Reconstructing Macroeconomics: A Perspective from Statistical Physics and Combinatorial Stochastic Processes

Description

In this book, the authors treat macroeconomic models as composed of large numbers of micro-units or agents of several types and explicitly discuss stochastic dynamic and combinatorial aspects of interactions among them. In mainstream macroeconomics sound microfoundations for macroeconomics have meant incorporating sophisticated intertemporal optimization by representative agents into models. Optimal growth theory, once meant to be normative, is now taught as a descriptive theory in mainstream macroeconomic courses. In neoclassical equilibria flexible prices led the economy to the state of full employment and marginal productivities are all equated. Professors Aoki and Yoshikawa contrariwise show that such equilibria are not possible in economies with a large number of agents of heterogeneous types. They employ a set of statistical dynamical tools via continuous-time Markov chains and statistical distributions of fractions of agents by types available in the new literature of combinatorial stochastic processes, to reconstruct macroeconomic models.

Masanao Aoki is Professor Emeritus in the Department of Economics at the University of California, Los Angeles. He is past President of the Society for Economic Dynamics and Control, a Fellow of the Econometric Society, and a Fellow of the IEEE Control Systems Society. Currently Associate Editor of the journal Macroeconomic Dynamics, published by Cambridge University Press, Professor Aoki also served as Editor of the Journal of Economic Dynamics and Control and the International Economic Review. He is the author or editor of a dozen books, including Modeling Aggregate Behavior and Fluctuations in Economics, which won the 2003 Nihon Keizai Shinbun-Center for Japanese Economic Research Prize for best book in economics by a Japanese scholar (Cambridge University Press, 2002), and New Approaches to Macroeconomic Modeling (Cambridge University Press, 1996). Hiroshi Yoshikawa is Professor of Economics at the University of Tokyo. He received his Ph.D. from Yale University in 1978 and has also taught at Osaka University and the State University of New York at Albany. Professor Yoshikawa is the author of seven books, one of which received the Nikkei Award and another of which received the Yoshino-Yomiuri Award, in addition to a textbook in macroeconomics and the frequently cited Macroeconomics and the Japanese Economy (1995). He is a member of the Council on Economic and Fiscal Policy of the Japanese Government's Cabinet Office, and served in 2002 as president of the Japanese Economic Association.

'Thoughtful macroeconomists are uncomfortably aware that consumers, firms, and workers vary widely in their locan environments, perceptions, and beliefs. Ignoring this heterogeneity, as 'modern macro' does, is a likely source of systematic error. Aoki and Yoshikawa propose to repair this failure by modeling the macroeconomy explicitly as a cloud of interacting particles. The goal is to deduce the distributions of economic characteristics that describe the system as a whole. This puts more emphasis on statistical properties and less on the internal decision making of each agent. There are already some surprising beginning results, including a novel treatment of aggregate demand, and one can expect more when their approach is combined with standard economic reasoning. This is the start, not the finish, of a potentially far-reaching research program. It should excite the curiosity of all those thoughtful macroeconomists.' Robert M. Solow, Nobel Laureate, MIT 'This book is a bold and daring challenge to the growing influence of neoclassical equilibrium theory in the field of modern macroeconomics. Not simply an approach to traditional Keynesian theory that attempts to refine it and make it more accurate, the treatment makes use of a new methodology in statistical physics and combinatorial stochastic processes to mount a direct challenge to real business cycle theory and rational expectations theory. This technique makes it possible to analyze the interactions of a large number of fluctuating micro agents. Professor Aoki has made important contributions to the application of statistical physics to economics, and Professor Yoshikawa is a leading Japanese economist who has done outstanding work in the fields of both theoretical and empirical economics. This book is the superb product of the optimum combination of these two scholars' different talents.' Ryuzo Sato, New York University and University of Tokyo 'Masanao Aoki and Hiroshi Yoshikawa have written no less than the foundation of a new approach (and I believe the right one) to the core problem of macroeconomics, which is to aggregate behaviors by stressing the importance of the heterogeneity and variability of real economic agents. Getting inspiration from and adapting the concepts and tools of statistical physics, they masterfully derive important and novel insights on the most crucial problems of the field: the principle of effective demand, role of uncertainty, sticky prices/wages, and the endogenous business cycle. By systematically discussing and comparing their theory with empirical data and real economic situations, this book is perhaps the first successful effort to develop macroeconomics as a real science on par with physics, with falsifiable hypotheses underpinned by sound micro-principles and testable predictions.' Didier Sornette, Swiss Federal Institute of Technology, Zurich 'This book shows the impossibility of efficient equilibria in economics with market clearing mainstream hypotheses when such an economy is populated by a large number of heterogenous agents. In such a case, Aoki and Yoshikawa show that, though combined stochastic processes, a new approach to macroeconomics is not only possible: it is real and this book shows how to reach it.' Mauro Gallegati, Universita Politechnia delle Marche