Information and Macroeconomics Macroeconomic theorists hold contrasting assumptions about information. Hayek (1945) argued that information should be both broad and localized. ‘Localized’ information is important for economic decision making in the micro-level.
However, when information becomes too ‘localized’, the individual or firm may have hard time adapting to economic changes in the macro-level. However, Hayek (1945) argued that information must be first localized, and then exposed to economic changes in the macro level (societal). Although Hayek’s assumption of information is generally oriented towards prediction, it fails to take into account the relative magnitudes of ‘macro’ and ‘localized’ information.
No specific distinction is presented. For classical economists like Smith, information must essentially be macro-oriented. All individuals in an economy must have a complete knowledge of prices, decision-making patters, wage levels, and production outputs of aggregate firms (unrealistic though).
This allows rational individuals to calculate cost and benefits, and firms to determine competitive output levels. The ‘lag’ period in the economy will therefore be eliminated (achievement of Pareto Optimality). ‘Localized’ information for the classical economists is nothing but a reflection of the macro information; hence of no significant value.
The assumption about information allows simplicity in analysis. Micro changes though are generally neglected (weakness). For the monetarists and Keynesians, information must be broad and variable. The ‘variability’ concept of information assumes that information changes in small time periods. The determination of money supply and demand, the fluctuations in stock prices, and exchange rates depend on the variability of information. Rational individuals are therefore expected to take into account information changes so as to avoid the effects of information asymmetry. The strength of this assumption is evident.
It allows macro changes to be incorporated into individual behavior in the micro-level. However, this approach is vulnerable to information asymmetry (especially in the public sector).For rational expectation theorists, the concept of information is directly related to the concept of “best guess of the future.” In simple terms, information is used for forming expectation of economic variables (Muth, 1961). Information, in this case, can be both broad and localized. The strength of this approach to information lies in its ability to predict future behavior. However, most of the models used proved unrealistic.
ReferencesHayek, Friedrich August von. 1945. “The use of knowledge in society.” American Economic Review: 35(519-30).Muth, John .1961.
“Rational Expectations and the Theory of Price Movements”. The New Classical Macroeconomics. Vol. I. International Library of Critical Writings in Economics: (1992): 3-23.