Blake Riley

Microfoundations of the city

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Geoffery West, a physicist associated with the Santa Fe Institute, concluded that cities scale superlinearly: when cities double in size, per-capita wealth, crime, innovation, traffic, construction spending, AIDS cases, etc, increases by 15%. Firms, on the other hand, scale sublinearly. While cities and firms are integral parts of economics, this looks nothing like modern economic theory. Where are the optimizing agents with preferences and budget constraints? Theoretical economics is something more like a method than a subject area, with little room for laws established by observation. Economists are happy users of statistics, but any overarching patterns should be reinforced by a model suggesting how the relationship emerges from interacting agents. Cosma Shalizi doubts whether macroeconomic theories really need these microfoundations. Certainly it would be great to know exactly how the law arises, but how necessary is it?

As I make the transition from economics student to economics researcher, questions like these are at the front of my mind. What exactly are economists trying to accomplish? My current opinion is that, contra Friedman, economic theory is not about prediction. Instead economics models are frameworks for ex ante understanding and evaluation of counterfactuals. I see strong ties between economics and evolutionary biology. If anything, economic tools like game theory are better suited to evolution than their original domain.

Written by blakeriley

2011.01.20 at 20:52

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