## Keynes on microfoundations

11 Jul, 2020 at 20:16 | Posted in Economics | 3 CommentsThe atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.

Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.

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But then, Keynes also said that, at full employment, Classical economics, with its optimization principles, comes back into play.

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Keynes was able to distinguish those questions which dealt with the matter of unemployment and those questions which dealt with matter of the distribution of employment. He could see that at any level of employment that the distribution of employment was not in question.

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So he accepted microfoundations as such but not as determinants of the level of employment.

Comment by Henry Rech— 11 Jul, 2020 #

Even the simplest physics model, an ideal gas, with the simplest atomic model of hard elastic colliding spheres, gives rise to a statistical mechanical estimate for kinematic viscosity. When that’s placed into the Navier Stokes equation Even for the simplest initial value problems, we see emergence of turbulence, (massively complex behavior), instability of basic linear solutions, chaos (hypersensitivity to initial data), and poor estimates of error bounds for many solution approximations. Indeed the number of solutions and their basic properties; smoothness, differentiability, etc. is unknown.

Keynes’ physics envy was largely misplaced.

Comment by peterblogdanovich— 12 Jul, 2020 #

Yes, I agree with peterblogdanovich’s comment above.

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Bridges stay up because, if I remember correctly from Bridge Engineering 101 ( https://www.edx.org/course/the-engineering-of-structures-around-us-2 ), engineers multiply specs by a safety factor of two. This is like economists saying “the poverty line is $12000 but we’ll make it $24000 to be safe.”

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Discontinuities occur not only in quantum mechanics, when particles change from continuous to discrete, but when you boil water: after the water is boiling, you can keep it boiling by turning the heat down so low it never would have boiled the water to start with.

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To come up with a set of assumptions that predict the behavior of water, you have to allow for irrational triple points and such. Instead water is treated as an exception but it is so common …

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Atomic theory did not predict entanglement, dark matter, dark energy, etc.

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Keynes’ physics envy was largely misplaced, indeed.

Comment by Robert Mitchell— 15 Jul, 2020 #