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Non-self-averaging in macroeconomic models: a criticism of modern micro-founded macroeconomics

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Abstract

When the coefficient of variation, namely the ratio of the standard deviation over the mean approaches zero as the number of economic agents becomes large, a system is called self-averaging. Otherwise, it is non-self-averaging. Most economic models take it for granted that the economic system is self-averaging. However, they are based on the extremely unrealistic assumption that all the economic agents face the same probability distribution, and that micro shocks are independent. Once these unrealistic assumptions are dropped, non-self-averaging behavior naturally emerges. Using a simple stochastic growth model, this paper demonstrates that the coefficient of variation of aggregate output or GDP does not go to zero even if the number of sectors or economic agents goes to infinity. Non-self-averaging phenomena imply that even if the number of economic agents is large, dispersion could remain significant, and we cannot legitimately focus solely on the means of aggregate variables. This, in turn, means that the standard microeconomic foundations based on representative agents have little value for they are meant to provide us with accurate dynamics of the means of aggregate variables. Contrary to the main stream view, micro-founded macroeconomics such as a dynamic general equilibrium model does not provide solid micro foundations.

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Authors and Affiliations

  1. Department of Economics, University of California, Los Angeles, CA, USA

    Masanao Aoki

  2. Faculty of Economics, University of Tokyo, Tokyo, Japan

    Hiroshi Yoshikawa

Authors
  1. Masanao Aoki
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  2. Hiroshi Yoshikawa
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Correspondence to Hiroshi Yoshikawa.

Additional information

The first author is grateful for many helps he received from Prof. M. Sibuya. This work is supported by the program for Promoting Methodological Innovation in Humanities and Social Sciences by Cross-Disciplinary Fusing of the Japan Society for the Promotion of Science. We are grateful to two anonymous referees for their very detailed comments and also to an Editor for his kind editorial assistance. We would also like to thank professor Robert M. Solow for his encouragement. An early version of this paper was presented as The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory, Economics: The Open-Access, Open-Assessment E-Journal, Vol. 3, 2009-37.

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Aoki, M., Yoshikawa, H. Non-self-averaging in macroeconomic models: a criticism of modern micro-founded macroeconomics. J Econ Interact Coord 7, 1–22 (2012). https://doi.org/10.1007/s11403-012-0088-3

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