Anwar Shaikh On Micro Together With Macro Economics

As I noted inward my give-and-take of Anwar Shaikh's novel mass Capitalism: Competition, Conflict, Crises, i of the most interesting parts of the piece of job was his give-and-take of how microeconomic behavior is reflected inward aggregate performance. There are primal constraints upon private behavior that final result inward the same aggregate patterns at the macro level. Using the currently pop buzzword, macro behavior is emergent,  and cannot last predicted from private behavior amongst reference to the aggregate system. In my view, this is useful for macro analysts, every bit it agency nosotros exercise non waste materials our fourth dimension obsessing virtually the lessons of microeconomics. For mainstream ("neoclassical") economics, this business of thinking is disastrous, every bit it agency that entire "microfoundations project" has all the usefulness of a foundation made of sand.

Why Aggregate Behaviour Matters

As discussed inward "Finding The Solution In Influenza A virus subtype H5N1 Simple SFC Model," the macro accounting relations are non plenty to pivot downwards the solution of a Stock-Flow Consistent (SFC) model. We require to also model how the diverse sectors gear upward spending flows. Standard SFC models usage fairly basic behavioural functions to pivot downwards the solution, whereas mainstream modellers insist upon extremely complex "micro-founded" behavioural rules (behaviour is the final result of optimising decisions of households). (The complexity of those optimisations agency that the actual solutions used past times researchers tend to last approximations.)

Aggregates And Micro Behaviour

Chapter three of Capitalism is focussed on the give-and-take of micro too macro behaviour. The chapter summarises enquiry published elsewhere, although he has some simulation code available (on request).

If nosotros expect at the example of need curves, he is able to demonstrate that they are of a familiar downward sloping shape every bit a final result of 2 effects.

1. Households seem upward an income constraint.
2. Engel's law: households volition buy a (socially-defined) minimum of "necessary" goods, too and therefore increasing amounts of other (luxury) every bit their income increases. (This is a robust empirically observation.)

(To explicate what is meant past times "socially defined" inward the final point, a motorcar for washing clothes would last considered a necessary buy for a abode possessor inward 2016 inward North America, whereas it would conduct maintain been a luxury inward those societies inward the 1930s.)

Shaikh describes 4 different behavior patterns for private households -- including neoclassical homogeneous agents amongst Cobb-Douglas utility functions -- too they all cease upward amongst an essentially identical aggregate need function.

In other words, the micro behavioural rules did non thing for the aggregate results. So long every bit the SFC model approximation is reasonable, it would acquire the same results every bit a neoclassical model amongst highly complex behavioural rules (assuming the neoclassical researchers calculated the results properly).

(Production functions are some other expanse where the human relationship betwixt micro too macro behavior has been pinned down. This was the bailiwick of a 1974 newspaper past times Anwar Shaikh, too is discussed inward Appendix 1.1 of Monetary Economics past times Godley too Lavoie.)

Influenza A virus subtype H5N1 Physical Analogy

Although I am non a huge fan of analogies from physics, Anwar Shaikh usefully discusses the ideal gas police line (PV = NRT, if that agency anything to you). In summary, if y'all compress a gas, or rut it up, its pressure level increases.

When initially proposed, the aggregate behavior was believed to last the final result of atoms bouncing closed to similar piddling billiard balls. However, amongst the advent of quantum physics, nosotros no longer squall back of atoms every bit existence particles at a known seat too velocity. That said, fifty-fifty the to a greater extent than complex quantum atomic behavior ends upward amongst the same aggregate result.

(At i betoken of my life, I took a course of pedagogy on quantum thermodynamics. This supposedly would conduct maintain made it easier to sympathize the performance of silicon chips, but at the damage of existence mystified every bit to how my rut view works. If in that place are whatever electrical applied scientific discipline faculty members reading this, delight conduct maintain your undergraduate students acquire sensible thermodynamics every bit taught past times mechanical engineers. Thanks.)

Characteristics Of Rigorous Aggregate Analysis

 Shaikh argues that in that place are 5 characteristics of "rigorous aggregate analysis." (Found inward the department "Methodology For Economic Analysis" of Chapter 3; I conduct maintain the ebook version too cannot offering a page reference.)

1. "It should last rooted inward some theory of the relevant factors at the micro level."
2. "It should permit for the fact that alone a few of these factors may last relevant at the macro level."
3. The aggregate functional shape may last quite different than the micro functional shape (which implies that in that place is no such thing every bit a "representative agent").
4. There are "many micro foundations that are consistent amongst whatever given aggregate pattern." 
5. The style to provide to equilibrium is a hypothesis, too "the existence, speed, too way of performance must last explicitly addressed."

He argues that the "classical" economists conduct maintain addressed this number inward a much to a greater extent than acceptable fashion than the neoclassicals. He cites Keynes, Kalecki, too Friedman every bit having discussing what affects private behaviour, too therefore transitioning to the aggregate patterns. The aggregate functional forms are different than the micro form.

Good News For Macro Analysts

For academic economists, the difficulty inward the transition from micro to macro behavior makes the creation of a Grand Unified Theory of economic science difficult. It volition ever last possible to telephone vociferation upward into enquiry the functional forms used inward macro models.

For those who are to a greater extent than interested inward the applications of macroeconomics, this may last somewhat of a blessing. Although it is impossible to prove that a item gear upward of behavioural laws is correct, it is also impossible to prove that they are wrong. This allows us to develop macro models without losing slumber virtually what is supposed to last happening at the micro level. Instead, nosotros tin only focus on the enquiry of whether the aggregate behavior resembles existent Earth information sets.

Whither Neoclassical Economics?

Neoclassical economists justify the exclusion of other schools of thought from the move past times academic journals on the footing that they are non "microfounded." If these microfoundations are fraudulent, i realises that this exclusion was only a raw academic ability grab. Unfortunately, it seems unlikely that the mainstream volition acknowledge that entire decades worth of enquiry are essentially worthless.

(c) Brian Romanchuk 2016