by Angus Armstrong
Our third annual Rebuilding Macroeconomics conference aims to explore some of the threads running through the thirty seven research projects we have funded. If we were to choose two words to summarise, they would be ‘social’ and ‘interaction’ between people.
This post describes one way to see the conference sessions fitting together. A link to the conference programme and joining instructions can be found here.
When we issued our calls for research, applicants were asked to articulate which big real-world issue they would address, and which interdisciplinary methods or new practices they would use. The idea was not to presume a method, but to take risks and try to stretch the limits of macroeconomic enquiry.
We show samples of research where we have brought into economics ideas from anthropology, cognitive science, complexity, ecology, evolutionary science, sociology, psychology and physics. We also hear from leading policy makers about what they see as the priorities.
Social macroeconomics opens-up outcomes that cannot always be deduced from micro-foundations. It examines processes, rather than being limited to equilibrium paths. This may allow access to some important macroeconomic policy issues such as resilience, inclusion, stability and identity which have so far proved elusive.
Day 1: Nature of social reality
A fundamental proposition to emerge from many of our projects is that the macroeconomy is built on social foundations. This means embracing that, in Spinoza’s words, ‘man is a social animal’ and that most of our meaningful actions take place together in groups with other individuals.
We engage in almost non-stop interactions with those nearest to us to meet our needs for care, affection, sharing ideas and many other motives including, of course, our material needs. Through our interactions we reciprocate engendering trust, forging shared customs and identities. Our economic success may even rest on our ability to cooperate enabling us to overcome a myriad of incomplete contracts.
Our first panel considers how interactions within and between groups creates our social structure and what is the appropriate level of analysis for macroeconomics. We usually see the economic terrain as either micro or macro. Yet small social groups are the building blocks of successive levels of hierarchical organisation. These blocks can be combined in endless ways.
According to economic orthodoxy, people make their decisions on the basis of fixed preferences – de gustibus non est disputandum. Yet if common behaviours are forged within groups, the appropriate level of analysis may be a meso level depending on the question being asked.
Our second panel explores how hierarchical structures evolve over time. Evolutionary theory explores how groups compete and what ensures survival. Dynamics may favour cooperative groups (e.g., well managed firms) at group level selection to the extent that this overcomes within group non-cooperative incentives. The constant reconfiguration of the building blocks ensures an evolving economic environment.
Day 2: Methods of analysis
To understand macro-phenomenon such as endogenous booms and crashes, agglomerations and areas of depravation, ‘imbalances’ that are sustainable until they are not, and productivity surge eras versus hysteresis, we need theory to elucidate the underlying mechanisms. It is far from clear that convergence and equilibrium are the right lens to interpret such a system.
In a structured and evolving society, individuals face complex multi-layered decisions often with unreliable and local information. We have to be strategic, anticipating the responses of others, with competing interpretations of their meaning. Our action is purposeful but guided by our thoughts which, in turn, are influenced by our social context.
Game theory is, of course, all about strategic decision making. But we still need a coordination mechanism to make sure that we correctly interpret how others are will respond. Last week’s Nobel Prize winner Robert Wilson is sceptical that we have made any real progress in answering these foundational social questions.
Our third panel looks at decision making in a world of fundamental uncertainty. Rather than imposing that everyone perceives the same structure of the economy, we need a social epistemology. To borrow from Herbert Simon, in this context rationality is bounded not necessarily by our imperfect cognitive capacity (e.g., the path of behavioural economics) but by the social foundations we create collectively which form the context for much of our decision making.
Our fourth and fifth panels address possible approaches to disequilibrium macroeconomics and stability. Once we increase the number of agents with non-trivial interactions in a system ‘new laws’ emerge at the aggregate level that could not have been reasonably predicted in advance – even with a sophisticated knowledge of the agents.
This is ‘emergence’ where higher level outcomes emerge that cannot be fully reduced to the actions of individuals. Macro becomes different to micro. Simple examples include knowing how a flock of birds would fly or school of fish would swim by studying each animal in isolation. When two people become a couple they also take-on different behaviours.
These modelling techniques require us to be explicit about our interactions. While they invariably involve computer simulations, they can incorporate multiple attractor states or groupings analogous to socially structured settings discussed above. These models highlight areas of concentration risk, threshold effects, transition phases into other states (i.e., crises) and feedback loops.
One example is the renewed interest in economic resilience. We know from other disciplines such as physics, biology and engineering that optimizing a complex system along a single dimension generates fragility along at least one other dimension. This is similar to trophic coherence structures observed in food chains which is one project being discussed.
Day 3: Cultures of expertise
All the discussion above would be incomplete if we did not question knowledge production within our own group – economists – and how it relates policy making and practice. One of the questions the ESRC wanted answering is whether a monoculture exists in macroeconomics and the role the role of institutions, hierarchies and knowledge practices within the economics profession.
Economics, like all disciplines, is hierarchical. But unlike experimental sciences, where existing orthodoxies are regularly challenged and overturned by experiment, economic ideas can be maintained by doctrine. This may be a necessary component of a non-experimental science. We would like to reflect on why this and some of the consequences for policy making.
At its best, a culture of expertise protects a body of knowledge from ‘fast pattern seekers’. At its worst, it can inhibit innovation and exclude people and ideas. Our sixth panel looks at cultures of expertise in two linked sites: academic macroeconomics and economic institutions. It is through academia that economists are socialised, assessment frameworks create incentive structures and it is through the policies of economic institutions that their ethos and networks impact on our lives.
Our seventh panel takes a step back to ask the coming generation of economists their opinion about the current and future state of macroeconomics. Economics has been challenged by various student groups to become more open, relevant and for everyone. We are extremely fortunate to have such committed people to probe and drive macroeconomics forward. We have invited representatives from a number of economics groups to share their ideas.
We close the conference with a conversation between Martin Sandbu of the Financial Times and author of The Economics of Belonging and myself about relevance for policy and the path forward.