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.

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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

Martin Wolf on Rethinking Economics

Martin Wolf is Chief Economics Commentator at the Financial Times, and a journalist whose pieces are frequently interesting and informative. Since the financial crisis of 2008 he has become more critical of the mainstream economic thinking which surely played a role in bringing on the crisis and shaping its consequences.

He has written the forward to the book I am reading at the moment: Rethinking Economics – An introduction to pluralist economics (2018). The book contains short introductions to the main heterodox (non-mainstream) schools of thought by leading thinkers from each school, including Post-Keynesian, Marxist, Austrian, Institutionalist, Feminist, Behavioural, Complexity, Co-operative and Ecological.

The project has been coordinated by the Rethinking Economics movement, which is leading calls for changes in the way economics is taught towards a more open, accessible and pluralist approach. Continue reading

Is full employment possible under capitalism?

An interesting interview with Robert Pollin on the Real News Network, in which he discusses the possibility of achieving full employment under capitalism. He considers the ideas on this subject of Marx, Keynes, Kalecki and Friedman.

For me, the historical record seems to support the ideas of Kalecki and Marx, in that achieving full employment may be possible, but sustaining it is much more difficult. This is because it tends to change the balance of power in society in favour of the workers, which the employers don’t like. If high inflation or a squeeze on profits is to be avoided, a new bargain between employers and workers is necessary.

The solution is thus a political one, and leads to a different kind of capitalism. It may be possible for a while but, once again, history suggests that this is hard to sustain, and that a squeeze on profits will result, leading to a slowdown in investment and growth and subsequently to a rise in unemployment once again. This also lends support to the ‘classical’ ideas of Anwar Shaikh on wages and unemployment, which I discuss here.

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

Ha-Joon Chang on the market and the state

In this short video, Cambridge University’s Ha-Joon Chang, a particularly thoughtful economist whose work I find both interesting and inspiring, discusses the boundaries of the market and the state in modern economies.

He also argues that economic change is inevitably political and makes a strong case against the imposition of ostensibly scientifically derived economic policies on democratic states by unelected technocrats. This happened in nation-states from Greece to Italy in the wake of the eurozone crisis.

Michael Hudson on economics

JisforJunkEconAnother extract, in this occasional series, from Michael Hudson‘s excellent J is for Junk Economics (p.86), this time on the definition of economics itself:

Economics: The linguistic roots of the word “economics” stem from Aristotle’s Greek terms oikos (house or household) and nomos (rule). This often is trivialized as self-sufficient “household management”, in contrast to chrematistics, making money by market exchange and money lending. But economic organization and markets have always been wrapped in a political context as mixed economies. The paradigmatic “household” was the Mesopotamian “large house” (Sumerian and Babylonian é.gal), the temples and later the palaces in which accounting, weights and measures (including the origin of money), standardized interest and wage rates are first documented. Most merchants in Mesopotamia’s takeoff occupied official status in the royal bureaucracy, adopting management techniques from the large institutions. Prices were denominated for accounting purposes and for payment of debts to these large institutions, but were free to fluctuate outside of the city gates and outside of the temple and palace sector.

It thus is a travesty to narrow the study of economics to “markets”, defined simplistically as private sector households earning and spending their income on goods and assets. All markets operate in the context of public regulation, taxation and government spending to provide basic services, including those of the military and religious infrastructure.

Economic theory in modern Europe started as Political Arithmetic for royal management. The key concerns were money, taxes, and the trade policy needed to obtain silver and gold. James Steuart (1713-1780) called the latter “money of the world” and related it to population growth and immigration, colonialism and export production. Classical political economy shifted the focus of economics to domestic value, price and rent theory with a view toward political reform to check the power of landlords and other rent extractors.”