J Evol Econ (2008) 18:261–273

DOI 10.1007/s00191-007-0084-2
R E G U L A R A RT I C L E

Micro foundations for meso and macro economic theory

Richard H. Day

Published online: 1 April 2008

# Springer-Verlag 2007

Abstract The natures of rational thought and rational lives are described as the basis
of an adaptive economizing theory which presents an alternative microeconomic
foundation contrasting with but complementary to optimal control theory for
modeling mesoeconomic order. Contrastingly, that micro foundation seems to imply
the inappropriateness of representing macro data as an optimal economic agent.
Rather, direct representation of the emergent causal order in the macroeconomic data
is suggested.

Keywords Micro foundation . Mesoeconomic . Economic theory

JEL Classification B40 . B41 Economic Methodology . E1 General Aggregrative

Whenever there's an occasion to go back to the

fundamental conceptions on which any
science rests, and to formulate them
with accuracy, we almost always
encounter difficulties....
Augustin Cournot1
These authors failed to realize in what respects
a world peopled by men perfectly equal

1
Cournot (1963, p. 14).
R. H. Day (*)
University of Southern California, Kaprielian Hall (KAP) 318a, Los Angeles, CA 90089-0253, USA
e-mail: rday@usc.edu
262 R.H. Day

in knowledge and foresight would

differ from the real world.
Ludwig von Mises2
Production, exchange, and consumption in a democratic market economy involve
millions of households, firms, government agencies, and private non-market
institutions. Government policy makers charged with various responsibilities for
influencing the private sector must acquire practical knowledge that permits
appropriate and effective policy to be formulated but that is simple enough to be
understood and implemented. Constructing an empirical representation of the
economy for this purpose based on a microeconomic representation of its various
components would be impossible. Instead, mesoeconomic aggregates based on
household classes and industrial sectors are formulated. In huge economies even
very coarse aggregations of this kind can involve excessive empirical and
computational complexities. For many purposes macroeconomic aggregation that
describes the national economy as a whole then becomes the only practical tool.
Nonetheless, macroeconomic theorists have rightly emphasized the importance of
microeconomic foundations, for it is obvious that a theory of the whole economy
which is inconsistent with the character of its constituent parts must be misleading
and possibly dangerous if it were to justify policies whose effects were different than
those intended. This then would seem to be the purpose of microeconomic
foundations: to guide the formulation of meso and macro economic theories that
are consistent with the behavior of firms, households, and government agencies.
Fundamental to any such consideration must be: first, the nature of rationality and
economizing behavior; second, the character of the emergent meso and macro
orders; and third, what they imply for how economic modeling should be conducted.
In commencing this undertaking I have tried to start from scratch—not in the
sense of ignoring previous theory—but rather by trying to describe and formalize
behavior at a more elemental level and then see if and how the concepts of
economics need to be modified to serve better the purposes of science and policy
that motivated their development in the first place. Explicit mention of some
concepts with which each of us is intimately familiar would seem to be superfluous.
But I believe it is a chore necessary to re-establish contact between economic theory
and the subject matter it is intended to illuminate.3
Correspondingly, the succeeding pages are divided into sections dealing
successively with the nature of rationality, the character of rational lives, and the
processes of adaptive economizing and optimal control. With this background meso
and macro economic modeling are discussed. The paper concludes with implications
for the existence of social utility and for the theory of the economy as an optimal
agent.
The present contribution is a reflection on ideas central to my own work beginning
with the dissertation published in 1963. Sparing reference is made to the enormous

2
Mises (Reprint 2005).
3
It is worth quoting Mannheim, a fellow academic at this point: “Academic [concepts] tend to become
sterile because they fail to take cognizance of the world outside academia.” (Mannheim 1936, p. 73).
Micro foundations for meso and macro economic theory 263

related literature. For the seminal studies, the reader can do no better than to consult
Conlisk (1996). Subsequent work is readily available in the relevant journals.

1 The nature of rationality

Rationality is the capacity to exercise systematic, logical thought including the

careful identification of things, the perception of causal relationships among them
and the construction of logical procedures for solving problems or deciding among
conceivable plans and actions. It is a property of thought, not a property of action or
of outcomes, though actions based on rationality are said to be rational. It is also not
a property that can be ascribed to a group or a nation because groups or nations do
not think.
Unconscious thought may have a rational basis as is sometimes the case when
conclusions or actions are based on intuition. In such cases, a problem solution
becomes conscious through a kind of revelation, which may then be shown to be
rational, as in Poincaré's famous description of mathematical discovery.4 Any action
whose outcome can be shown to be consistent with a rational process can
meaningfully be thought of as rational, but the invention of a rational explanation
for actions once executed on a different rational basis is not in itself rational thinking
but ‘rationalization,’ which, however, may be part of a rational scheme.
In the exercise of rationality the imagination plays a fundamental role. It
constructs the problem to be solved. Solutions of previously solved problems can
simply be remembered and applied. Outcomes of choices not made before or at least
not yet made in one's current circumstances must be formulated or conceived.
Everyone possesses this faculty to some degree but clearly the scope of rational
considerations varies greatly among individuals. Some are willing and able to
imagine wide ranging alternatives while others are unwilling or unable to think of
more than a few more or less already familiar options. It includes capacity to
conceive potential activities and or objects that are entirely novel to that individual,
and which may tax the individual's capacity to transform that which has been
imagined into actual acts and objects. The greatest genius is characterized by both
attributes to a marked degree: both creative imagination and extreme competence in
solving the problems involved in changing the material world and/or influencing
other people's thoughts about it.
Introspection and close observation of those around us are sufficient to reveal
universal attributes of rationality and economizing behavior. Let us begin with the
recognition that rationality is local: thought is never about everything. It is always
conditioned by the current state of mind: one's current knowledge, level of
intelligence and perceptions, emotional state and focus of attention. To put it
negatively, rational thought is constrained by ignorance (the limited knowledge of
the relevant), by stupidity (the inability to perceive correctly or derive logical
implications of known facts or principals), by myopia (the limited ability to
anticipate consequences), by egoism (the inability to account sufficiently for the

4
Chapter 11, Poincaré (1952).
264 R.H. Day

preference and actions of others), and by immaturity (the experience dependent,

developmental character of knowledge and preference). As these limitations are
always present, it goes without saying that rationality is bounded. Thus, the phrase
‘bounded rationality’ is superfluous in characterizing human thought.5
Two types of rationality can be distinguished: strategic and tactical. A strategy is
a plan for one's overall kinds of activity that accounts for one's environment and
interactions with others. A tactic is a specific action, procedure, or sequence of
actions for carrying out a strategy. Once adopted, a strategy constitutes a constraint
that focuses rationality on concrete steps intended to advance the overall plan.
A strategic plan is seldom—if ever—thought out as an ‘open loop’ trajectory of
specific actions that will be followed ‘forever.’ Neither does rationality often—if
ever—arrive at a ‘closed loop’ rule that determines once and for all one's tactical
reaction to every contingency. Rather, strategic plans often involve more or less
‘vague stories,’ ‘lifestyles,’ or patterns of behavior and possessions that one would
like future actions to bring about. For want of a better term, let us refer to such
stories, lifestyles, or patterns as paradigms.6
A lifestyle paradigm involves a way of life made up of patterns of activity
involved in work and leisure and lists of generic goods appropriate for a given
lifestyle. The analogous business interpretation is a firm's strategic plan that outlines
the general objectives for future attainment in terms of product development,
capacity expansion, managerial reorganization, etc. A somewhat similar distinction
between strategic paradigm and tactical decision was made by Herrnstein and Prelec
(1991) who, on the one hand, refer to ‘distributive choices’ that involve ‘bundles’ of
decisions that may be distributed over an anticipated future and, on the other hand,
choices that result in immediate action. Strategic choices here are distributive
choices in their sense. Our concept is more general including, in effect, a choice
among more or less vague stories or potential autobiographies that then focus or
constrain tactical choices to ones designed to make that story come true.
Paradigmatic choices are not always economic in nature for, as is often the case,
they are not constrained by resources, money, or even time but only by imagination
and intelligence. Instead, paradigmatic choices frame further thought by narrowing
down the prospective alternatives of a lifetime. They do this by posing a limited
class of less strategic and tactical choices distributed over time that will be involved
later in effecting the chosen paradigm. They decomplexify the overall problem of
how to live one's life or run one's business into a sequence of simpler problems, each
one of which need be considered only after its predecessor has been solved: it will be
dealt with ‘when the time comes.’
Although not formulated as a specific sequence of tactics, a life paradigm may
involve a complex of attributes. For example, one may want to become a high level
business manager, a ‘good’ or moral person, an accomplished golfer, and a patron of
the arts, each one of which will impose a host of challenging but subsidiary, less

5
The founders of the discipline had nothing else in mind. The necessity for emphasizing the point is the
very different interpretation prevalent in much of contemporary theorizing.
6
I do not recall seeing this concept in works of economic theory but have come across related arguments
in philosophical writings, John Dewey (1958), for example, and after writing this passage, Bratman
(1987).
Micro foundations for meso and macro economic theory 265

comprehensive strategic plans, each of which will eventually require tactical choices
in specific situations that cannot be imagined when such a paradigm is chosen. A
paradigm's attributes also typically include various capital goods appropriate for a
given lifestyle, the most important of which will only involve a few tactical choices.
Thus, one purchases only a few homes or sets of golf clubs, and then one at a time.
Rationality focused on complex problems is algorithmic. People are sometimes
able to solve quite difficult problems “in their heads.” But intelligent people
continually pose problems of such complexity that purely mental gymnastics are
insufficient. In such cases, they construct a sequence of simple but approximate
problems—an algorithm—which leads to or approximates a ‘best’ solution. This
effort may require considerable (possibly enormous) mental and physical resources
(such as managing a large business enterprise or landing persons on the moon and
returning them to earth safely).
Prioritizing and satisficing is an algorithmic device often incorporated in decision
making procedures. Needs and wants are arranged in order from most important or
highest objective to least important or lowest objective, attending to the highest
objective first, then, assured that it is satisficed by taking up the next, and so on until
no more scope for further choice according to less important goals remains.
Prioritizing preferences combined with satisficing constraints in this way is typical
of decision making, not because people are not rational, but because they are! They
know this is often the best way to be effective in the exercise of rational choice.
Notice that satisficing in this context is equivalent to acting as if a ‘best’ choice is
one that is ‘good enough.’ Those who can not prioritize and satisfice in this way are
often mired in quandaries; unable to ‘sort things out’; unable to commit themselves
to any objective because they just cannot decide what is best.
In addition to an explicit comparison of contemplated alternatives, rational choice
may involve trials of actual alternatives, that is, trial and error search. This could
include adopting or imitating the choice of another and it may include the adoption
of habits which liberate the attention both of which economize on thought. Thus
there are alternative ways of being rational: rationality is modular.

2 Rational lives

Not all conscious thought is rational, indeed, perhaps most of it is not. Once a
problem has been solved or when action induced by rational choice is underway, the
mind might be occupied by all sorts of thoughts until the object of the action or
sequence of actions has achieved the objective or until a new problem is conceived.
Between periods of rational activity the mind may be absorbed by study,
contemplation, daydreams, reveries, reminiscences, religious exercises, some form
of entertainment, conversation, etc. To put it briefly, rational thought is intermittent.
Moreover, the rational being evolves. With the advent of consciousness one does
not plan one's detailed course through life. Rather, one might decide to act according
to one's parents' wishes—or not! The choices that follow might produce
consequences (parental approval or disapproval, a new toy or a spanking, etc.) that
leads to a revised strategy. As one gradually matures, other modes of behavior may
be adopted such as—regardless of the situation—to tell the truth, to be considerate,
266 R.H. Day

to do a good job. Alternatively, one may choose to lie when convenient, take
advantage of others whenever possible, do as little as necessary.
Eventually, occupations and lifestyles will be considered. On the basis of one's
parent or a favorite uncle or aunt one may choose to become a physician, live in an
upscale suburban neighborhood, have a good family of one's own, and belong to a
country club. Once made, such a lifestyle choice provisionally commits one's
rationality from that point on. It must be focused on high school grades; then,
accepted to a college, it must be focused on a particular sequence of courses and
grades; accepted to a medical school, it is then focused on a more advanced
sequence of courses and grades; passing the boards, it is focused on the choice of a
speciality and internship; later, it is focused on a decision to marry a specific partner,
where to practice, how many children to have, where to send them to school, when
and where to retire, etc. As each action in effecting a lifestyle is made, a host of new
tactical decisions unfolds.
One’s conscious knowledge of internal and external states and of the causal
relationships among them may be mistaken. Unanticipated changes in circumstance
may force adjustments in response. If a failure occurs, it may be necessary to adopt a
new paradigm—or, perhaps, less dramatically, one may repeat a tactic or adopt new
tactics to overcome the hurdle. All along the way experience accumulates, new
options arise, knowledge advances, one's preferences change, one's skill in carrying
out intended actions improve. In short, learning occurs and states of mind that
condition thought evolve. Early on in life paradigms may be impractical or foolish
and strategic choices short sighted. Later, new life styles may be considered (not
every little boy's desire to be a truck driver or fireman will be retained). Eventually,
longer range planning emerges involving more complex tactical actions based on a
wider perspective. If, somewhere along the way, one fails to derive a viable action,
events will force the occasion; the individual must then solve a new problem.
How foolish it would be to base life's choices on a strategy determined once and
for all when one is young, before much experience has been accumulated, and before
one's preferences are more fully formed. It is true that humans sometimes adopt a
way of life based on the repetition of a stable pattern of behavior and eschew
consideration of new information and new ways of acting. Still, our minds are so
constructed that, in response to crucial types of outcomes, learning is reinitiated and
search resumed. It is this capacity that constitutes the extreme adaptability of humans
to different or changing environmental conditions.
To summarize: behavior in continuous time is broken into intervals, some of
which are governed by specific modes of rational thought and which switch at
intermittent intervals among possible modes and periods of nonrational behavior.
Rationality itself is governed by evolving preferences. The history of each agent will
almost certainly be unique.

3 Modeling economizing behavior

Microeconomic theory is the science of rationality applied to the problems of

determining how hard to work, how to allocate income and wealth among alternate
consumption and savings possibilities, what and how much to produce, how to
Micro foundations for meso and macro economic theory 267

produce it, and how to market it. This involves specifying one's preferences or profit
objectives, identifying constraints, enumerating and comparing alternatives, then
determining a most preferred choice among those that satisfy the constraints.
I suggest that adaptive economizing serve as a general term for rational economic
choices made in a partly understood world where information is incomplete,
cognitive potential bounded, and judgment fallible, as, in reality, is always the case.
Its mathematical analog is the class of recursive programming (RP) models. The
term ‘recur’ means “to come up again for consideration...” and “to occur again after
an interval.” ‘Programming’ is a term used synonymously for the constrained
optimization problems. Rational economic decisions are modeled mathematically in
this way. Thus, recursive programming implies making currently best decisions
again and again as time passes.
To account explicitly for the uncertain outcome of decisions once made and
actions undertaken, the probabilities of alternative outcomes may be estimated and
alternatives defined in terms of their statistical, expected values. Far more frequently
followed in actual practice is the restriction of considered choices to a neighborhood
of current practice represented by subjective “flexibility” restraints that define a
cautious response to estimates of future consequences using partial information and
calculated for a finite time horizon. The decision-maker adapts recursively, more or
less cautiously moving in the direction of what, on the basis of incomplete
knowledge, seems like the “best way to go,” then reconsiders after time passes and
new information has been revealed.
The various activities about which decisions are being made may or may not be
pursued. It is an attempt to do what is best locally that determines which activities
are undertaken and which constraints are binding. The currently pursued activities
and binding constraints form a ‘causal structure.’ The specific activities pursued and
the specific constraints that are binding change from time to time, which is
equivalent to a change in the structure of causal relationships governing the dynamic
process. The period of time during which a given causal structure is effective is
called a phase, regime, or epoch. Thus the history of a given individual, family,
economic organization, sector, or economy as a whole can be described in terms of
the sequence of phases through which it passes. Structural change is modeled
explicitly and economic evolution is seen to consist of the endogenous generation of
one structure after and “out of another.”
Each problem in the sequence of recursive programs characterizes the formulation
of a potential future action that is about to be or is taken, or a sequence of potential
actions associated with imagined future periods, the first one of which will be
implemented. In the latter case, a description of rationality requires two time
indexes, anticipation time representing future time periods, and historical time
representing the current period for which imminent action is to be determined and
the order by which past events are remembered. In such a case, each decision
problem in the sequence is called a dynamic programming problem.
If the process of reconstituting the components and re-estimating their parameters
based on information available at the beginning of each historical period, t, is
explicitly represented, we would seem to be compelled to use the awkward but not
redundant term recursive dynamic programming for the overall model of decision
and behavior that results. At each time, t, a sequence of anticipated actions is
268 R.H. Day

determined; the first of which is undertaken, the problem as a whole is reconstituted,

and the process repeated.7
If, however, the structure of the dynamic program representing the intertemporal
optimization problem does not change with the passage of historical time, an optimal
strategy can be derived which constitutes a rule connecting the best current decision
with the current state of the underlying economic structure in terms of the wealth,
technology, and preferences or profit objective, as the case may be. Then the
economizing agent can be thought of as An Optimal Economic Agent. Such an agent,
knowing this optimal strategy, would believe rational thought would never be
required again!
If the problem contemplated at a given time is complicated enough to defy the
intuition, an algorithmic procedure must be introduced to search out or approximate
the optimal solution. But then a decision cost is introduced that further exacerbates
the demands on rational thought. The nature of this complication is discussed by
Conlisk (1996), who describes a “search and stop algorithm” that accounts for the
trade-off between improving one's choice and the cost of attempting to do so.
In very special decision problems where potential interactions between the
specific environmental conditions and the controls to be determined can be
represented with great accuracy, the methods of optimal control are quite useful.
Such problems arise in engineering contexts where physical processes are well
understood and exacting description and control possible. But even then, ad hoc
adjustment procedures are usually involved. For example, in guiding a manned
spacecraft to the moon dynamic programming could in principle provide an optimal
strategy if the assumptions of Newton's equations could represent the process
exactly. But they do not. Thus, the earth is slightly pear shaped. It is not a mass point
but an extensive object with heterogeneous density. So called perturbation terms
must be incorporated in the mathematical model of space flight to provide for these
complications. The fact that they are approximations means that the optimal control
model must be reinitialized at intermittent intervals to give accurate projections. This
requires using information from an independent source about the actual position of
the craft so the endogenously generated prediction can be reinitialized before the
actual departure from the computed ‘optimal’ path leads the crew too far astray. This
is the case even if no random perturbations at all impinge on the system. Thus,
optimal control—in practice—is often applied recursively!
It is worth noting that algorithms designed to compute optima—or approximate
optima of complex mathematical optimization problems—involve sequences of
relatively simple trial and error searches based on local optimizing in which each
trial determines a direction and ‘distance’ to go in the search, a criterion for assessing
the success or failure of the outcome and a procedure for reformulating the search
problem in the neighborhood of the resulting choice. All, in effect, rely on a distance
metric to determine how ‘cautious’ or ‘daring’ the search should be and a set of rules
to determine how the local approximation is to be constituted. Evidently, optimizing
algorithms share essential features with and belong to the general class of recursive
programs.

7
For a general, abstract formalization of this theory, see Day (2004).
Micro foundations for meso and macro economic theory 269

The RP way of theorizing about rationality originated with Cournot, Walras, and
Marshall: Cournot with his recursive best response adjustment process; Walras with
his consumers and producers t(aileen) atonnement (when modeled in discrete time);
and Marshall with his incremental consumer choice and quasi-rent dynamics of the
firm. The idea is implied in temporary economic equilibrium theory as expounded in
Hicks' classic Value and Capital or in more general terms by Grandmont (1988).
Alan Kirman (1975) presented a particularly insightful example of the RP
approach using a learning model of monopolistic competition to derive a profound
insight: learning from experience using a more or less ‘sophisticated’ econometric
scheme for estimating the parameters of a model can lead action to a state in which
the decision maker believes there is nothing more to learn when in fact the data
generating process is different than assumed, there is more to be learned, and benefit
could potentially accrue to appropriately modified action. Put as a general rule: what
you learn depends on how you learn; how you learn depends on what you assume;
what you assume conditions what you do!
In Bayesian Dynamic Programming where the dynamic structure of the real
process is assumed to be known but the parameters unknown, a recursive, dynamic
programming structure emerges. Each stochastically influenced past outcome is
incorporated in the new Bayesian optimal estimate of the next anticipated action.
The dynamic structure of such a decision formulation, however, does not, nor ever
can be based on the true dynamic feedback structure of the actual environment of the
decision maker, not because that environment is stochastic but because it is always
based on incomplete knowledge and approximation.
A contemporary student might understandably ask, “But why should anyone
behave suboptimally? Why should we not use the true model and derive the optimal
learning strategy?” Kirman actually did derive the Bayesian optimal strategy for the
problem, and was able to do so because he formulated the ‘true model’ simply
enough to make such an exercise possible. He recognized that the scientific role of
the theorist is not only to derive optimal solutions to idealized problems, but more
importantly to use idealized models to explain how learning that only approximates
the ‘true problem’ may lead to deceptive optimality.
But there is a more general answer to the student's question: There is no ‘true’
model of the world except the world itself! As one dynamic programming theorist
answered, “All models are false.” We could also add that, “Good models
characterize relevant aspects of experience, inform our understanding, and help us
figure out what to do when we think we know what our objectives are.”

4 Meso economic order

A national economy is comprised of a vast number of diverse individuals differing in

sex, age, family, intelligence, talents, ethnicity, education, and employment status.
They interact within and among tens of thousands of diverse private and public
institutions distributed over a vast and varied land. Each is an adaptive economizer
and none are exactly alike. One of them, selected to be an agent representative of the
whole, would in fact represent very little of the nature of that economy. None would
even be representative of the family of which they are a part and none could in any
270 R.H. Day

way be representative of even the smallest business firm or farm, let alone a large
corporate enterprise, and that would be true of any sort of real or constructed
representative person.
All that not withstanding, for many useful purposes individuals can be grouped
according to specific characteristics (sex, age, family income, occupation, etc.).
Behavior among individuals or families within these groups is in many regards quite
similar. Likewise, firms that produce similar products or bundles of products using
similar technologies can be conveniently treated as forming distinct production
sectors. Their aggregated data then form an empirical description of the resulting
emergent mesoeconomic sectors. A vast literature provides numerous examples of
theoretical and empirical analyses of the order that emerges in mesoeconomic data.
Modeling the continuous flow of actions would involve excessive if not mind
numbing complication. But every behavior mode, rational or otherwise, is initiated at
discrete intervals. This fundamental, regime switching nature of behavior suggests a
natural reduction to a sequential process of explicit economizing activities, not in all
their details and frequency of occurrence, but exploiting instead aggregations of them
that would in principle be decomposable into their detailed components and executable
in turn within a given finite interval. These intervals not only may aggregate an entire
sequence of activities that are in fact carried out over a finite period. They will also
subsume or ignore altogether the very large number of nonrational actions that will
inevitably be interspersed in reality within the period chosen for economic analysis, be
it a month, quarter, year, or generation of quarter century.
Two contrasting examples will illustrate the methodological distinctions that are
involved. One treats an industrial sector as an optimal economic agent. The other
treats an agricultural region or an industrial sector as an adaptive economizing agent.
In a collection of theoretically based econometric studies published during the
period 1963–1971, Dale Jorgenson (1996) in Chapter 3 characterized investment
behavior in a specific firm or industry as the solution of an infinite horizon Optimal
Control Model, that is, as if a firm or industry is an optimal economic agent. In
chapter 6 he reinterpreted the model's agents as recursive dynamic programmers but,
given the simplifying assumptions about technology and equilibrium prices, the two
are equivalent. In each study output, investment, and capital stock are aggregates of
the corresponding goods actually produced, types of labor employed, and various
capital goods utilized in the firms or industrial aggregates under investigation. By
introducing conveniently chosen functional forms and by assuming competitive
equilibrium prices, the equilibrium cost of capital is implied and the effect of
corporate taxes on optimal investment can be assessed.8
An alternative theoretical and empirical research strategy based on the adaptive
economizing theory and applied to agricultural regions and industrial sectors is
described in broad terms in my book, Divergent Dynamics of Economic Growth
(2004). In these studies the multiple products and alternative technologies that
characterize agricultural and industrial firms and, hence, mesoeconomic regions and
industries are incorporated explicitly. The empirical models were motivated by the

8
Note the implicit paradox: An economy wide equilibrium that generates the equilibrium prices for a
given economic sector would depend on that sector's output. Thus, the solution of the sector's optimal
control model and the prices on which that solution is based cannot be independent.
Micro foundations for meso and macro economic theory 271

need to better understand and quantitatively estimate how the process of investment
and the allocation of capital and land to alternative technologies and alternative
products impacted the demand for labor and other production inputs over time. All
of these models exploited the recursive programming method for representing
mesoeconomic behavior. The empirical results for a variety of case studies
demonstrated that the approach—based as it is on the activity analysis and on
direct observation of micro units making up the meso aggregates—is quite effective
for its intended purpose.
The two contrasting research programs illustrate fundamental theoretical attributes
that distinguish alternative mesoeconomic modeling research, one based on the idea
of an optimal economic agent behaving within a competitive market equilibrium,
and one based on the idea of an adaptive economizing agent possibly in—but
undoubtedly out—of a competitive market equilibrium.

5 The emergent macro economy

The histories of associated individuals, or individuals in similar situations, may be

similar, precisely because people often do behave like others of similar psychological,
sociological, technological, and geographical attributes. Imitation of successful others
and the following of others who have authoritative standing is sufficient to explain
some of this, and as recognized previously, such imitation and following is seen to
have a rational basis. Anyway, the interest of economics is ultimately not about
individuals at all but about aggregates of them. That is why operational economic
models are usually formulated with reference to aggregates: household groups and
industrial sectors or the Macro Economy as a whole. As noted in the preceding section,
mesoeconomic order may be effectively modeled for many scientific and policy
purposes as discrete time, sequential optimization processes that represent the
behavior of aggregates constituted of appropriately similar households and firms.
The Macro Economy, however, is not remotely like a person or business firm at
all. It is created from index numbers: weighted averages of quantities of highly
dissimilar goods and services, aggregates of hours worked, existing and utilized
production capacity, and so forth. From these quantitative indexes a Macro Economy
emerges. Most of the indexes can be computed on a per capita basis, but the
resulting per capita data characterizes neither a representative individual nor a
representative firm but the emergent Macro Economy in per capita terms.
None of the micro characteristics of human individuals or firms are reflected in
these index numbers. Once represented in graphical terms, however, characteristics
of the Macro Economy leap out: its growth, fluctuations in its rate of growth, its
increasing wealth, productivity, and average wellbeing, and so on. Moreover,
meaningful macro-causal forces are evident in the aggregate or per capita data: the
relation of macro-output to macro-labor and macro-capital utilization, the relation-
ships of aggregate consumption, savings, and investment to aggregate income,
wealth, and real interest rates. The possibility of a distinct theory of the Macro
Economy based on emergent macroeconomic variables is implied. Indeed, almost
immediately after these data became available, the macro variables they measured
were incorporated in models of national economies as a whole whose parameters
272 R.H. Day

were estimated statistically. Empirical, Keynesian–Tinbergenian macro econometrics

was born.9

6 Social utility and the macro economy as an optimal economic agent

The macroeconomic theory that has actually dominated the advanced pedagogical
literature for a third of a century, innovated by Ramsey (1928) and championed by
Stokey and Lucas (1989), Cooley and Prescott (1995), and others, is of a very
different sort than described in the preceding remarks. Instead of a causal structure
defined in terms of macro indexes, it describes the economy as if it were a rational
person—or what is the same thing—as a group of identical rational persons, not of
the kind described in Sections 2 and 3 +AKA-but as one who has—once and for all—
formulated an infinite horizon optimal control representation of the economy, derived
its solutions in terms of an optimal strategy in a competitive equilibrium and then
consumed, invested, and produced according to that optimal equilibrium strategy. In
short, they treat the Macro Economy as if it were an optimal economic agent.
As in its application to mesoeconomic order, it offers a characterization of the
fundamental problem of taking into account what one would like in the future when
deciding how to act in the present. Like the analogous optimal control theory of
mesoeconomic order it ignores the facts that excess capital capacity and
involuntarily unemployed labor are quantitative realities and have always been so
since macro indexes have been available to measure them. It also ignores
government agencies, which operate according to procedures entirely different than
the market that governs private, production, marketing, and consumption. Thus, it
abdicates any role for the economist as an advisor to government agencies or,
indeed, to industries or households as well. It sees the economic world as the best it
can be and the economist as a cheerleader on the sidelines.
However, a different perspective described elsewhere shows that under special
conditions a Keynesian model of emergent macro economic order can in principle
converge to or eventually fluctuate about a steady state growth path compatible with
a Solow growth model that explicitly incorporates government expenditures on
public services and investment. In that case the Cooley/Prescott method for
estimating a supporting social utility function can be invoked. The implication is
that, given these special conditions, the emergent macro economic order functions
like a real time algorithm for generating a competitive equilibrium that can be
characterized in the limit as the solution to an optimal control problem. In this way
the two very different theoretical points of view are integrated in a unified theory of
macroeconomic growth, fluctuation, fiscal and monetary policy.10

9
It is worth noting that the Emergent Macro Economy is quite analogous to the emergent Newtonian
macro order of the Solar System. The sun, planets, and moons are all agglomerations of micro components
that for purposes of explanation and prediction of change in the macro order can be treated without
building them up from the constituent micro components.
Day and Yang, “From Keynes to Solow to Cooley–Prescott: An Encompassing Theory of Growth and
10

Macroeconomic Policy.” Available from the authors on request.

Micro foundations for meso and macro economic theory 273

7 Conclusions

Henri Poincaré observed that, “Trying to make science contain nature is like trying
to make a part contain the whole.” In other words, there can be no unique
transformation from reality into models of it. The abstract models presented here,
therefore, are not offered as the foundations for economic theory, but rather only as
representative alternatives. They are offered as ways to characterize salient
properties of economic life as we know it. Obviously, building on the micro
foundations of Sections 2 and 3 is not easy. It is easier to stick to Pollyanna models
that represent what is is the best it can be. That approach, however, cannot inform
practical needs of business and government for it does not represent government at
all. Our job is not to economize for consumers, businessmen, and government
agents. Rather, it is to characterize their behavior so that models of meso and macro
economic behavior can be constructed that offer explanatory power, that provide
some predictive capability, that are close enough to what we know to be true at the
micro level, and that their insights are convincing to those responsible for devising
policies based on them. There is still much to do.

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