The only economic convention with which SFEcon seeks active hostility, being almost universally held, is the most difficult to call into question. Our articulation of this tacit premise is that the generalities to be gleaned from our experience with familiar economic entities, such as the firm or the household, are sufficient to describe macroeconomic order, e.g.:
Austrian School economics teaches that we should begin to study macroeconomics by studying microeconomics. Macroeconomics can be explained only as the outcome of microeconomics. What an individual does in a private property legal order can be explained in terms of economic theory: profit and loss. What the entire economy does can also be explained in terms of individual profit and loss. Any system of macroeconomics whose defenders assert its autonomy from microeconomics is an illusion. Cause and effect in economic theory begin with individual decision-making.1Most indicia of economic causality are drawn from observations on, or imputations of, behaviors that are near to hand. A rational materialist investigating ‘the firm’ might impute maximal profit as the motive of economic activity: business managers actively assert their passion for realizing the best return on their investors’ capital whenever asked; it is rational for investors to desire the greatest return; and free markets presumably operate to bring about that which is desired.
Moving on to invoke another truism to the effect that the economic whole must equal the sum of its parts, we can conclude that a free market economy generally operates toward marginal revenues equaling marginal costs, and then deduce whatever needs knowing from the premise that a general optimum is present.
While sourcing one’s economic causality on Human Action 2 does indeed heal the micro/macro split that had begun in English classical economics with Ricardo,3 the resulting a fortiori edifice is at peril from the falsification of its foundations by the empirical findings of a more specialized discipline, e.g.:
Much has happened in the conversation between economics and psychology over the last 25 years. The church of economics has admitted and even rewarded some scholars who would have been considered heretics in earlier periods, and conventional economic analysis is now being done with assumptions that are often much more psychologically plausible than was true in the past. However, the analytical methodology of economics is stable, and it will inevitably constrain the rapprochement between the disciplines. Whether or not psychologists find them odd and overly simple, the standard assumptions about the economic agent are in economic theory for a reason: they allow for tractable analysis. The constraint of tractability can be satisfied with somewhat more complex models, but the number of parameters that can be added is small. One consequence is that the models of behavioral economics cannot stray too far from the original set of assumptions. Another consequence is that theoretical innovations in behavioral economics may be destined to be noncumulative: when a new model is developed to account for an anomaly of the basic theory, the parameters that were modified in earlier models will often be restored to their original settings. Thus, it now appears likely that the gap between the views in the two disciplines has been permanently narrowed, but there are no immediate prospects of economics and psychology sharing a common theory of human behavior.4
Accepting demonstrations by behavioral science that interpersonal relations are not based on the maximization of gain, the heterodox position is then inferred from the logic by which macro behaviors arise from a scaling-up micro behaviors, i.e.: that the macro economy cannot possibly be organized around a general maximization of profits.
We agree with none of this. While the psychologist may content himself with generalities that presumably apply to all mankind, any common theory of human behavior would be foreign to economics’ subject matter:
Economics inquires as to the means by which a great many vocations come to be organized in a harmony such that the products of every vocation are just sufficient to one another’s needs in producing the next generation of goods. It is therefore necessary for each vocation’s personality to be given is peculiar expression.
Securities analysis, the peculiar vocation responsible for general profit maximization, is no doubt acquisitive to the exception of all else. But this sector is small, and can exist as a stable exception to the civility, generosity, and tolerance that is (prior to the astonished findings of psychology) the established norm of a healthy society.Moreover, we do not see individual firms and households as economic entities at all; and would fervently wish to see the word ‘microeconomics’ replaced by ‘sociology with dollar signs’ or some such harmless construction. These sentiments are neither foreign nor new in economic thinking, e.g.:
Society does not consist of individuals but expresses the sum of interrelations, the relations within which these individuals stand.5Seeing no basis upon which to presume that the micro and macro worlds of commerce are to be discerned with continuity using our current kit of ideas about economic order, we humbly accept a conceptual disconnect between the micro and the macro — rather in analogy to physics’ conceptual separation between the subatomic world governed by Schrödinger and the more familiar world governed by Newton. While the whole is indubitably equal to the sum of its parts, there exists no precisely-understood system in which the behavior of the whole can be seen to even resemble the behavior of any of its parts. Moreover, we shall attempt to demonstrate that no such system is remotely conceivable.