Thursday, January 12, 2012

OK, lets draw lines

I stole this from Money Illusion who stole it from somewhere.

How does this chart work in Shannon and Austrian Theory?

The process of finding order in chaos proceeds a pth such that signal to noise ratio starts low and increases to standard constant.

At the initial state, right after the crash, that chart is a likely sparse distribution of dots representing a few transaction that start.  As more transactions complete, the dots tend to narrow, traders creating the market probability distribution. Each party to the transaction agrees on one thing, the market signal to noise ratio, that it is small after the crash and increases to a fixed number as more events happen. The dots begin to coalesce identifiable points on the chart, then the agents promptly make them a bit disordered again.

In this chart, growth is moving up and to the right?  Households and firms see increasing internal inventory growth., signal, relative to probability of a transaction, noise. Demander seeks to decrease SNR,( lowers transaction costs) by shopping less often,  supplier seeks to offer greater specialization which induces more distinct inventories in the demander  (increases SNR).  So if the supplier induces  demander to maintain more/separate inventories, then the channel is using more bandwidth, while maintaining specialization and sustainability in trade.

All the math leads to one agent who executes one simple aggregate function, the household or firm is executing Benford's Law.  Actually it is simpler, it really is based around the retail exclusion principle, keep the number of people in line at 2.5 or less.

Shannon, Benford, Network theory unite with Huffman encodings of a semi-group, the Huffman encoding tree should be the dual network of the economic production system. Another way to look at this as an optimal flow.  If the distribution network was fed an inventory bulge, then it should be designed such that flow occurs with the minimum number of transactions, products sizes and transaction rates already set up.  This is the channel view,  Huffman encoding are designed to get the most flow with the minimum number of symbols.

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