Microeconomics, Macroeconomics and Consciousness.

Please Note:

The author of this article takes no credit for the ideas mentioned though there are his own ideas involved too. The exact work where the fundamental idea behind this article was present, is not in possession of the author, it shall be duly acknowledged as and when the author finds it or recalls about it.

Economic theorizing (except for some heterodox schools), follows the empirical method of investigation, primarily subjected to the principles of logical consistency and empirical falsification. In such a methodological set up, it’s imperative to understand the definitional categories of Economics so as to understand the subject and the ongoing research properly.

The definitions of Macroeconomics and Microeconomics are one such area. Historical developments and the contribution of numerous Economists have helped develop a particular definition of these terms. It is possible to understand them in one more way- as the results of conscious and unconscious individual decision making.

In Microeconomic analysis, an economy is essentially disaggregated into individual units, at the most being grouped into a non-aggregate group- such as industry, market, etc. The individuals are assumed to follow certain behavioural assumptions such as rationality, transitivity, etc. and are expected to do so under certain environmental settings such as under a particular market structure, under particular macroeconomic environment.

Methodological individualism thus considers an individual consumer or a producer as the fundamental unit of analysis. The results of this rationalized individual’s decision making through her interaction with other similar individuals produces Microeconomic outcomes. These outcomes are mainly in terms of Price, Demand and Supply generated in a market (whether labour, product or factor). What is to be noted here is that these economic outcomes are the result of conscious decision making by these individuals. The individuals consciously act and react in a particular manner which gives rise to their anticipated results. For e.g. when buyers and sellers negotiate over price, the outcome is something that is a result of their conscious efforts to reach that result- otherwise they wouldn’t get into it in the first place.

Contrast this with aggregated outcomes- as analyzed by Macroeconomics. Numerous individuals are aggregated into broad units of analyses- such as Households, Firms, Government and Foreign sector or in terms of markets- such as labour, goods, money and assets markets. The interaction of ‘aggregated’ individuals in these markets cuts across a hugely heterogeneous set of objective functions of individuals- all undertaking conscious rationalized decision making to achieve their desired economic outcomes.

Yet, what is surprising is that the macroeconomic outcomes produced by individual decision making units through their interactions in these aggregated markets are not at all produced by any conscious efforts to achieve these outcomes. Macroeconomic outcomes are primarily in terms of Output, inflation, unemployment, interest rate, exchange rate, price level, etc. None of these macroeconomic outcomes (produced by the macroeconomy) is a part of a microeconomic unit’s objective function, yet the diverse and theoretically infinite objective functions (due to subjective, non-comparable preference rankings of individuals) somehow fulfil the macroeconomic objective function- viz. of price and output stability and other such macro-policy objectives.

Macroeconomic outcomes are thus an unconscious result of conscious individual decision making and economic activity. This difference of the type of human consciousness that is associated with macroeconomics and microeconomics may open up new doors of understanding the role that Analytical Philosophy (and especially ontology) can play in appreciating better the beauty and breadth of the discipline of economics.

'Output per Worker' as the Opportunity cost of Unemployment: Rough notes

ALP (Average Labour Productivity) or OPW (Output Per Worker) as an Opportunity cost of Unemployment to society

It is very much plausible to look at Output Per Worker (OPW) or Average Labour Productivity (ALP) as a measure of Opportunity Cost of Unemployment to society. Unemployment theories and the theory of natural rate of unemployment [probably the Classical theory of Labour markets], talk about Unemployment and its related costs (in long-run & very long-run). So does the Keynesian theory of Output determination (in short-run).

Opportunity Cost means:

The cost of the next best alternative forgone is the Opportunity cost of the chosen alternative.

In Microeconomic theory, Consumer Behaviour theories like indifference preference theory, revealed preference theory; Production theories like Optimization behaviour of firms regarding their output under various market structures, etc.; Cost theories like Optimization behaviour by firms regarding their costs, etc. utilize this concept extensively.

In Macroeconomic theory too, Opportunity cost concept is utilized in various theories- for e.g. the Aggregate Labour Supply theory uses it in deriving the Aggregate Labour Supply curve from Individual labour supply curves. This is done by the means of the Microeconomic theory of Leisure-Income trade-off. Many other applications of this concept exist in Macroeconomics such as Production Possibilities frontiers, etc.

A simple model for Output Per Worker:

If the Production function is:
Y = A*f[K, N]
then OPW = Y/N.

This is but per labourer output in the economy.

OPW as such a measure:

OPW as above [at macroeconomic level] can be thought of as one such cost that the society has to forgo on account of there being people who cannot find work/do not want to work. Were they employed, we would have gained at least that much amount of output per labourer as produced by the current labour force of an economy [country]

Some Assumptions required here are:

Indeed, many qualifications arise here as below:

1. We need to assume that the Production function [Y = A*f(K, N)] remains the same even if the currently unemployed labourers become employed. It means even if N increases on account of increased labour force, Y changes in such a manner so as to keep ALP constant as before the unemployed became employed.
2. Technological parameter [A] remains constant. 
3. Production function continues to exhibit the same returns to scale as it did before the unemployed become employed. Probably a restatement of Assumption 1.
4. No change in Marginal Productivity of the inputs including labour [as well as others].  This means that the slopes of Total Product curves of Labour and Capital remain constant. In other words the partial derivatives of Total Product curves of Labour and Capital remain the same as they were before the unemployed become employed. Some other assumptions may be needed too.

Empirical research possibilities:

If above assumptions are satisfied, then OPW can be a proxy measure of the Output per unemployed labourer forgone by society on account of their unemployment. Data on Aggregate Output and Labour statistics, at least in the case of the U.S., where Labour statistics are available to some extent can be extensively used. As for India, proxy variables can be used. More on this later.

P.S.: Couldn't add mathematical equations I wanted to as such a feature isn't available here.

-Regards.