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.

An Introduction to Multiplicity in Economics

Dear readers, I have prepared a paper on an issue that I consider of primordial importance for theoretical economics. Especially important is its implication for young students of Economics who are introduced to the subject of Economics in a particular manner that systematically blurs the existence of alternative methods and schools. It juxtaposes neo-classical and Keynesian as Economics per se. Moreover, the textbooks of G.S.E.B. and C.B.S.E. do not even admit that they're teaching a particular type of Economic theory and not Economics. Ignorance of such a simple fact leads to what I call 'confusing an epistemological fact for an ontological fact'. Though this paper does not delve in detail on this issue, it still touches upon it to sensitize our young students about the controversial and pluralistic character of the subject.

Kindly find it for download here:

Click on this: Academia.edu page
If that doesn't work, click here:
https://www.academia.edu/6480773/An_Introduction_to_Multiplicity_in_Economics
Critical commentaries, Constructive criticisms, suggestions and feedbacks are open-heartedly welcomed. Do write me about your understanding- whether supportive or critical. Do provide me at least 4 days to reply.

- Warm Regards,
- Bhagirath Baria.

Simple Regression, 'I' and 'A' in the IPAT model, Indian economy

This was a regression analysis of two variables of the IPAT model of effects of human activity on environment. It was submitted as a short empirical study, as apart of my assignment in an online course offered by The University of Edinburgh in critical reasoning[informal logic]. I'll put online all the regression output in Excel soon. This short analysis showed some interesting facts about the effects of Affluence factor on Environmental degradation. I had to use proxy variables as data availability was a critical issue here. Anyway, have a look. Let me know if more detailed study interests you on this topic.

Submitted material:

Hello. The homework section gives following instructions:

"For this week's homework, we would like you to do some research for yourselves and find one or more examples, in your own global context, where the environmental impact is being (or can be) mitigated through changes in A or T. Post a brief summary of what you have found, with references (e.g. links to websites), on the Homework/Population/Case Studies forum thread. Once you have done that, read and comment on the other submissions from fellow students, and upvote the examples that you think illustrate this principle best."

I’ve tried to do the following in context of Indian Economy[my nation of residency]. Hope I got it right. I understood it as giving one's own example. A simple empirical illustration too shall be admissible is what I've assumed here.

1.    Find a numerical value of the degree of relationship between the variables I[Environmental  degradation] and A[Affluence factor].

2.    Fit a regression line through the available data and predict the future behaviour of I with reference to a particular value of ‘A’.

3.    Also find out how much part of the variation in I is explained by A with the given data set. In short calculate the r-squared measure[coefficient of determination].

4.    All this using Microsoft Excel only. No use of advanced statistical packages has been done.

Proxy variables used:

1.    For ‘I’ [Environmental degradation], I used the Annual carbon dioxide emissions in tonnes per capita as a proxy variable.

2.    For ‘A’ [Affluence factor], I used GDP per capita in India at constant price [base year 2004-05]

3.    Isolated the data analysis to a statistical relation between ‘I’ and ‘A’ because the data was readily available.

Data used:

1.    For the variable ‘I’ {year 1990 to 2010}-http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions_per_capita

Please look at the row showing India’s data.

2.    For the variable ‘A’ {year 1990 to 2010}, in INR-

Handbook of Statistics on Indian Economy, 2012-2013, published by RBI. The section on ‘Macroeconomic aggregates at constant prices’ includes data on GDP per capital at constant price, base year being 2004-2005. Available here: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/002T_BST130913.pdf

3.    Data series used: Year 1990-91 to 2010-2011 for both I and A as explained above.

Results:

1. Correlation between 'I' and 'A' as per the data series is 0.978224 or 0.98[approx.]. This shows a strong degree of linear relation between both the variables in context of India.

2. Regression line produced: I = 0.612619153 + 1.98157E-05[A] 

3. r-squared comes out to be 0.9569 or 0.96[approx.]. Approximately 95% of the variation in I is explained by A.'I' being Environmental degradation measured by CO2 emissions, tonnes per capita in India between 1990-91 upto 2010-2011. And 'A' being GDP per capita at constant price, base year- 2004-05, from 1990-91 to 2010-2011.2.

4. Using the above Regression line, I found the following expected level of CO2 emissions[representing 'I'] for the year 2011-12 with GDP per capital being 55054.37 INR to be 1.70355 tonnes per capita per year

Data series:

The units have been stated above already.

Regression Output has been stated already above.

> Thus, it can be seen that in India, between 1990 to 2010, there has been a high correlation between I and A as stated here. The expected amount of environmental degradation[proxy- CO2 emissions in India] based on the data available for 2011 come out to be 1.70 tonnes per capita per year in India. More interpretations can be found out here.

Limitations of this analysis:

1. Proxy variables chosen might not be sufficient to explain all that needs to be explained. Also the isolated effect of one of the variable in the IPAT model, on 'I' has been explained. This was mainly due to data inavailability.

2. p-value, standard error, etc. has been ignored here. There's no autocorrelation[Error terms lacked linear correlation].

3. Data series might not be sufficient to explain the phenomenon satisfactorily.

4. High correlation does not imply causation. Hence this remains to be explained here.
5. Y variable has repetitive[same] values. Might be an issue.

Please let me know if this short analysis gave some insights to you. Your suggestions/criticisms/feedback are always welcomed.

- Thank you.

- Bhagirath Baria, Surat, Gujarat, India.

Note on Absolutist vs. Relativist interpretation of Economic History

Two works of History of Economic Thought provide very authoritative viewpoint of looking at the History of Economic thought. They are:

1. Economic Theory in Retrospect by Mark Blaug, and;
2  History of Economic Thought by E.K. Hunt and Mark Lautsienheiser.

The fomer work classifies History of Economic thought into two competing Interpretative frameworks:

1. Absolutist interpretation.
2. Relativist interpretation.

Absolutist interpretation abstracts away from Historical conditions- primarily concerned with the development of theoretical systems of various Economists, their criticism and emergence of better theories. It is therefore, it appears, is concerned with the development of economic principles irrespective of the ideological elements affecting them. Mark Blaug also explains that it is possible to refine the various economic theories and focus on the non-ideological aspects of the theory.

Hence, each theoretical system by an Economist will have at least following two elements:

1. Ideological- reflecting the Social reality around- Politics, Culture, Science & Technology, and other such variables. Hence, the theorist would have been affected by such variables around her which her theory would inevitably express.

2. Scientific- reflecting the maxim- 'Knowledge for Knowledge's sake'. These elements of the theorist would be focused solely on developing previous theories, criticising them if required, and proposing better, much more real theories- nearer to truth. These aspects woukd be solely scientific and shall be independent of the historical conditions.

The former of the above listed works follows this methodology of interpreting Economic History.

In the next post we'll see how the latter work- by Hunt and Lautsenheiser interprets the history of economic thought.

Bajaj Chakan plant strike and Theory of Value

Recent strike at Bajaj's Auto plant at Chakan brings out the need to understand such issues through the concept of Value, distinct from that of Price. Students of Mainstream neo-classical microeconomics would not make a distinction between Value and Price. Both are used interchangeably and more often than not in very casual sense. Yet, it is possible to understand this issue through the Labour Theory of Value of Classical Economists in general and Marx's Labour Theory of value in particular.

Marx's Theory of Value has the Theory of Commodity fetishism as its foundation, without the grasp of which Marx's analysis cannot be grasped. It is very much possible to apply the Marxist LTV[Labour Theory of Value] to Bajaj Auto plant strike, which can open up newer vistas of understanding Capital-Labour relations, not as Technical means of production but as Social Production relations specific to the currently prevailing Economy: Commodity-capitalist economy.

Marx's LTV is mostly perceived as a tailor-made radical tool of revealing the inner contradictions of Capitalism. Yet, the theory is perceived in a mechanistic way, addressing the question "What is Value?" in a simplistic manner. The foundation of the theory of Commodity fetishism is generally put aside or appealed to when explaining the surface appearances of a Capitalist society.

The next post will examine How can Marxist Value theory help to understand such events as also the ways in which it can be deployed to analyze such contradictions of everyday life in Capitalism.