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Microeconomic Structure determines Macroeconomic Dynamics. Aoki defeats the Representative Agent

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  • Sorin Solomon
  • Natasa Golo

Abstract

Masanao Aoki developed a new methodology for a basic problem of economics: deducing rigorously the macroeconomic dynamics as emerging from the interactions of many individual agents. This includes deduction of the fractal / intermittent fluctuations of macroeconomic quantities from the granularity of the mezo-economic collective objects (large individual wealth, highly productive geographical locations, emergent technologies, emergent economic sectors) in which the micro-economic agents self-organize. In particular, we present some theoretical predictions, which also met extensive validation from empirical data in a wide range of systems: - The fractal Levy exponent of the stock market index fluctuations equals the Pareto exponent of the investors wealth distribution. The origin of the macroeconomic dynamics is therefore found in the granularity induced by the wealth / capital of the wealthiest investors. - Economic cycles consist of a Schumpeter 'creative destruction' pattern whereby the maxima are cusp-shaped while the minima are smooth. In between the cusps, the cycle consists of the sum of 2 'crossing exponentials': one decaying and the other increasing. This unification within the same theoretical framework of short term market fluctuations and long term economic cycles offers the perspective of a genuine conceptual synthesis between micro- and macroeconomics. Joining another giant of contemporary science - Phil Anderson - Aoki emphasized the role of rare, large fluctuations in the emergence of macroeconomic phenomena out of microscopic interactions and in particular their non self-averaging, in the language of statistical physics. In this light, we present a simple stochastic multi-sector growth model.

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Paper provided by arXiv.org in its series Papers with number 1401.7496.

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Date of creation: Jan 2014
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Handle: RePEc:arx:papers:1401.7496

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  1. Masanao Aoki & Hiroshi Yoshikawa, 1999. "Demand Creation and Economic Growth," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-43, CIRJE, Faculty of Economics, University of Tokyo.
  2. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  3. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S71-102, October.
  4. Challet, Damien & Solomon, Sorin & Yaari, Gur, 2009. "The universal shape of economic recession and recovery after a shock," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(36), pages 1-24.
  5. Zhi-Feng Huang & Sorin Solomon, 2001. "Finite market size as a source of extreme wealth inequality and market instability," Papers cond-mat/0103170, arXiv.org.
  6. Solomon, Sorin & Richmond, Peter, 2001. "Power laws of wealth, market order volumes and market returns," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 299(1), pages 188-197.
  7. Masanao Aoki & Hiroshi Yoshikawa, 2012. "Non-self-averaging in macroeconomic models: a criticism of modern micro-founded macroeconomics," Journal of Economic Interaction and Coordination, Springer, Springer, vol. 7(1), pages 1-22, May.
  8. Aoki, Masanao & Hawkins, Raymond J., 2010. "Non-self-averaging and the statistical mechanics of endogenous macroeconomic fluctuations," Economic Modelling, Elsevier, Elsevier, vol. 27(6), pages 1543-1546, November.
  9. Sorin Solomon & Peter Richmond, 2001. "Power Laws of Wealth, Market Order Volumes and Market Returns," Papers cond-mat/0102423, arXiv.org, revised Apr 2001.
  10. Gur Yaari & Andrzej Nowak & Kamil Rakocy & Sorin Solomon, 2008. "Microscopic Study Reveals the Singular Origins of Growth," Papers 0803.2201, arXiv.org.
  11. Y. Louzoun & N. M. Shnerb & S. Solomon, 2007. "Microscopic noise, adaptation and survival in hostile environments," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, Springer, vol. 56(2), pages 141-148, 03.
  12. G. Yaari & A. Nowak & K. Rakocy & S. Solomon, 2008. "Microscopic study reveals the singular origins of growth," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, Springer, vol. 62(4), pages 505-513, 04.
  13. Sorin Solomon & Natasa Golo, 2014. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall-Walras Disequilibrium," Papers 1402.0176, arXiv.org.
  14. Kevin Lee & M. Hashem Pesaran & Ron Smith, . "Growth and Convergence in a Multi-County empirical Stochastic Solow Model," Discussion Papers in Economics, Department of Economics, University of Leicester 96/14, Department of Economics, University of Leicester.
  15. O. S. Klass & O. Biham & M. Levy & O. Malcai & S. Solomon, 2007. "The Forbes 400, the Pareto power-law and efficient markets," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, Springer, vol. 55(2), pages 143-147, 01.
  16. Huang, Zhi-Feng & Solomon, Sorin, 2001. "Finite market size as a source of extreme wealth inequality and market instability," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 294(3), pages 503-513.
  17. Klass, Oren S. & Biham, Ofer & Levy, Moshe & Malcai, Ofer & Solomon, Sorin, 2006. "The Forbes 400 and the Pareto wealth distribution," Economics Letters, Elsevier, Elsevier, vol. 90(2), pages 290-295, February.
  18. Lee, Kevin & Pesaran, M Hashem & Smith, Ron, 1997. "Growth and Convergence in Multi-country Empirical Stochastic Solow Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(4), pages 357-92, July-Aug..
  19. C. A. Hidalgo & B. Klinger & A. -L. Barabasi & R. Hausmann, 2007. "The Product Space Conditions the Development of Nations," Papers 0708.2090, arXiv.org.
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