Everybody has taken an economics course at some point or another, and everyone has likely seen something a lot like this: IMG_0876

It’s a simple enough heuristic to teach beginners how aspects of “the economy” interrelate. But unfortunately, it is often the same tool that is used by seasoned economists to “predict” how the economy will respond to various interventions and scenarios. Proponents of this tool (virtually everyone) could make such a metaphor as “it’s no different than using a two-dimensional playbook to model three-dimensional football plays. It works like a charm, for the most part!” And when the model does fail to match up with more empirical data gathered from the “real world” it’s chalked up to the immense complexity of the economy. “The economy is so complex, so it’s natural that our methods of modeling it will fail in some cases”, cry the economists. But, deep down, they know that there must be a better way. Many of them believe this better way is a form of strict empiricism, in the sense that surveys and raw data are the only tools that we can use to more accurately assess the economy. “Right now we currently don’t have enough processing power to gather enough data, but we will! And when we will then we will finally understand the economy fully” they say. But computing power without a proper method is no better than a shiny, top-of-the-line typewriter perched in front of a primate; and economics needs and deserves a better method. Some economists, still dissatisfied with the strict economic empiricism, turn towards sociology, perhaps analyzing the social situations and influences upon economic factors. But the methods in this domain are severely lacking and the economic empiricists are unwilling to consider such “relative” and “subjective” forms of economic analysis as sociologically-influenced economic research. So what’s the answer?

It’s certainly not simple, but I believe I have a rough starting point. We must first ditch the notion that, in terms of economic and sociological analysis, that emotions and motivations are “far too subjective and relative” to even be considered. By and large, in terms of economic and societal analysis, we need not know exactly what a person feels like to asses the impacts of his motivations and the way his actions effect society at large. The questions of why? are up to psychology. And, regardless, sociology cannot be reduced to any sort of “human nature” or psychology. The virulent spread of the false notion of sociological “relativism” has done nothing but harm to the social sciences, namely economics and sociology. And there are ways in which to economically model that include motivations, agreements and other such notions that are currently sequestered into the hermetic box of “messy social issues”. Let’s take a look…

As I’ve presented in my previous blogs, sociology can be presented, at base-level, as a web of agreement-execution-fulfillment interplay. And there is a form of “logic” (of modal nature)–that I’ve been developing–that can present the nature of both the motivations of individuals, households, groups, businesses and governments; the structures of their interrelations and even their personal views of various agreements. Now here’s the crucial point: agreements, executions and fulfillments represent the foundation for economic activity, in addition to sociological activity. For what is economics but the–often socially covert–layer on top of society? Agreements in many instances are created by an abstract “money motivation”, the execution of these agreements is financed through money and the fulfillment often depends on the quality of the resources that were financed in the execution stage. If we can develop a system of analysis that maps these different stages to their different constituent groups, while accounting for the monetary exchange that occurs, then we’ll be well on our way. Let’s look at a few possibilities…

So these first two diagrams show the first part of the process–agreement. With a little bit of tinkering one can find a number of different sociological agreement structures such as that represented in the lower picture. These “needs”, not arising from psychology per se, exist to serve societal norms and functions. And–in reference to the top picture–each agreement between two entities has four characteristics, and when we add the specific entities’ “motivations” into the mix, there are six characteristics. This is important as most times when the word “agreement” is used, in terms of sociology, only two characteristics are considered, with perhaps the “influence” of a third party. This form of agreement and sociological need modeling can also be combined with a form of modal logic. We can also formalize this model, creating statements that resemble something like:

Now for the macroscopic scale, we can introduce a network of different industry types (primary, secondary, etc), different companies, different households, spending/revenue flows, all this in addition to the aforementioned agreement-need modeling.

With such a model we can better model the various interconnections of industry and household. Certain groups of households are more likely to work in certain industries; yet these same households are unable to purchase from all industries, whether by functional or monetary constraint. This much is common knowledge, but within the vast expanse of macroeconomic modeling these details are often obscured. Now, the model seen above is just a two-dimensional sketch of what’s likely optimal. It’s possible that this sort of model may even work better as a kind of of three-dimensional matrix, plotting different entities and their interconnections in that manner. But all this is rather abstract and I’m still working on the best way to format this idea. But intuitively I feel that I’m moving in the right direction.

Another thing to mention is the possible compatibility of these models with agent-based simulations. In terms of current agent-based sim methods, I believe that these models could provide a bit more of a framework than is currently in place. Agent-based modeling can only go so far with its current methods of analysis, namely it’s extremely simple motivation-agreement structures. I’m definitely interested to see how my models can help ABMs.

So unfortunately that’s all for today guys, and as usual, there’s much more to come!

–JM

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