Thursday, January 20, 2011

Are Microfoundations Necessary?

A typically thoughtful piece by Cosma Shalizi, says Arjun.

And it is thoughtful, for sure, and smart, and interesting. But I think it concedes too much to really existing economics. In particular:
Obviously, macroeconomic phenomena are the aggregated (or, if you like, the emergent) consequences of microeconomic interactions.
No, that isn't obvious at all. Two arguments.

First, for the moment, lets grant that macroeconomics, as a theory of aggregate behavior, needs some kind of micro foundations in a theory of individual behavior. Does it need specifically microeconomic foundations? I don't think so. Macroeconomics studies the dynamics of aggregate output and price level, distribution and growth. Microeconomics studies the the dynamics of allocation and the formation of relative prices. It's not at all clear -- it certainly shouldn't be assumed -- that the former are emergent phenomena of the latter. Of course, even if not, one could say that means we have the wrong microeconomics. (Shalizi sort of gestures in that direction.) But if we're going to use the term microeconomics the way that it's used, then it's not at all obvious at all that, even modified and extended, it's the right microfoundation for macroeconomics. Even if valid in its own terms, it may not be studying the domains of individual behavior from which the important macro behavior is aggregated.

Second, more broadly, does macroeconomics need microfoundations at all? In other words,do we really know a priori that since macroeconomics is a theory of aggregate behavior, it must be a special case of a related but more general theory of individual behavior?

We're used to a model of science where simpler, more general, finer-scale sciences are aggregated up to progressively coarser, more particular and more contingent sciences. Physics -> chemistry -> geology; physics -> chemistry -> biology -> psychology. (I guess many people would put economics at the end of that second chain.) And this model certainly works well in many contexts. The higher-scale sciences deal with emergent phenomena and have their own particular techniques and domain-specific theories, but they are understood to be, at the end of the day, approximations to the dynamics of the more precise and universal theories microfounding them.

It's not an epistemological given, though, that domains of knowledge will always be nested in this logical way. It is perfectly possible, especially when we're talking societies of rational beings, for the regular to emerge from the contingent, rather than vice versa. I would argue, somewhat tentatively, that economics is, with law, the prime example of this -- in effect, a locally law-like system, i.e. one that can be studied scientifically within certain bounds but whose regularities become less lawlike rather than more lawlike as they are generalized.

Let me give a more concrete example: chess. Chess exhibits many lawlike regularities and has given rise to a substantial body of theory. Since this theory deals with the entire game, the board and all the pieces considered together, does it "obviously" follow that it must be founded in a microtheory of chess, studying the behavior of individual pieces or individual squares on the board? No, that's silly, no such microtheory is possible. Individual chess pieces, qua chess pieces, don't exist outside the context of the game. Chess theory does ultimately have microfoundations in the relevant branches of math. But if you want to want to understand the origins of the specific rules of chess as a game, there's no way to derive them from a disaggregated theory of individual chess pieces. Rather, you'd have to look at the historical process by which the game as a whole evolved into its current form. And unlike the case in the physical sciences, where we expect the emergent phenomena to have a greater share of contingent, particular elements than the underlying phenomenon (just ask anyone who's studied organic chemistry!) here the emergent phenomenon -- chess with its rules -- is much simpler and more regular than the more general phenomenon it's grounded in.

And that's how I think of macroeconomics. It's not an aggregating-up of a more general theory of "how people make choices," as you're told in your first undergrad economics class. It is, rather, a theory about the operation of capitalism. And while capitalism is lawlike in much of its operations, those laws don't arise out of some more general laws of individual behavior. Rather they arose historically, as a whole, through a concrete, contingent process. Microeconomics is as likely to arise from macroeconomics as the reverse. The profit-maximizing behavior of firms, for example, is not, as it's often presented, a mere aggregating-up of utility maximizing behavior of individuals. [1] Rather, firms are profit maximizers because of the process of accumulation, whereby the survival or growth of the firm in later periods depends on the profits of the firm in earlier periods. There's no analogous sociological basis for maximization by individuals. [2] Utility-maximizing individuals aren't the basis of profit-maximizing firms, they're their warped reflection in the imagination of economists. Profit maximization by capitalist firms, on the other hand, is a very powerful generalization, explaining endless features of the social landscape. And yet the funny thing is, when you try to look behind it, and ask how it's maintained, you find yourself moving toward more particular, historically specific explanations. Profit maximization is a local peak of lawlikeness.

Descend from the peak, and you're in treacherous territory. But I just don't think there's any way to fit (macro)economics into the mold of positivism. And there's some comfort in knowing that Keynes seems to have thought along similar lines. Economics, he wrote, is a "moral rather than a pseudo-natural science, a branch of logic, a way of thinking ... in terms of models joined to the art of choosing models which are relevant to the contemporary world." It's purpose is "not to provide a machine or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly way of thinking about our particular problems." (Quoted in Carabelli and Cedrini.)


[1] Economist readers will know that most mainstream macro models, including the "saltwater" ones, don't include firms at all, but conduct the whole analysis in terms of utility-maximizing households.

[2] This point is strangely neglected, even by radicals. I heard someone offer recently, as a critique of a paper, that it assumed that employers behaved "rationally," in the sense of maximizing some objective function, while workers did not. But as a Marxist that's exactly what one should expect.


EDIT: Just to amplify one point a bit:

I suggest in the post that universal laws founded in historical contingency is characteristic of (some) social phenomena, whereas in natural science particular cases always arise from more general laws. But there seems to be one glaring exception. As far as we know, the initial condition of the universe is the mother of all historical contingencies, in the sense that many features of the universe (in particular, the arrow of time) depend on it beginning in its lowest entropy (least probable) state, a brute fact for which there is not (yet) any further explanation. So if we imagine a graph with the coarse-grainness of phenomena on the x-axis and the generality of the laws governing them on the y-axis, we would mostly see the smoothly descending curve implied by the idea of microfoundations. But we would see an anomalous spike out toward the coarse-grained end corresponding to economics, and another, somewhat smaller one corresponding to law (which, despite the adherents of legal realism, natural law, law and economics, etc., remains an ungrounded island of order). And we would see a huge dip at the fine-grained end corresponding to the boundary conditions of the universe.

FURTHER EDIT: Daniel Davies agrees, so this has got to be right.

11 comments:

  1. This has always seemed to me to be another instance of economists wanting to be scientists, and borrowing hard science concepts to apply to human systems. The most egregious, imho, example of this desire is ceteris paribus. This is an appropriation of the concept of superposition (as it's called in its electronics application): the idea that you can isolate the effects of individual influences on a system and add them up to get the answer. This works great in circuit theory or physics, because the basic drivers (the four forces, say) do not interact in most if not all instances (lets leave quantum mechanics out of this). Two batteries in a circuit will not influence each other at all, and you can add up their individual influences to get the answer you're looking for anywhere in the circuit.
    Human societies on the other hand are nothing if not interactive. The idea of 'holding all else constant' has no practical application, except as SWAG.*

    * SWAG = scientific wild-ass guess

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  2. @Josh:

    I'm afraid your chess analogy is not quite right. Macroscopic chess theory and practice is indeed derived from a robust theory of the microscopic properties of chess pieces--namely, their mobility: the more squares a chess piece can move to and attack, the more valuable it is. This simple metric underlies reliable power rankings: Queen, rook, bishop, knight, King and finally pawn.

    It's true that these micro considerations are sometimes confounded by conditions of constrained mobility--particularly in the opening--or bizarre positional holisms like the occasional knight-and-pawn checkmate combination. Still, the micro properties of pieces exert a domineering influence on the macro outcomes of games. Suppose I ask you to guess the outcome of a mid-game situation, but tell you nothing about the positions of the pieces; all I tell you is that white's major pieces are two rooks and a queen, while black's are two knights and a bishop. You would guess that white will win, deducing this solely from the greater micro-mobility of his individual pieces. And 99 times out of 100, you would be right. This theory of micro-mobility is internalized by good players. When they contemplate a line of play that, say, trades queen for knight, they (almost always) automatically reject it without further exploring its holistic positional advantages or checkmating implications. The micro-mobility theory thus allows them to efficiently prune otherwise unmanageable decision trees.

    Economies are, of course, much more complex than chess-boards, and reductionist theories linking micro behaviors to macro outcomes do often go astray in economics. The solution, I think, is not to reject reductionism in favor of holism--that really does spell the abandonment of scientific reasoning for romanticism and mysticism--but to hew resolutely to a skeptical empiricism. For example, the pernicious micro-macro theory that high marginal tax rates enervate the rich and thus erode productivity and growth is easily demolished with empirical data.

    willboisvert@aol.com

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  3. I'm not sure the argument of micro-properties of pieces accounts for a refutation of Josh's example even though it does explain the simple maxim of, when having a material advantage, simplify the position!!!

    I say this because the relative strength in this metric abstracts from concrete positions, where the value of the pieces in evaluating the position- not a very easily learned attribute- depends on the other pieces. That is why players like Mikhail Tahl and Garry Kasparov were revolutionary-they changed the perspective as to what are the appropriate coordinates for evaluating a position. Its not necessarily about material advantage, but about creating dynamic position, which cannot be explained by taking the pieces in isolation in terms of their weighted average but in relation to each other. If your claim was 100% correct then computers and their calculating capacity, from the very beginning, would have been more than a match for humans. I think its fair to say that computers were programmed to follow this microscopic approach. now they are re-programming them...

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  4. I forgot to add that of course, you can make the argument that the position is defined by the other pieces, in which 99% of the time the metric seems to define such positions, but i think here the issue of "dynamics" in a position is way much more subtle and complicated. Maybe at the end Josh's example is not the best:)

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  5. @Ian:
    You're right that position plays a crucial role in addition to material (i.e., the number and mobility of individual pieces), especially in grandmaster play, where material parity is assumed. (Grandmasters usually resign when they incur a significant material deficit.)My point was simply that microscopic properties of pieces matter a lot to macroscopic outcomes, so theories linking the two are important, though not all-important. To look at this another way, imagine how macroscopic outcomes would change if we changed the microscopic properties of the king, endowing it, as befits its majesty, with the super-mobility of the queen and knight combined. In that case, mates would be virtually impossible, because a super-mobile king could escape virtually any check. Almost all games would end in stalemate with the two kings gazing helplessly at each other across an otherwise empty board.

    @ Josh:

    You're right to emphasize the primacy of broad empirical relationships over micro-foundations in economics. That's actually true in all sciences. The gas law, PV=NRT, started as an empirical macro-law centuries before Boltzmann grounded it in the statistical mechanics of microscopic particles. Newton's Law of Gravity was also a macroscopic empirical relationship, almost occult in its obscurity. Newton had no idea what the microscopic mechanism governing it was; it would take centuries for physicists to understand it as the exchange of gravitons between microscopic particles.

    I just have misgivings about mystifying empirical macro-laws and rejecting in principle any causal link between micro-economics and macro-economics. Sometime micro-foundations do have robust macro-economic implications. For example, the idea that panics among bank depositors lead to needless runs on banks, financial collapse and deflation is a robust theory linking microscopic psychology to macroscopic economic outcomes. It seems to be true, and it yields important and non-obvious policy prescriptions--deposit insurance.

    The world is a muddle, and we need to look at it from every angle, micro and macro, though always with a skeptical eye.

    willboisvert@aol.com

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  6. I cheerfully defer to Ian on all questions chess-related. But just to be clear, I had in mind something simpler, that there is no sense in which individual chess pieces are prior to the game of chess. What's a queen, if were not talking about chess? A female monarch. Or from the other direction, a radially symmetric piece of wood or plastic a few inches long. We cant even start talking about how it moves, let alone it's value and so on, until we've first established the basic parameters of the game. (There is a board with a grid of spaces, pieces occupy one space at a time and can move between them, etc.) That seems obvious, but it seems to me that it's precisely equivalent to what microeconomic foundations fail to do. My argument is that to see human beings as inherently possessing property, or maximizing utility through private consumption, makes no more sense than seeing moving in a straight line as an inherent property of the piece of wood or the royal woman. but that's what microcoundations effectively does. Maybe that's clearer?

    Think of it this way. There are four different claims here.
    1. Macroeconomics can be usefully developed even if microeconomics doesn't (yet) provide adequate microcoundations.
    2. Microeconomics as it exists is incapable of providing adequate microfoundations for macroeconomics.
    3. There is no specifically economic micro theory at all. Economic behavior only exists in the context of the emergent macro phenomenon of capitalism.
    4. There is no microfoundation possible for historically specific totalities like capitalism at all. It is (to some extent) irreducibly contingent.

    Shalizi is arguing for 1. I'm arguing for all four, albeit with diminishing confidence. But even if we reject 4 as obscurantist holism (as Lewontin would say) we can still agree on the first three claims, or at least the first two.

    Also, Bill: Did you look at the original Shalizi piece? He makes some very similar analogies with the physical sciences.

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  7. Oh, also: either or both of you might have seen that classic book by Macpherson, The Political Theory of Possessive Individualism, which makes a somewhat similar point in the context of the history of political philosophy. Basically, he points out what a radical departure it was in the 17th century when people began to think of society as being primarily structured by mutually exclusive property claims. Individuals as microeconomics imagines them really didn't exist before then.

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  8. @Josh:

    Thanks for correcting my misconceptions. You are right that a chess piece’s movements are defined only by the parameters of the entire system of the game, which are historical conventions. My point was that once we take the rules governing movements of individual pieces as “given,” they constitute a micro-foundation for a robust theory linking the properties of individual pieces to macroscopic game patterns and outcomes.

    You’re concerned with a deeper question: where do the rules governing the behavior of individuals come from? Again, you’re right that in chess they do not arise from innate properties of the wooden pieces themselves—they are, as you argue, imposed on the pieces by exogenous forces, namely chess players who design them with an eye to the holistic functioning of the game. (For example, the king’s movements are constrained enough to afford interesting check-mating opportunities so that the game doesn’t automatically end in a boring stalemate.)

    But is chess then really an exact analogy to human economies? Chess pieces have no autonomy or agency or innate preferences, but individual humans do. Most humans prefer satiety to hunger and comfort to pain, and they consciously act on these preferences; to what extent more complex preferences are innate is still an open question. We also know that chess pieces don’t write their own rules—the players do. But in life there are no exogenous players on high; the human pieces write their own rules. Of course human society, just like the chessboard, is a class hierarchy, but sometimes human pawns, individually and collectively, evade or defy the rules kings and bishops write for them. These differences mean that it’s at least plausible to ask whether there are intrinsic regularities to individual behavior, and whether they might shape broad macro-economic phenomena in a way that chess pieces cannot.

    Look, I sympathize with the case you’re making against neo-classical micro-economics. Its concept of an individualistic, asocial state of nature is certainly false, its pretensions are vastly overblown, and it’s propagandizing against progressive macro-economic policies in the name of mystified notions of a competitive, selfish human nature is sinister. There clearly are transpersonal forces—climate and resource availability, technologies and ideologies and regimes of social control—that act systemically to shape individual behavior, and microeconomic models that deny this are unrealistic. But to deny that causality in economics also flows the other way, to reject on principle the possibility that systemic macro-economic parameters can be shaped by tenacious propensities of human nature, is equally unrealistic.

    It’s also a false opposition. Microeconomics, to give it its due, often does acknowledge systemic influences on individual behavior, in precisely the way you advocate. Its mode of argument is often to ask, given a prior set of social and legal constraints, which of the myriad propensities of human nature—remember that neo-classicism is nihilistic—will come to the fore: predation? rent-seeking? entrepreneurship? What’s more, micro-foundations don’t necessarily entail neo-classicism. Some fashionable theories of human nature—evolutionary psychology’s model of kin-bonding humans ruled by innate moral instincts, behavioral economists’ model of risk-averse humans prone to silly cognitive biases—actively undermine the neo-classical model of rational profit-maximizers.

    willboisvert@aol.com

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  9. You referenced:
    that classic book by Macpherson, The Political Theory of Possessive Individualism, which makes a somewhat similar point in the context of the history of political philosophy. Basically, he points out what a radical departure it was in the 17th century when people began to think of society as being primarily structured by mutually exclusive property claims. Individuals as microeconomics imagines them really didn't exist before then.
    That’s like the Virigina Woolf aphorism that, about the year 1910, human nature changed. But what can it mean that individuals “really didn’t exist” before the 17th century? Was there not a single medieval merchant who bought cheap and sold dear, no rich man who lent at interest and then seized his debtor’s land? (If so, what were anti-usury laws for?) Does Macpherson mean that the social ideology finally caught up with the economic facts, or that it instigated economic change de novo? If there were no individuals, how do we explain Achilles or the Canterbury Tales? This statement takes social constructionism too far, to the point of mystifying it.

    Francis Fukuyama says a lot about this in his upcoming The Origins of Political Order. He’s got a fascinating argument that feudalism, going back to the 12th century and farther, was actually a modernizing force that hatched revolutionary notions of individualism and property rights. (The feudal knighting ceremony posited voluntary agreements between unrelated vassals and lords with contractually specified mutual obligations—a profound break with the customary system of automatic allegiance to family and clan.) The Church played a crucial role: it promoted marriage and inheritance laws that broke up customs of collective land-ownership by family and clan so that pious individuals, especially widows, could bequeath land to the church without the permission of kinsmen. I think Macpherson’s periodization, at least, sounds wrong; Western Europe, circa 1300, was already structured by mutually exclusive property claims, and flirting with joint-stock companies, double-entry bookkeeping, etc. Were Europeans micro-economic individualists then? Some must have been.

    So yes, ideologies—in this case Catholicism and feudalism—can change economic behavior. But to say that the individual “didn’t really exist” before the 17th century is taking social constructivism too far, to the point of mystifying it. People certainly could conceive of individuals owning land, and many individuals wanted to, but existing custom and law meant an individual could rarely disentangle a piece of land from the countervailing claims of relatives. (Fukuyama points out that even today oil companies trying to get mineral rights in New Guinea have to negotiate with thousands of people who claim collective title to pieces of land where their clan-members are buried.) Once the Church threw its institutional and ideological weight behind individual land ownership, things changed—but not because human nature changed.

    People are not monads, but they are also not blank slates for social paradigms to write upon. It’s all about the balance.
    willboisvert @aol.com

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