June 16, 2014

Treating Macro Theory as Systems Theory: What Does it Matter?

  • Richard Wagner

    Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
  • Vipin Veetil

    Assistant Professor, Indian Institute of Technology Madras
read more

Read the paper at SSRN.com. 

Standard macro theories have the same analytical structure as their micro counterparts. Where micro theories work with equilibrium between supply and demand for particular products, macro theories work with equilibrium applied to aggregates of products. This common approach treats the micro-macro relationship as scalable, with macro variables being aggregations over micro variables. In contrast, we pursue a systems-theoretic approach to the micro-macro relationship. This relationship is not scalable and rather entails a disjunction between micro- and macro-levels of theory. While micro phenomena are still susceptible to choice-theoretic analysis, macro phenomena are products of ecological interaction and so entail emergent phenomena. Our alternative approach treats macro theory as a form of systems theory where the behavior of the system has properties that are not reducible to properties of the individual elements within that system. Besides sketching this alternative approach, we examine some of the different insights this approach offers into such topics as unemployment and stabilization.