Micro-macro dynamics and complexity

The whole is greater than the sum of its parts. That, in a nutshell, is the concept of emergence which justifies the existence of macroeconomics as a field of study distinct from microeconomics.

Mainstream economics places great store on ‘microfoundations’, and new classical macroeconomics aims to do away with the macro side of things by assuming that the hyper-rational representative individual or agent is the basic building block of its models.

Complexity and systems theory has a lot to offer those who accept the need for microfoundations in economics, but in a way that macroeconomic objects emerge from them, and cannot be predicted from simply examining a single ‘representative’ micro agent.

If this is the correct way to proceed, then macro objects can be said to emerge from the interactions of micro agents. The latter can be different from one another, in form and behaviour, but still produce an emergent order which can be studied and used to further understanding and inform economic policy.

As micro agents interact and produce coherent macro relations, structures and processes, the latter also act to shape micro-level behaviour. There is thus a two-way interaction between micro and macro, or a micro-macro dynamics.

This video, while not focusing exclusively on economics, covers what is an important part of the nature of the objects studied (ontology) in many strands of heterodox or non-mainstream economics. It touches, simplistically, on the difference between a pure free market and socialist economy, whether such things exist or not, but much of it is useful and is worth a view, keeping economics in mind.

In an economics employing a micro-macro dynamics, the micro agents might be individuals, classes, households or firms, while the macro structures and processes might be the national or international economy.


Inequality, global imbalances and crisis

Tracing a connection between rising inequality and the Great Recession of 2008 is appealing to leftist economists. It suggests that what they see as two of the potential downsides of capitalism and in particular the neoliberal economic order can perhaps be mitigated via appropriate policies. Thus, a more egalitarian capitalism can become less prone to crisis or recession.

Of course, what is appealing as social and economic outcomes is not a good enough reason to investigate linkages between them, though I suspect that I am far from the only one who is drawn to particular ideas as a matter of bias.

Perhaps there is nothing wrong with that as a starting point, followed by economic analysis of the chosen object of study.

An article in the latest issue of the heterodox Cambridge Journal of Economics explores the potential linkages between the distribution of income and current account imbalances in a simplified model of the global economy consisting of the US, Germany and China, prior to the 2008 recession.

These three countries had the largest current account imbalances in absolute terms in the run-up to the recession. The US ran a deficit, and Germany and China were running surpluses. Since these imbalances have been pinpointed by some economists as a cause of the recession itself, analysing them is important. Continue reading

Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading

Michael Hudson on Quantitative Easing

Plenty of economists, investors and others have been wondering what will happen to financial markets and the real economy as monetary stimulus in the form of Quantitative Easing is wound down by central banks from the US to the Eurozone in the face of stronger growth.

I will be writing more about it next week, considering the perspectives of critic Richard Koo among others, but here is Michael Hudson from, as ever, his iconoclastic and insightful ‘dictionary’ J is for Junk Economics (p.189-91): Continue reading

A Keynesian case for industrial policy

DSC00234Keynesian economics emphasises the primacy of aggregate demand or expenditure in driving the growth of output and employment. More mainstream neoclassical Keynesians, and the New Keynesians, tend to argue that inadequate demand is a short run phenomenon. The more radical post-Keynesians argue that it can be a problem in the long run too.

To varying degrees, these economists make the case for demand management via some combination of monetary, fiscal and exchange rate policy. The more radically minded have also long argued for incomes policies to manage wage and price inflation, and reform to the international monetary system in order to allow national governments the space to manage demand and promote full employment while preventing excessive and destabilising current account imbalances.

While Keynesian economics focuses on demand and, traditionally, macroeconomics, industrial policy aims to impact more on the supply-side of the economy and draws on microeconomics. Continue reading