Mark Thoma suggests that people need to pay more attention to the macroeconomic foundations of microeconomics. We talk about the microeconomic foundations of macroeconomics all the time (this is one of those areas where Keynesians have been working and publishing seminal stuff for decades, but critics ignorantly insist they never even tak about). As a result, we have good instincts to guard against committing ecological fallacies. But we never consider the reverse, and so we often very easily slip into fallacies of composition. Things that ought to be intuitive, like the "paradox of thrift", instead become... well... paradoxical.
The other major problem that comes of this micro-obsession is the confusion of accounting identities with behavioral laws. When you think that all you need to explain is individual behavior, and then you just have to add up all that individual behavior, then you can put an awful lot of faith in accounting identities. Ceteris paribus (the most dangerous two words in economics) allows all sorts of false inferences based on intuition about individual behavior.
The really interesting question is why we're always so interested in microfoundations in the first place and not macrofoundations. I honestly never considered this until I saw this by Thoma today. Why?
Wednesday, June 16, 2010
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Because there really is no such thing as macroeconomics. What we call macroeconomics is the totality of micro decisions.
ReplyDeleteJust as a forest is nothing more than a collection of trees and wildlife; it has no separate identity other than what makes it up.
But a forest IS more than a collection of trees and wildlife. That's the whole point.
ReplyDeleteDo biologists that aren't specifically interested in anatomy study their subjects in isolation in a cage, or do they study them in their wider ecosystem? Why? Why can't they study everything its own cage and then say "well the ecosystem is what happens when we put all the wildlife next to each other".
It makes no more sense to do that than to have a microeconomics that is not conscious of macro phenomena.
Maybe it was my mistake in bringing up the topic of forestry, but you are confusing and overlapping distinct areas of study.
ReplyDeleteAm I suggesting that because we know the one axiom of mathematics (and thus can deduce the rest of it) that we can apply the same deductive formulae for botanists studying plants, or chemists studying atoms? Of course not.
I am suggesting however, that in studying individual action, we as economists understand all the insights of the market economy because they are already present in the study of man.
This argument goes back to the typical argument about whether praxeology is the tool needed to study economics.
I'll ask you a question now: What macro concerns do we need to be aware of that are not already fully and completely elucidated by the study of the individual? What more can we learn by studying a collection of individuals rather than a single individual, in an economic sense?
Prove to me, in a sense, that there is something in the "whole" that is not present in the sum of its parts.
Biology is the study of living organisms, and humans are living organisms. What gives you the right to retract a discussion of biology and insert a discussion of mathematics? The burden is on you to demonstrate why the study of the economy is not like biology and why it is like math, because the default assumption should be that the study of any given living organisms is going to be roughly similar to the study of all other living organisms.
ReplyDeleteYou're also confusing the point I'm making. I don't know if there is any knowledge that can't be derived from studying individuals. That really depends on how closely you study those individuals, I suppose. The point is that macro-study improves your ability to understand collective phenomena that may not be impossible to derive from individual study, but are perhaps harder to - like the paradox of thrift, for example.
What I haven't heard from you is exactly why we have to study the economy from the individual level. You assert that study individuals is sufficient and... nope... that's it. That's all you say. Tell me Mattheus, how am I not supposed to understand praxeology as some sort of religion? You swear by it and yet you never lift a finger to justify it. Evidence can't touch it. And while I'm willing to recognize the merits of multiple perspectives, praxeology overrules everything else. Why? All you ever say is "it is entirely sufficient in itself". Sooner or later you're going to have to do better than that, or people are going to start getting tired of you.
"Do biologists that aren't specifically interested in anatomy study their subjects in isolation in a cage, or do they study them in their wider ecosystem? Why? Why can't they study everything its own cage and then say "well the ecosystem is what happens when we put all the wildlife next to each other"."
ReplyDeleteWhat you are really talking about here is ecology; a sub-set of the biological sciences. While a lot of biologists draw from ecology, most biologists aren't ecologists. Anyway, the focus of most biologists is in fact individual or specific types of organisms or even processes within individual or types of organisms; they may relate that other organisms, but that isn't required nor what is done in the majority of cases.
I would say that these are just rather different disciplines and that trying to draw analogies between them is not going to get one very far.
Xenophon -
ReplyDeleteAs in post after post after post here you seem to be construing my statement to be the most extreme, strange version possible - I suppose because that's the version you have the easiest time arguing against.
I'm not saying that every biologist needs to consider the broader ramifications of the ecosystem any more than I'm saying that every economist needs to consider the broader ramifications of the macroeconomy. But it is an important perspective and it's one that has been underemphasized in economics (macrofoundations have been underemphasized, that is - microeconomics, macroeconomics, and microfoundations obviously aren't underemphasized).
Economics is a very specific kind of human biology.
"As in post after post after post here you seem to be construing my statement to be the most extreme, strange version possible..."
ReplyDeleteAu contraire, I'd say that shoe fits on your foot.
"Economics is a very specific kind of human biology."
And I suppose history, sociology and political science are also just very specific types of human biology as well. This is just a silly claim on its face.
Anyway, I'm quite sure why economics cannot simply stand on its own, why economists have historically tried analogize it to one or another of the sciences.
ReplyDelete1. Sociology and political science are very specific forms of human biology. I'm not sure history is - history isn't really a science.
ReplyDelete2. It's not an analogy it's a branch. An analogy is simply meant as an illustration. I'm not illustrating a point, I'm describing a reality. When you study the social system of ants or apes it is considered biology. When you study the social system of humans it has to be grounded in an understanding of humans as a biological organism. There's no analogy here - those are the facts. That's like saying that chemistry is "analogizing" when it acknowledges that atomic physics is at the root of chemistry. That's not an analogy, it's a real relationship.
Nor is economics really a science.
ReplyDelete"It's not an analogy it's a branch."
You keep telling yourself that.
RE: "Nor is economics really a science."
ReplyDeleteI know you're fond of unsupported allegations, but you might want to defend this a little more. It's not quite as self-evident as you seem to think.
I think economics can be a science, but so far it is at such a juvenile level of development that it isn't one.
ReplyDelete“The burden is on you to demonstrate why the study of the economy is not like biology and why it is like math, because the default assumption should be that the study of any given living organisms is going to be roughly similar to the study of all other living organisms.”
ReplyDeleteUntil and unless you accept that human action is fundamentally different than animal instinctive behavior, this argument stops here. It was a great contribution of Mises to fully elucidate the exact logical character of man and the implications that follow because of it. Once again, I stand by the axiom of action and all the deductions that follow. In that sense, the study of man becomes an application of logic.
“The point is that macro-study improves your ability to understand collective phenomena that may not be impossible to derive from individual study, but are perhaps harder to - like the paradox of thrift, for example.”
What collective phenomena? Is there a different type of action that man is involved in when in the “macro sphere?” As far as I know, the only action that can describe our behavior is action to change our surroundings from a state of greater uneasiness to a state of lesser uneasiness. Are you arguing this doesn’t hold in the macro economy?
You’re going to have to excuse my impoliteness, but the paradox of thrift is a fantasy – A conjured up scenario in the make-believe world of wage and price rigidity. Once you relax the assumption of price rigidity, you’ll realize that a society increasing its cash balances does nothing more than increase the purchasing power of the currency.
“What I haven't heard from you is exactly why we have to study the economy from the individual level.”
Because the whole is truly nothing more than the sum of its parts. The science of catallactics does not distinguish between a farmer growing wheat to feed himself and a watchmaker building watches to trade for wheat to feed himself. Autarkic and interpersonal exchange follow the same logical steps. So, not only is it much more difficult to study economics from the “macro” level, it’s also more prone to error because you aren’t privy to the individual desires and actions that create the economy.
HA! This digressed into the next post I wanted to comment on. So I will start here:
ReplyDeleteI think, Daniel, that we have a tendency to ignore macro-foundations is that we come through undergrad and even grad school being taught that macro is simply an aggregation of micro. I was told by my thesis advisor, when I applied to grad school, that I should expect to take micro and macro , which was just micro. And in many ways they are right. Macro is certainly built on a micro foundation.
But to throw your favorite Basitat quote into the ring in defense of your argument..let's look at things as if the possibility existed of reverse causality. And in fact it is quite clear that real business cycle expectations drive consumer behavior. That monetary policy drives investor behavior. That macro-financial linkages drove the recession 2007-2010 which had huge effects on micro-fundamentals. Inflation, a macro-fundamental is a huge determinant in firm and individual choices. In fact I am working on a paper right now on real time business cycle forecasting (nowcasting) that is intended to help investors have a better handle on investment decisions. So anyway, my point is...it makes a lot of sense to think about things in this way.