Economic Growth and Change in a Material World
7. From agent to aggregation 7.1 THE TRANSITION FROM MICRO TO MACRO Up to now we have focused mostly on so-called ‘micro-foundations’ and implications for the behavior of individuals and small groups of agents (belonging to H. Economicus) interacting within a relatively stable environment, not too far from equilibrium. However, in order to address macroeconomic problems, including such phenomena as ‘bubbles’, depressions and growth, there comes a point where it is necessary to make the transition from microto macro-perspectives. This transition involves a major change of perspective: a number of variables and factors that are ‘exogenous’ at the micro-scale become ‘endogenous’ at the macro-scale. However, ﬁrst we need to deal with some preliminaries, especially deﬁnitions of terms. An economic system consists of a collection of economic agents, consisting of ﬁrms or households, performing economic functions, including exchange, production or consumption for subsistence purposes. (Consumption for other purposes plays an important role in creating demand, for instance, but as noted in Appendix B it does not always satisfy the AAL rule that governs most economic activities.) Agents necessarily interact within an institutional (and a natural) environment. In economic processes the agents exchange goods, money and information with each other, as well as exchanging materials and energy with the natural environment. The real economic system is inherently non-linear, with many feedbacks, some of which are inherently stabilizing (i.e. positive feedbacks), while others are destabilizing (negative feedbacks). These feedbacks are mutually interdependent. The economic system is extremely complex in the technical sense...
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