Macroeconomics in society

Angus Armstrong

29 September 2021

The Institute for Global Prosperity welcomes the Rebuilding Macroeconomics research network

At Rebuilding Macroeconomics, we place macroeconomics squarely within society. We begin with a description of human activity, then decide which method to use.

Macroeconomics has to be, first and foremost, about our propensity for almost continuous direct interaction. Some of these interactions are largely economic, but they are always a subset of our fuller social relations. This is our starting point.

To put this as starkly as possible, as with our social relations, the basis for our economic behaviour is often co-created with other people. Rules and conduct of exchange emerge from common understanding. Therefore, in Rebuilding Macroeconomics we step outside a core tenet of modern economics and reject strict methodological individualism.

When Lord Robbins defined economics back in 1932 as the problem of allocating scarce resources amongst competing ends, he studiously left unsaid who’s ends he meant. Presumably the relevant collective group for macroeconomists is society; it is for us to decide our ends based on the shared values and objectives that we want to prevail.

Just as we collectively chose to no longer trade human lives, we can choose what is an acceptable level of equality or lack of agency, and indeed whether the environment, biodiversity and eco-systems should be exploited for our immediate gratification, or safeguarded and preserved.

Social foundations go well beyond the ethical limits of markets. Our exchanges are always imbued, to a greater or lesser extent, with social relations. They are necessary for Adam Smith’s observation that our natural propensity is to “truck, barter and exchange.” We cannot do this on our own.

It is in these interactions that we re-organise our activities through the division of labour, which enables us to learn, create knowledge and eventually produce more for society.

Specialisation also creates uncertainty, where all eventualities cannot be known or managed by writing contracts on outcomes we have not even thought of. Rather than being a dead-end, this is the very context where our greatest human capabilities of imagination and creativity can flourish.

Where might this lead analytically? Perhaps a clue is offered by Alfred Marshall when he said, “organisation aids knowledge.” We create and re-create institutions to manage uncertainty on one hand, and encourage creativity on the other. Good managers know that effective organisations are more than a set of contracts.

Even our economic outcomes also have a social element. Many carefully repeated studies of the Ultimatum Game, show that the outcomes of complete strangers seem to matter to us, even at our own expense. It is time we embraced this observation, rather than treating it as an oddity.

These ideas are, of course, already part of a long old heritage in economics. Perhaps most exciting is that we now have new tools, social theories and digital technologies to know more about how our interactions change our contexts and lead to very different macroeconomic processes.

If we are to persuade anyone to change, the real test will be whether putting direct interaction at the front of analysis creates more traction on important policy issues, such as productivity, resilience and sustainability.

Take, for example, this Government’s Levelling-Up agenda. We contend that there cannot be an economic solution without including the social aspects of interaction. It will be about creating new and changing connections, where the social and economic are two sides of the same coin. Only then will economic policies complement, rather than contradict social policies.

Dr Angus Armstrong is the Director of the Rebuilding Macroeconomics Network.

Rebuilding Macroeconomics is an ESRC funded research network, tasked with exploring how interdisciplinary insights and new methods can make macroeconomics more policy relevant.

Rebuilding Macroeconomics is inviting applications for two new Research Funding Calls. The calls encourage creative and rigorous research by supporting pilot projects which incorporate interdisciplinary insights and new methods to address important ‘real world’ macroeconomic issues. Details on https://www.rebuildingmacroeco..., deadline 29 October.