarily better than one that doesn't as long as it gets the job done.

Smith observes that theories constructed within the conventional framework that conventional economists presume is not getting the job of explanation and prediction done very well.

He cautions that this doesn't necessarily mean that a more complex framework is better at explanation (formal theoretical model) and prediction (empirical testing of the model against adequate data).

The dynamic equilibrium frame [of Smith's information transfer economics] not only radically simplifies the description of the data, but radically reduces the information content of the data.... 

This is all to say the dynamic equilibrium model bounds the relevant complexity of macroeconomic models. I've discussed this before here, but that was in the context of a particular effect. The dynamic equilibrium frame bounds the relevant complexity of all possible macroeconomic models. If a model is more complex than the dynamic equilibrium model, then it has to perform better empirically (with a smaller error, or encompass more variables with roughly the same error). More complex models should also reduce to the dynamic equilibrium model in some limit if only because the dynamic equilibrium model describes the data.

This would suggest that the methodological debate in economics is not over, as conventional economists claim.

Information Transfer Economics
In the right frame, economies radically simplify
Jason Smith