It is only after coordination failures have been excluded from the purview of macroeconomics that it became legitimate (for the sake of mathematical tractability) to deploy representative-agent models in macroeconomics, a coordination failure being tantamount, in the context of a representative agent model, to a form of irrationality on the part of the representative agent. Athreya characterizes choices about the level of aggregation as a trade-off between realism and tractability, but it seems to me that, rather than making a trade-off between realism and tractability, modern macroeconomics has simply made an a priori decision that coordination problems are not a relevant macroeconomic concern.
Pointer from Mark Thoma. In other words, the representative-agent approach in modern macro serves to eliminate what some of us think is the important reason that unemployment exists. In my book, I add
The first fundamental flaw is to to treat the production process as instantaneous. You have your capital and labor sitting there, and all you have to do is put them together to produce output. In my view, Fischer Black’s emphasis that production takes time is very important. It means that plans made months or years ago have to be reconciled with current conditions. As tastes and technologies evolve, some plans turn out to be brilliant, while others turn out to have been misguided…
The second flaw in mainstream macreoconomics is to ignore the time that it takes to discover successful production processes. There is a trial-and-error process at work as enterprises are launched. The fortunate few will expand, but most new firms will fail. Starting from a situation such as one that prevailed in 2009, with many previously-viable patterns of production no longer sustainable and consequently high unemployment, it takes a lot of time and effort to discover the new patterns of specialization and trade that will reveal everyone’s comparative advantage and restore full employment.
The importance of this laborious discovery process is what I think is missing from Fischer Black’s account of macroeconomics. He insists on using the term “general equilibrium,” while I believe that it is important to recognize that the economy is never in an equilibrium state. Moreover, the adjustment to changes in tastes, technology, and shocks (such as a surge in oil prices) can be long and painful.
The major error was including time in their model. Replace time with relative probability of occurance.
http://alephblog.com/2014/02/04/differences-in-us-states-unemployment-over-the-last-36-years/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheAlephBlog+%28The+Aleph+Blog%29
Aleph has an example from an private research report. They look at codependence and independence among states among using unemployment as the instrument. Then they group the states into five groups such that the variance of codependence in each group matches. The five groups thus represent a value added network that delivers unit of unemployment to the aggregate. Thus, this model represents the minimum network needed to deliver unemployment units that maintain the aggregate unemployment with the minimum number of transactions. No time variable, a minimal queuing network. A great piece of work and well worth reading.
And, I might add, this is the proper method to measure roundaboutness.
I guess I left a hanging assumption. How do I get fromthis research to the value added network, one that looks like thie:
http://en.wikipedia.org/wiki/Huffman_coding
Well, the construction of the research delivers the minimum netwrok that delivers unemplyment from the states, so any other construction that creaes the same result will be a the network, having the same rank and breadth. So the Huffman network mentioned above is the cannonical method if we created the methematical network that took external shocks to the economy and converted them to the minimal chuinks of unemployment. To the extent that GDP is constructed from units of unemplyment, then the cannonical network will be the dual nework of the trading patterns within the groups.
Arnold
Unfortunately, you are attracting too many cranks as commenters.
Well, its theoretically sound, and used extensively in stock market analyis with its basis set, fibonacci. But go back to the original paper, take that as far as it goes, good stuff.
Arnold,
After the problems in Japan with the tsunami etc. you suggested this be a good test of neo-Keynesian vs PSST, how do you think this played out, or to early to say?
I don’t think either Japan or the U.S. experienced a demand-side surge as a result. so I think that PSST won.