Reconstruction of macroeconomics : methods of statistical physics, and Keynes' principle of effective demand

This book explains how standard micro-founded macroeconomics is misguided and proposes an alternative method based on statistical physics. The Great Recession following the bankruptcy of Lehman Brothers in September 2015 amply demonstrated that mainstream micro-founded macroeconomics was in trouble. The new approach advanced in this book reasonably explains important macro-problems such as employment, business cycles, growth, and inflation/deflation. The key concept is demand failures, which modern micro-founded macroeconomics has ignored. “It (Chapter 3) captures analytically a good part of the intuition that underlies the Keynesian economics of people like Tobin and me.” Robert Solow, Emeritus Institute Professor of Economics, Massachusetts Institute of Technology, Nobel Laureate in Economics, 1987 “Professor Hiroshi Yoshikawa provides a unique synthesis of statistical physics and macro-economic theory in order to confront the dismal failure in economics and in finance to understand how an economy or a financial market works, given the heterogeneous decision making of many different individual interacting actors. Economics has failed in this regard with the naive and often misleading concept of “representative agents.” The author presents many insights on the historical development, concepts, and errors made by the most illustrious economists in the past. This book should be essential readings for any economics students as well as academic researchers and policy makers, who should learn to bring back good-sense thinking in their impactful decisions.” Didier Sornette, Professor on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH Zurich) Preface Acknowledgments Praise for Reconstruction of Macroeconomics: Methods of Statistical Physics, and Keynes' Principle of Effective Demand Introduction Contents About the Author 1 Why Are the Standard Microfoundations Wrong? 1.1 Beginnings 1.2 Representative Consumer/Firm 1.3 Lucas Model—An Example 1.4 Economic Agent Optimization 1.5 Rational Expectations 1.6 Walras’ General Equilibrium Theory 2 Statistical Physics and Macroeconomics 2.1 Variational Principle—Is an Inorganic Particle Fundamentally Different from Us? 2.2 The Method for Macro Analysis 2.3 Ramsey Model 2.4 Markov Model of the Business Cycle—An Example 3 Stochastic Macroequilibrium: A Microfoundation for Keynesian Economics 3.1 Introduction 3.2 Limitations of Search Theory 3.3 Distribution of Productivity as a Measure of Underemployment 3.4 Stochastic Macroequilibrium—The Basic Idea 3.5 The Model 3.6 The Principle of Effective Demand 4 Business Cycle: The Role of Aggregate Demand 4.1 Introduction 4.2 Analysis Based on Industry Data 4.3 Concluding Remarks 5 Demand Saturation and Economic Growth —Where Keynes and Schumpeter Meet 5.1 Growth Theory 5.2 Lewis Model 5.3 Saturation of Demand 5.4 Product Innovations and Economic Growth 5.5 Population and Economic Growth 6 Prices, Wages, and Monetary Policy 6.1 Deflation and the Economy 6.2 Monetary Policy and Expectations 6.3 Determination of Price 6.4 Individual Prices and Aggregate Price Index 6.5 Wages 6.6 Summary 7 Financial Markets and the Real Economy 7.1 The Neoclassical Approach 7.2 Mathematics of Asset Price Fluctuations 7.3 The Bubble 7.4 Difference Between Financial Markets and the Real Economy 7.5 Rationality in Financial Markets 8 Summing Up Appendix Pioneers References Index