Friday, November 28, 2014

Micro, Macro, Meso, and Meta Economics

HONG KONG – Given the crisis weighing down the world economy and financial markets, it is not surprising that a substantive reconsideration of the principles of modern economics is underway. The profession’s dissident voices, it seems, are finally reaching a wider audience.

For example, the Nobel laureate Ronald H. Coase has complained that microeconomics is filled with black-box models that fail to study the actual contractual relations between firms and markets. He pointed out that when transaction costs are low and property rights are well defined, innovative private contracts might solve collective-action problems such as pollution; but policymakers rely largely on fiscal instruments, owing to economists’ obsession with simplistic price theory.

Another Nobel laureate, Paul Krugman, has claimed that macroeconomics over the last three decades has been useless at best and harmful at worst. He argues that economists became blind to catastrophic macro failure because they mistook the beauty or elegance of theoretical models for truth.

Both Coase and Krugman bemoan the neglect of their profession’s patrimony – a tradition dating at least to Adam Smith – that valued grand and unifying theories of political economy and moral philosophy. The contemporary obsession with reductionist and mechanical models seems to have driven the profession from theory toward ideology, putting it out of touch with the real economy.

The simplicity and elegance of micro and macro models make them useful in explaining the price mechanism and the balance or imbalance of key aggregate economic variables. But both models are unable to describe or analyze the actual behavior of key market participants.

For example, the textbook theory of the firm does not examine the structure of corporate contracts, and delegates the study of assets, liabilities, incomes, and expenditures to “accounting.” How can firms be understood without examining the corporate contracts that bring together their stakeholders – that is, their shareholders, bankers, suppliers, customers, and employees – whose complex relationships are manifested in companies’ balance sheets and transaction flows? In concentrating on production and consumption flows, national accounts aggregate or net out such data, thus neglecting the importance of financing and balance-sheet leverage and fragilities.

Indeed, today’s mainstream micro- and macroeconomic models are insufficient for exploring the dynamic and complex interactions among humans, institutions, and nature in our real economy. They fail to answer what Paul Samuelson identified as the key questions for economics – what, how, and for whom are goods and services produced, delivered and sold – and rarely deal with “where” and “when,” either.

The division of economics into macroeconomics (the study of economic performance, structure, behavior, and decision-making at the national, regional, or global level) and microeconomics (the study of resource allocation by households and firms) is fundamentally incomplete and misleading. But there are at least two other divisions in economics that have been neglected: meso-economics and meta-economics.

Meso-economics studies the institutional aspects of the economy that are not captured by micro or macroeconomics. By presupposing perfect competition, complete information, and zero transaction costs, neoclassical economics assumes away the need for institutions like courts, parties, and religions to deal with the economic problems that people, firms, and countries face.

By contrast, the economists Kurt Dopfer, John Foster, and Jason Potts have developed a Macro-Meso-Micro theory of evolutionary economics in which “an economic system is a population of rules, a structure of rules, and a process of rules.” The most important feature of a meso-economic framework is to study the actual web of contracts, formal or informal, in family, corporate, market, civil, and social institutions. Doing so provides a natural linkage between micro and macro, because the micro-level rules and institutions typically imply macro-level consequences.

Meta-economics goes still further, by studying deeper functional aspects of the economy, understood as a complex, interactive, and holistic living system. It asks questions like why an economy is more competitive and sustainable than others, how and why institutions’ governance structures evolve, and how China developed four global-scale supply chains in manufacturing, infrastructure, finance, and government services within such a short period of time.

In order to study the deep hidden principles behind human behavior, meta-economics requires us to adopt an open-minded, systemic, and evolutionary approach, and to recognize the real economy as a complex living system within other systems. This is difficult, because official statistics mismeasure – or simply miss – many of the real economy’s hidden rules and practices.

For example, measurements of GDP currently neglect the costs of natural-resource replacement, pollution, and the destruction of biodiversity. Furthermore, it is common to assume in public policy that what is not easily measured statistically is insignificant or does not exist. Static, linear, and closed analyses applied to open, non-linear, dynamic, and interconnected systems are bound to be faulty and incomplete.

The British economist Fritz Schumacher understood that human institutions, as complex structures with dynamic governance, require systemic analysis. He defined meta-economics as the humanizing of economics by accounting for the imperative of a sustainable environment; thus, he included elements of moral philosophy, psychology, anthropology, and sociology that transcend the boundaries of profit maximization and individual rationality.

Similarly, Eric Beinhocker, at the newly established Institute for New Economic Thinking, argues for “a new way of seeing and understanding the economic world.” Such an approach requires incorporating psychology, anthropology, sociology, history, physics, biology, mathematics, computer science, and other disciplines that study complex adaptive systems.

We believe that the framework of “micro-macro-meso-meta-economics” – what we call “systemnomics” – is a more complete way to analyze human economies, understood as complex living systems evolving within dynamically changing complex natural systems. This is a particularly useful framework for analyzing the evolution of ancient but re-emerging economies such as China and India, which are large enough to have a profound impact on other economies and on our natural environment. 

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    1. CommentedNathan Coppedge

      What the article points out is the "vertical problem" of the traditional structural model. Nature is made of coherent, horizontal relationships, which deal with verticals in terms of value that is not financial. When the value is reduced to a form of finance, other values go missing. It is interesting to admit to what degree the displacement is entirely a displacement of values, and not necessarily some outward "process-thing". While it is a key insight to realize that businesses are dynamic, more often than not I am guessing that the key influences upon a business' values financially or otherwise are variables such as values influencing processes, rather than the processes themselves. Once or as soon as those processes become values, then we are dealing with macro economics. So I don't think it is ultimately important to dissuade people of the value of the macro. The macro is implicated in the meta much as the micro is implicated in the meso. To some degree these are all functions of some type of citizenship (following in a Platonic vein), even if problems emerge such as the lack of true environmental citizenship. But the counterpoint to these ostensible or prospective problems, these pond-logics which emerge from considering economics as a function of citizenship, is the limit of economic theory itself, as expressed by the "vertical problem". Ultimately, what I think some economists have trouble embracing is that the future "is become" a function of computers. We need to embrace not only the citizen's functional environment, but the virtual citizen's economic function. This writing seems to raise a number of issues which may concern economic development, not only as a present conditional reality, but as a future theory-environment.

    2. Portrait of Gregor Schubert

      CommentedGregor Schubert

      It's all oh-so-complex! Nature! Humans! And look at those economist simpletons:
      "By presupposing perfect competition, complete information, and zero transaction costs, neoclassical economics assumes away the need for institutions like courts, parties, and religions to deal with the economic problems that people, firms, and countries face."

      Strawman much, Mr. Sheng and Mr. Geng? If anyone thinks that the statement above represents mainstream economics, he must have been asleep since about the 1900s. Asymmetric information, institutions, imperfect competition etc. are standard parts of most economics classes and research nowadays! However, and here the authors are half-right, these things are complex to model and oftentimes the simpler abstraction does well enough to sacrifice the complexity of a comprehensive model for one that human minds can actually comprehend.

      In the end this column seems to be a cry for a better world, where we can understand it all! But as long as policy makers are not, as suggested here, blindly following textbook economics but rather falling into myths and fallacies as soon as the word "crisis" appears on the horizon, keeping it simple may be the best way of keeping it real: If a policymaker was taught the New-Keynesian model and nonetheless thinks that fiscal policy always works and that asset price declines cause recessions, the issue is not a lack of complex models - it is a lack of understanding even the simple models.

    3. CommentedAlex Kee

      Look at Nature, which other living organism on Earth invent and practice Economics? Only when we humble ourselves and recognize that Economics like religion is based on beliefs only and own no holy cows but that it is created to serve humanity and not the other way round; can we then only and truly achieve Enlightenment!

    4. CommentedMadaniou DIEME

      Over the last three decades, macroeconomics has been useless because of the rise of liberalism.

    5. Commentedjames durante

      Part of "systemnomics" (what an atrocious word!) must be a full understanding of the ethics, psychology and ecology of what Aristotle called "unnatural wealth getting." Retail trade and usury have, as an aim, the accumulation of unlimited wealth. Money becomes entirely detached from its origin as a means of exchanging use values. For the merchant and banker there is virtually no conception whatever of the actual, natural value of things but only of the maximum money derived from exchange. This is approximately one billion times the case today with multinational corporations backed by interstate and state institutions. The devastating impact on the living earth is proportionally similar.

      You could say it'd greed. But it is also a matter of losing touch with family, community, earth, and the more substantial and rewarding aspects of human existence.

      Anyway, hers is Aristotle from Book I of the "Politics":

      "Of everything which we possess there are two uses: both belong to the thing as such, but not in the same manner, for one is the proper, and the other the improper or secondary use of it. For example, a shoe is used for wear, and is used for exchange; both are uses of the shoe. He who gives a shoe in exchange for money or food to him who wants one, does indeed use the shoe as a shoe, but this is not its proper or primary purpose, for a shoe is not made to be an object of barter. The same may be said of all possessions, for the art of exchange extends to all of them, and it arises at first from what is natural, from the circumstance that some have too little, others too much. Hence we may infer that retail trade is not a natural part of the art of getting wealth; had it been so, men would have ceased to exchange when they had enough. In the first community, indeed, which is the family, this art is obviously of no use, but it begins to be useful when the society increases. For the members of the family originally had all things in common; later, when the family divided into parts, the parts shared in many things, and different parts in different things, which they had to give in exchange for what they wanted, a kind of barter which is still practiced among barbarous nations who exchange with one another the necessaries of life and nothing more; giving and receiving wine, for example, in exchange for coin, and the like. This sort of barter is not part of the wealth-getting art and is not contrary to nature, but is needed for the satisfaction of men's natural wants. The other or more complex form of exchange grew, as might have been inferred, out of the simpler. When the inhabitants of one country became more dependent on those of another, and they imported what they needed, and exported what they had too much of, money necessarily came into use. For the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.

      When the use of coin had once been discovered, out of the barter of necessary articles arose the other art of wealth getting, namely, retail trade; which was at first probably a simple matter, but became more complicated as soon as men learned by experience whence and by what exchanges the greatest profit might be made. Originating in the use of coin, the art of getting wealth is generally thought to be chiefly concerned with it, and to be the art which produces riches and wealth; having to consider how they may be accumulated. Indeed, riches is assumed by many to be only a quantity of coin, because the arts of getting wealth and retail trade are concerned with coin. Others maintain that coined money is a mere sham, a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food. But how can that be wealth of which a man may have a great abundance and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold?

      Hence men seek after a better notion of riches and of the art of getting wealth than the mere acquisition of coin, and they are right. For natural riches and the natural art of wealth-getting are a different thing; in their true form they are part of the management of a household; whereas retail trade is the art of producing wealth, not in every way, but by exchange. And it is thought to be concerned with coin; for coin is the unit of exchange and the measure or limit of it. And there is no bound to the riches which spring from this art of wealth getting. As in the art of medicine there is no limit to the pursuit of health, and as in the other arts there is no limit to the pursuit of their several ends, for they aim at accomplishing their ends to the uttermost (but of the means there is a limit, for the end is always the limit), so, too, in this art of wealth-getting there is no limit of the end, which is riches of the spurious kind, and the acquisition of wealth. But the art of wealth-getting which consists in household management, on the other hand, has a limit; the unlimited acquisition of wealth is not its business. And, therefore, in one point of view, all riches must have a limit; nevertheless, as a matter of fact, we find the opposite to be the case; for all getters of wealth increase their hoard of coin without limit. The source of the confusion is the near connection between the two kinds of wealth-getting; in either, the instrument is the same, although the use is different, and so they pass into one another; for each is a use of the same property, but with a difference: accumulation is the end in the one case, but there is a further end in the other. Hence some persons are led to believe that getting wealth is the object of household management, and the whole idea of their lives is that they ought either to increase their money without limit, or at any rate not to lose it. The origin of this disposition in men is that they are intent upon living only, and not upon living well; and, as their desires are unlimited they also desire that the means of gratifying them should be without limit. Those who do aim at a good life seek the means of obtaining bodily pleasures; and, since the enjoyment of these appears to depend on property, they are absorbed in getting wealth: and so there arises the second species of wealth-getting. For, as their enjoyment is in excess, they seek an art which produces the excess of enjoyment; and, if they are not able to supply their pleasures by the art of getting wealth, they try other arts, using in turn every faculty in a manner contrary to nature. The quality of courage, for example, is not intended to make wealth, but to inspire confidence; neither is this the aim of the general's or of the physician's art; but the one aims at victory and the other at health. Nevertheless, some men turn every quality or art into a means of getting wealth; this they conceive to be the end, and to the promotion of the end they think all things must contribute.

      Thus, then, we have considered the art of wealth-getting which is unnecessary, and why men want it; and also the necessary art of wealth-getting, which we have seen to be different from the other, and to be a natural part of the art of managing a household, concerned with the provision of food, not, however, like the former kind, unlimited, but having a limit. "

    6. CommentedProcyon Mukherjee

      Some of the fascinating aspects of Economics is that we are dealing with responses to stimuli which is itself multiplying and we have on the other hand factors and choices that are also equally high in number, which cannot all be modeled either linearly or non-linearly, while some of them are always being rationally ignored continuously. The variables interact with the polity responses, institutions and the evolving debt & credit induced macro-environment where excessive financialization has taken the reins of decision making processes that earlier existed. As information asymmetries have come down, transaction challenges have altered course but we have to further deal with the rise of institutions and their regulatory environment which is mired in an exchange which more often than not leaves one winner and many losers; incentives of the society are increasingly being designed and accepted by the majority where ‘winner takes all’.

      I have a couple of questions which do not have straight answers, like what if we alter the rules of the game for a temporary period to make a lasting adjustment to the debt woes of the world, would the world be better off with this adjustment that leaves the current winners lose part of their advantage, but leaves the rest with a better head-start for the future? How can a fair deal be reached to achieve this adjustment where there is a sacrifice involved for the more advantaged?

      Procyon Mukherjee

    7. CommentedPartha Sarkar

      This is a fairly interesting article and the paper on “Micro-Meso-Macro” framework to explain how micro forces shape overall macroeconomic environment is interesting. The framework does have the potential to be the ontological framework of choice for evolutionary economics.

      As the article suggests, the success of any theory and its usefulness lies in it’s’ ability to accurately predict and account for real world events. Based on the same litmus test, the current Macro & Micro economic theories have been criticized for their “algebraicism”, abstractionism and adherence to equilibrium models valid only in a very narrow domain and context.

      However the same litmus test is what limits the potential for such a framework because, in my opinion, it will be decades before the first working mathematical model based on such framework is realized. This is mostly due to the fact that any one of these models will have a n:1 - Micro:Meso relationships and correspondingly z:1 - Meso:Macro relationships. As both n and z ~ large numbers and most of these relationships tend to be a random walk of some sorts with infinite dimensions and often stochastic steps, the aggregate stochastic nature of the final function would inherently make the models extremely inaccurate.

      Moreover when compared to other scientists, say a physicist or a biologist, the Economists do not have the luxury of validating models in a controlled setting. Thus the only way the models on Micro-Meso-Macro structures can be verified is to see whether they accurately work with empirical data. However this also limits the ability to further refine and fine tune a model and find its boundaries through manipulation of endogenous or exogenous variables.

    8. CommentedJorge Simao

      Moving from blind individualistic and reductionist models to fully holistic ("kitchen and sink") models/theory is also not the right solution. Just adding the political dimension, bits of structure, with some salt of plausible psychology, with some parallel computer for simulation crunching, would make all the difference in the world. That produces models that specify -- move X x% and Y will move by y%. However, most economics studies are more motivated to repeat the same assumptions and make the same unfounded conclusions that serve status quo, or ask for a return to past that never existed.

    9. CommentedZsolt Hermann

      Following the principles and examples of the article it seems that first of all we have to start with the meta-economics level in order to understand the big picture, how the whole system is set up what the main principles laws are moving the system, like understanding and installing the operating system on the computer.
      And when the operating system, the foundations are right, that is when the finest details down to the micro level can be sorted. Going back to the computer example this is the time when the more specific softwares, individual functions can be put in place.
      If we do not get the large, overall, meta picture right, if we try to install software that is unsuitable for the operating software, we fail.
      This is what is happening today.
      While the environment around humanity has changed completely, when a completely new operating software is needed, we still try to use the old system, old programs and methods.
      Today's global, fully interconnected and interdependent human network inside the closed, finite natural environment requires a completely new approach, completely new social and economic theories than the previous, free market, open, fragmented, polarized world.

    10. CommentedJ. C.

      The problem is not the method but the variables we are optimizing... the models are still useful, what is worthless is traditional economists understanding and over-simplification of the human nature.

    11. CommentedFrank O'Callaghan

      What we choose to measure and what we choose to value determines our understanding of economics.

      It has been clear for a very long time that the choices have not been in the interest of the great majority of people or at least only in their interests as much as the ruling elites found necessary.

    12. Commentedrobert defina

      Macro-Meso-Micro theory of evolutionary economics already exists. It's called sociology.

        CommentedGustavo Flores

        No, Economics is a Social Science, as like sociology, anthropology, archaeology, criminology, history, linguistics, communication studies, political science, international relations, geography, and psychology.