Welcome to MetaManager.net

Posts in the ‘Economics and Finance’ Category

Information and Energy: Part I

Tuesday, March 25th, 2014


This is an extended footnote to the definition of information presented in Mowshowitz, A., On the market value of information commodities: I. The nature of information and information commodities, Journal of the American Society for Information Science, 43, 1992, pp. 225-232. Information was defined in that article as “the ability of a goal-oriented system to decide or control,” where “decide” and “control” both reduce to the verb “choose.” This definition was motivated in part by an analogy between information and energy. Energy, understood informally as the “ability to do work”, is clearly a property of a system rather than of any material substance (or fuel) from which energy may be extracted. Viewing information, like energy, as the ability of a system to do something, constitutes a radical departure from the usual definitions in which information is equated with organized collections of symbols.

The current note probes the analogy between energy and information, with a view to justification of the definition cited above and the theory of the economic value of information erected upon that definition.

The Analogy

When coal is burned in a furnace or gasoline in an engine, energy is released. The energy may be viewed as latent in the coal or gasoline, but, clearly, these substances are fuels or sources of energy, not energy itself. We argue in this note that a similar distinction holds for information and its sources (e.g., manuscripts, computerized files, videotapes, audio recordings, etc.).

The relationship between fuels and fuel-burning engines suggests a revealing parallel in the domain of information. When speech is processed by a human being or text is processed by a computer, information is ‘released’. Speech and text – embodied in their respective media – are analogous to fuels, i.e., they are sources, which when properly processed will give rise to information. Thus, like energy, information may be latent in sources such as text, but the source is not the information.

Information is typically said to be “contained” in a book or report, or “gotten out of’” a lecture or TV program, so the idea that information is somehow latent in a source is not inconsistent with ordinary usage. A common thread in the conventional view is that information is hierarchical in character. According to this view, some information is more “organized,” contains “deeper truths,” is more relevant or precise than other information. A typical hierarchy based on ideas of this sort is formed by the four elements data, information, knowledge, and wisdom. But these distinctions are characteristic of the relationship between the user and the source of information. Consider a book. Is the information to be obtained simply a property of the book? Some readers gain “information”, others “knowledge”, yet others “wisdom” from what they read.

This observation is obvious to anyone who has ever participated in a discussion about a book. Clearly, a source of information may give rise to very different experiences. Readers have much in common with fuel burning engines. Just as engines, which have different efficiency ratings and extract different amounts of energy from the same amount of fuel, different readers obtain varying amounts of usable information from a book.

Information, like energy, is a property of a system. In some sense it comes into existence in the relationship between a “source” and a “processor”. Neither energy nor information can be apprehended directly. Both are manifest in changes in the state of a system. Energy may be measured, for example, by a change in the temperature of a gas in a vessel; information may be measured by a change in the probability distribution of a random variable whose values are decision strategies.

A universal measure of information comparable to that of energy may seem unachievable because of the apparent differences in what can be extracted from various sources. The superabundance and variety of material that we normally conceive to contain information is so great as to defy any sort of reduction to a common denominator. The analogy with energy seems to break down. However, one tends to overlook the role of ‘pre-processing’ and classification that makes a universal measure of energy feasible and useful. The energy to be extracted by a given mass of coal is not determined for just any old substance. Rather the measurement of energy is applied to a given mass of coal of a particular kind, like anthracite coal consisting of pieces of uniform size and shape. To get this particular substance requires a number of operations on material extracted from the earth. The same can be said for fuel derived from petroleum. If comparable operations were applied to what is commonly called a source of information, it might be possible to use a universal measure and unit corresponding to the joule. Such a measure would make it possible to price information sources without reference to their intended uses, just as fuels are priced now. Gas stations charge the same amount per gallon of gasoline no matter what the customer does with it. So it could be for a unit of source information. Many books, magazines and reports are priced in this way, but non-traditional sources of information such as pages of online text and query results await the development of a suitable measure to allow for uniform pricing.

A further objection to the analogy might be raised in connection with the hierarchy “data, information, knowledge and wisdom.” Although these hierarchical distinctions are meaningful, they apply to the subjective experience of information (i.e., its meaning and value), not its objective measurement. Aspects of the meaning of information endow it with value, e.g., features such as timeliness, verisimilitude, etc. are characteristics of meaning that determine the value of information to a user. The value of information corresponds to the utility of energy. A given amount of fuel can be used to obtain energy for many different purposes such as heating a house, powering a vehicle, etc., and each use has its own particular economic (or subjective) value.

The analogy between information and energy holds for systems and processors, as well as for fuels and sources. Processors of information-sources, like fuel burning engines, are altered (for varying periods of time) in the course of processing. The respective system states are altered: for a fuel burning engine, the change occurs in energy level; for an information-source processor, the modification is organizational. The results of processing, however, reveal important differences between fuels and information sources. On the one hand, information sources such as books, computer programs, and databases can be read or processed without changing them – they can be reused by the same or different processors; on the other hand, oxidation chemically alters a fuel, after which it cannot readily be re-constituted in its original form. One might distinguish between hardware and software in the makeup of a processor. Hardware appears to be analogous to the usual conception of a fuel burning engine. Such an engine could be seen as having hard wired programs, corresponding to the software installed on a computer, controlling its behavior. There may also be differences having to do with degree of ‘intelligence’ of a processor. It may in some cases be useful to distinguish between processors and users of information. The human processor is usually the user, whereas the two may be different in the case of computer processors. For simplicity of argument we will assume the processor and user to be the same, subsuming the distinction in the multiple stages of processing.

Clearly there are differences in the respective etiologies of information and energy. On the one hand, fuels are transformed as energy is released, while sources of information remain unchanged as information is generated. On the other hand, fuel burning engines typically remain unchanged after the production of energy (i.e., in the absence of structural changes caused by damage or wear and tear, such an engine will behave the same way in future), while information processors may be transformed when information is created. For example, a program may be ‘structurally transformed’ in the sense that its behavior toward future inputs of the same kind may be different, e.g., adaptive systems such as game players that alter their playing strategy on the basis of the results of moves in previous games. Nevertheless, such changes do not alter the amount of information released in source-processing transactions. Computer controlled fuel burning engines introduce yet greater subtleties. Subsequent behavior of an engine with memory could be altered by burning a fuel under certain conditions.

These differences between information and energy suggest that the source-processor pair is central to the concept of information, just as the pair fuel-engine is to energy.

As noted before, a book (source of information) is normally unchanged by the human reader (information processor) in the course of reading, but the reader may be transformed (i.e., undergo a change in program) in perusing the text. Such transformations may vary greatly, but are detectable through changes in behavior. The same holds for computers. Input data remain unchanged in processing, but the computer is altered (however short-lived the change may be). Again, alteration is manifest in changes in behavior. Note that it is possible for the original input data to be altered by the computer, but it is reasonable to assume this does not occur (or at least that the data is preserved somewhere), just as we discount the possibility of the text of a book being altered by the reader.

The potential change in the processor’s behavior is the essence of information. We will take this up again in the section on processors.

by Abbe Mowshowitz

NEXT INSTALLMENT: The nature of information sources

TAGS: , , , , ,

Startling statistic

Tuesday, January 21st, 2014

The World’s 85 Richest Now Worth as Much as 3.5 Billion Poorest

Full circle: state of nature to virtual state of nature

Monday, December 16th, 2013

by Abbe Mowshowitz
Image: The Ouroboros (Wikimedia Commons)

Writing in the mid-17th century the social contract theorist Thomas Hobbes characterized the state of nature as a “time of war, where every man is enemy to every man” and “the life of man, solitary, poor, nasty, brutish and short.” Unbridled competition was the dominant feature of this primitive condition, leading people eventually to accept agreements which placed constraints on their behavior designed to end the state of war, ensure personal safety and establish conditions capable of supporting the necessary activities of daily life. Social contract theorists such as Hobbes, Locke and Rousseau argued that such agreements are implicit in the rise of civil society. The accounts of these philosophers differ in important ways, but all agree on some form of contract as the foundation of society.

Social philosophers may no longer accept the historical reality of social contract preceded by a state of nature, but the latter concept is useful for establishing a starting point or base case for gauging human social progress. The instruments and capabilities of primitive groups for shaping the environment were insignificant compared with those of the modern world, but both primitive and modern share a common feature, namely their tolerance of unbridled competition. Advances in technology have not been matched by progress in the ways individuals and groups deal with each other. A glance at daily news reports of conflict and strife in too many regions of the world is enough to convince one this observation is true.

Economists argue that competition is essential to the proper functioning of the market economy. It stimulates innovation and development of new or improved products and services, keeps production costs in check and lowers prices to consumers. Experience since the dawn of the Industrial Revolution testifies to the accuracy of this argument. However, there is no such thing as an absolute good – something of which there cannot be too much – and competition is no exception to this rule.

Economic conditions in the wake of the most recent financial crisis begin to resemble the mythical state of nature. The stark realities of ruthless competition have come to the fore in this time of economic duress and Hobbes’ war of all against all rages once again. Virtual organization, made practicable by advances in transportation, information and communication technologies, has intensified competition in the global arena. Commercial activity on a global scale is certainly not new, but the ability to move goods, people and capital easily, quickly and cheaply has given it a historically unprecedented boost.

Virtual organization supports, encourages and demands switching to lower cost alternatives for satisfying requirements in the making of products and delivery of services. This may take the form of shifting production from one venue to another, selecting the lowest cost supplier of particular goods and services, using transfer pricing schemes to lower global tax obligations, and substituting one individual for another on a project team. All of these types of switching, and many related organizational or accounting tricks, exploit opportunities for taking advantage of competition in the marketplace. Desire for increased profits realizable through such exploitation urges practices that stimulate competition between firms and individuals, undermine loyalty to place and person, and contribute to the “war of all against all.”

Just as technological and economic innovations in an earlier period underpinned the evolution of the centralized nation state, current innovations are undermining those same states. The great nation states, despite their military prowess, are doomed like the dinosaurs of old, unable, unwilling or insufficiently nimble to meet the threat to their dominance posed by agile virtual organizations that have no sense of national identity. As national governments wrested power from feudal barons in the early modern period, virtual corporations operating in global markets are taking it back by making it all but impossible for governments to gather the resources needed to govern effectively. Added to this slow but inexorable starvation is the complicity of government officials who are in effect tools of the rising power elites. Regulators who keep a weather eye out for lucrative employment opportunities in the companies they are charged to regulate are not likely to be over zealous in promoting the public interest. Absent the protection of the state, we will converge inexorably to a virtual state of nature. So much for progress and the perfectibility of man.

TAGS: , , , , ,

Signs of emerging virtual feudalism

Tuesday, October 22nd, 2013

“You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store”
From the lyrics of Sixteen Tons, popularized by Tennessee Ernie Ford

“Former President Jimmy Carter said Monday [October 7, 2013] that the income gap in the United States has increased to the point where members of the middle class resemble the Americans who lived in poverty when he occupied the White House.”

Read more:
Carter: Middle class today resembles past’s poor


“Magnetar Capital LLC, investigated by the Securities and Exchange Commission for its housing bets leading up to the property crash, acquired a rental business in January with about 1,900 properties [in Huber Heights, Ohio]. In April, its management company applied for the largest cut to property tax assessments in the county’s history. The move could curb funding for public schools, the police and fire departments and services to the disabled, said Montgomery County Auditor Karl Keith.

Private-equity firms and hedge funds have bought as many as 200,000 homes across the U.S., typically in areas hardest hit by the housing crash, to profit from soaring demand for rentals. What makes Magnetar’s investment unique so far is its focus, buying one in 11 homes in the Ohio suburb, magnifying its influence over the residents and the town’s finances.”

Read More:
Magnetar Goes Long Ohio Town While Shorting Its Tax Base


Also read:
Bodies Double as Cash Machines With U.S. Income Lagging: Economy

TAGS: , ,

The greatest Ponzi scheme of them all

Thursday, August 15th, 2013

by Abbe Mowshowitz

Pyramid Scheme (source: US Securities Exchange Commission)

Ponzi schemes operate on the principle of rewarding existing members with funds acquired from new members. Each new member brings in money, treated as an ‘investment’ for example, and interest is paid regularly to existing members according to their current balance and length of time in the scheme. No use is made of the money while it is invested in the scheme. The attraction is the relatively high rate of return on the investment, a rate that one might say is too good to be true. So long as membership grows everyone is happy. However, experience shows that something always comes along to interfere with growth, just as trees do not grow to the sky. Since the only source of revenue is the money brought in by new members, Ponzi schemes crash when growth stops. In one of the more notorious recent cases, namely the scheme perpetrated by Bernie Madoff in which participant losses amounted to an estimated $18 billion, the end came when Madoff allegedly told his sons about the massive fraud. Prosecution followed when the scheme was revealed to authorities and Madoff was eventually convicted of fraud and sentenced to a prison term of 150 years.

Is termination of growth unavoidable? Madoff kept his scheme going for decades despite occasional probes by financial regulators such as the Securities and Exchange Commission. What if the authorities remained blind to wrong doing or simply were befuddled by the seeming rectitude of a Ponzi scheme operator? After all Madoff was regarded for years as a pillar of his community, contributing substantially to his favorite charities and political parties. Perhaps he could have kept the scheme going and passed it on to the next generation. The key question for historians is what prompted Madoff to wind up his ‘business.’

Almost all natural phenomena one can think of have a finite life cycle. Plants and animals come into being then grow decay and die. Such is the way of nature. The lengths of these life cycle stages vary from one class of creature to another, but all are subject to the iron rule of growth decay and death. The same rule seems to apply to social and cultural phenomena as well. Empires and civilizations have come and gone. Are there any exceptions to the iron rule? At first glance there does appear to be one, namely, economic growth.

Economic growth has all the earmarks of a Ponzi scheme. The detailed workings vary from place to place and change over time, but certain basic features of the scheme are noteworthy. Each succeeding generation pays into the scheme by undergoing a protracted period of costly education and training. Families effectively manage trusts for children as they pass through the education and training system. When certified as skilled workers, the rising generation begins to receive ‘interest’ on its ‘investment’ in the form of wages derived from a job, and at the same time continues to contribute to the scheme. Clever accounting reduces the interest payments to active workers by withholding a portion that is reserved for various social insurance programs so that, for example, retirees can receive ‘interest’ from the system. Thus the amount invested in the scheme increases as the population grows. If economic growth comes to an end, as it does temporarily in recessions, those invested in the scheme can no longer count on any interest income.
[

TAGS: , , , , , , , , , ,

Copyright © 2018 MetaManager.net
The home of Virtual Organization