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Mesoeconomics

Mesoeconomics is a neologism used to describe the study of economic arrangements which are not based either on the microeconomics of buying and selling and supply and demand, nor on the macroeconomic reasoning of aggregate totals of demand, but on the importance of under what structures these forces play out, and how to measure these effects. It dates from the 1980s as several economists began questioning whether there would ever be a bridge between the two main economic paradigms in mainstream economics, without wanting to discard both paradigms in favor of some other basic methodology and paradigm.

Mesoeconomics is not a generally recognized term, and it has only a small number of adherents, though many of them are quite vocal in arguing for the necessity of mesoeconomic reasoning, and it should be regarded as a term specific to the authors that use it at the present time.

The term comes from "meso-" (which means "middle") and "economics", and is constructed in analogy with micro and macro economics.

Mesoeconomics Summary

"Meso- or Mes-, prefix, coming from the Greek word mesos, meaning middle” is how the American Heritage Dictionary defines Meso.

How do economists define meso? What then does it mean to add meso to economics, thus creating a new branch of inquiry mesoeconomics? What is mesoeconomics? It is said to be the link between microeconomics and macroeconomics, but what is included in the study a middle ground and how does one formalize this link? These issues along with how mesoeconomics fits into the realm of social science as a whole and a brief look at criticisms will follow.

Mesoeconomics is an emerging field of study, which has its modern roots in the 1980s, but as most economics theories you can go back in time and find people who were doing the same things and asking the same questions ‘back in the day' typically with little support from academia.

Mesoeconomics looks at "economic arrangements which are not based either on the microeconomics of buying and selling and supply and demand, nor on the macroeconomic reasoning of aggregate totals of demand, but on the importance of under what structures these forces play out, and how to measure these effects (Wikipedia-A 2006).”

Some argue, Mesoeconomics is not enough, they say traditional "research should be supplemented, besides macroeconomics and microeconomics, by three sections: by global economics or maxieconomics, regional economics or mesoeconomics, and also economics of the firm or minieconomics (Popov 2005).” Thus resulting in a mini-micro-meso-macro-maxi framework, I remain skeptical about the necessity of including the mini and maxi framework, but feel that the meso framework is absolutely essential for good research, as hopefully the remainder of their paper will show. A couple of the reasons why meso is essential are because, "at the heart of mesoeconomic theory is the notion of the economic "sector," which lies between the individual producers or consumers of microeconomics and the national aggregates of macroeconomics (Walz-Chojnacki 2006).”

In this middle sector is where much of life is happening. Kurt Dopfer, et al. feel that without understanding meso, one cannot understand evolutionary economics. As they said, "Evolutionary meso-economics is the conceptual heart of evolutionary economic analysis because it describes the essential thing that is changing in a process of evolutionary economic change (Dopfer Foster Potts 2004, 269).”

Looking back in the past, we see that "Schumpeter paved the way for a new micro–meso–macro framework in economics. Centre stage is meso (Dopfer 2006, 1).” How is this framework really divided? "We have seen previously that meso cannot be derived by simply aggregating micro units, and that, therefore, conventional economics cannot capture meso (Dopfer 2006, 15).” The use of mathematics in conventional economics is what Dopher, et al. are saying will be able to capture meso. They say, "Our critical take on algebraicism [the use of mathematics as the main method to understand a discipline] is that it has no meso domain (Dopfer Foster Potts 2004, 266).”

I disagree with this idea, I think there is a place for math within ALL economics, it does not need to have a central role, but it does play a role. It might not and I hope it would not be able to capture all of the pieces of the economic puzzle that fit into the meso-sphere. However, there is something to be said for statistical or spatial analysis in helping one understand even a meso problem.

Dopfer in the foreseeable future envisions a ‘meso revolution' largely driven by the work of Joseph Schumpeter. He says Schumpeter's "simple proposition that entrepreneurs carry out novelty, luring swarms of followers, contains in its core an analytical category - we call it meso - that prompts a breakdown of the traditional distinction between micro and macro and aspires to the reconstruction of economics on a micro-meso-macro basis (Dopfer 2006, 2).”

How then can one formalize the micro-meso-macro links. "The proper analytical structure of evolutionary economics is in terms of micro–meso–macro. Micro refers to the individual carriers of rules and the systems they organize, and macro consists of the population structure of systems of meso. Micro structure is between the elements of the meso, and macro structure is between meso elements (Dopfer Foster Potts 2004, 263).”

Through this type of analysis, one can form what Dopfer et al. call the "meso trajectory – and a way of understanding the micro-processes and macro-consequences involved (Dopfer Foster Potts 2004, 263).” Later in there article Dopfer et al. begin to explain more about interwovenness between micro and macro with meso.

"When we observe change in the meso, by which we mean a change in generic rules, i.e. in the knowledge base, and/or in their respective populations, we can then analytically focus on both the micro and macro aspects of this process. Micro involves a change in the composition of rule-carriers and how they interact. Macro involves a change in the coordination structure amongst meso units. Rules are the building-blocks of systems that form the micro-structure, or organization, of an economic system. The macro-structure, or order, of an economic system consists of systems of rule-populations, or meso units. We tend to view the macro through statistical aggregates but these are simply measures of output flow or asset value aggregations that arise from the existence of interacting populations of meso rules. The essential point to grasp here is that macro is not a behavioural aggregation of micro, but, rather, it offers a systems perspective on meso viewed as a whole. Similarly, micro is not the reduced essence of an economic system; it is a ‘bottom up' systems perspective on meso when viewed in terms of its component parts. The economic system is built upon meso; micro and macro are two perspectives that reveal the structural aspects of the changes in the meso populations that constitute the elementary units of the economic system (Dopfer Foster Potts 2004, 267).”

By "studying the interplay of various sectors is, he [Mamalakis] argues, a richer way of looking at the dynamics of economies than the traditional micro- and macroeconomic models (Walz-Chojnacki 2006).”

One of the essential characteristic according to Dopfer of mesoeconomics is that of bimodality, meaning that one idea or the generic rule can be physically actualized by many agents i.e. a population (Dopfer 2006, 1). This bimodality, allowing meso to work in both the micro and macro sphere at the same time is what makes this framework interesting and essential to understanding the modern world. Dopfer et al. work to operationalize bimodality in mesoeconomics by creating a meso trajectory with 3 phases.

"We shall refer to the three distinct phases of a meso trajectory as Meso 1, 2 and 3. The first phase of a meso trajectory (Meso 1) begins when an agent acquires, understands and imagines how to use a novel rule, which is to say with the meso concept of origination and the micro concept of first adoption into a carrier. Meso 1 begins with origination in the sense of global novelty (a generic idea) and local novelty (its first actualization) at once. Meso 2 involves the local adoption and adaptation of that novelty. In Meso 2 the existing order is disturbed and there must be a re-normalization of behaviour to adapt to the new rule. This is the process of institutionalization at the core of the Schumpeterian approach to economic evolution. Meso 3 is the limiting phase and one that can perpetuate over time in cases where rules retain fundamental importance in the economic system. It is a state of meta-stability attained through replication, maintenance, repair and retention. However, most rules are like fashions; they are abandoned prior to Meso 3, and their abandonment enables new ideas to enter the system. Durable rules can also be abandoned. For example, the rules that underpinned horse transportation in the era of the powered vehicle or the shift to Fordist production methods. When this occurs, we get spectacular infusions of novelty of the type that Schumpeter identified. Thus, the meta-stable states in Meso 3 play a major role in the maintenance of variety both in their core, facilitating role and in the opportunities that arise when structural stability is lost. (Dopfer Foster Potts 2004, 272).”
"In sum, a generic meso trajectory consists of three parts – Meso 1: origination, Meso 2: adoption, and Meso 3: retention – each with both micro and macro dimensions (see Fig. 1) (Dopfer Foster Potts 2004, 273).”

The unit of analysis proposed here is slightly different then other units of analysis for specific theories. What makes this one unique is that it is dynamic. What makes it dynamic is depending if you are looking at a more micro-meso or meso-macro what you will see will look slightly different though in reality it is the same thing, as Dopfer et al. go on to describe.

We can define a generic rule and its population of actualizations as a ‘meso unit'. When we focus upon a single generic rule and a particular carrier, we have a ‘micro' perspective on the rule in its local environment. … The meso perspective abstracts from such detail in order to focus on the population of rule actualizations. …The relationship between ‘meso' and ‘macro' is [similar but] … rather than individual rule actualizations. In the macro domain we abstract from such detail in order to focus upon the aggregate (Dopfer Foster Potts 2004, 267).”

If we were to only look at the "micro-macro dichotomy, the unit proposed is homeless; it is an intermediate category that gets its place as meso. Schumpeter's depiction of entrepreneurs adopting new technological and/or organizational rules that spread and become generic are of this character and it is no surprise that they are invisible in standard economic theory (Dopfer 2006, 14).”

We now have this meso unit of analysis of a rule and its institutional structure what is in the realm of mesoeconomics and meso-social science that we can now work to analyze. Looking first at institutions Dopfer et al. say, "For us, the central insight is that an economic system is a population of rules, a structure of rules, and a process of rules. The economic system is a rule-system contained in what we call the meso (Dopfer Foster Potts 2004,263).”

What they are describing here is the basis of the Original Institutional Economics (OIE) view of the world through rules, habits and there persistence over time. This OIE perspective can also be applied to grassroots policy formation, as this activist group in Africa states, the "best practice in work on institutions (often meso level), needs to be based on an understanding of people's livelihoods (micro), and the policy environment (macro). Where the latter is not helpful, it must also seek to influence the policy environment, otherwise it risks irrelevance (khanya-aicdd 2006).” Again they are referencing the implicit bimodality of the meso structure having to look both forward and behind at the same time.

In the realm of organizational economics, Dopfer through Schumpeter argues that creative destruction and it related components are the driving force behind the meso 3 trajectory.

This process of Creative Destruction", Schumpeter argues, "is the essential fact about capitalism." (Schumpeter 1942, p. 83, emph. as in orig.). This process runs through all levels of micro-meso-macro. It starts with an entrepreneur who carries out an innovation (micro), develops into a population of agents who imitate it (meso), and consequentially destroys the existing structure of the economy (macro) (Dopfer 2006, 20).”

Hopefully this creative destruction will lead to are more equitable distribution of resources. The economist, Markos J. Mamalakis, believes that there are two main dimensions of mesoeconomics first, all producers are treated fairly within and across sectors and second, that "semi-public and collective services are distributed in a manner that does not perpetuate permanent poverty by excluding certain groups (Walz-Chojnacki 2006).”

He goes on to say that "Economic justice - freedom and competition - for producers, is vital for a society that wants to raise income and consumption for all households, especially the poor" (Walz-Chojnacki 2006).”

Mamalakis thinks that mesoeconomics suggests more fruitful ways of attacking questions at the heart of social justice (Walz-Chojnacki 2006). When looking at the causes of inequality, most will look at private consumption, while at the heart of the problem is the distribution of semi-public goods and services, like education, health services, defense, public administration, etc. There is no good measure of these services and they are the ones that contribute most to upward mobility, "thus, their equal distribution is a key to economic justice (Walz-Chojnacki 2006).”

Looking at the case of Latin America he says, "Neglect of the mescoeconomic dimensions has given rise, on the one hand, to an incomplete, if not faulty, diagnosis of the problems of stagnation, (hyper)inflation, disequilibria in the balance of payments, poverty, and inequality; while it has contributed on the other, to policies which have perpetuated, even aggravated, poverty and inequality (Mamalakis 1996,183).”

These ideas and links between "meso-thinking” and social sciences extend much farther and are more interwoven then space allows in this paper. Mamalakis leaves us with one final thought about the role of the government, at least in the case of Latin America.

It is in the mesoeconomics of government where both the diagnosis and solution of Latin America's pernicious problems concerning poverty and inequality are to be found. In a nutshell, it is argued that these mesoeconomic constitutions (of agriculture, mining, industry, trade, finance, education, health, transport, and so forth) have been distorted, i.e. they have perpetuated, even aggravated, poverty and inequality (Mamalakis 1996,185).

If a system is to be fair or just it has to be fair to both households and producers, both the government and the people (Walz-Chojnacki 2006).” As was quickly mentioned mesoeconomics is complex because it is trying to describe a complex world. Everything one sees, feels, hears, smells, or tastes are complex one thing out of balance and it throws the whole system off. "Adoption of a more explicit micro–meso–macro framework enables us to conceive more clearly how complex systems theory and self-organization theory fit together with population-based thinking to provide evolutionary economists with an analytical apparatus that can embrace the emergence of generic novelty in structured open systems (Dopfer Foster Potts 2004, 268).”

Some people see the complexity of the world and want to try to find a way to connect everything to each other. Chemistry and Economics on the surface are very different so one must go down deeper, to a molecular level to try to understand how these are connected. What these scholars are proposing to do I think is similar to the game ‘Six Degrees of Kevin Bacon.' For those not familiar with the game it is "based on a concept which states that any actor can be linked, through their film roles, to Kevin Bacon. The game requires a group of players to try to connect any film actor in history to Kevin Bacon as quickly as possible and in as few links as possible (Wikipedia-B 2006).”

What I propose is that we do the same thing for theories and work out a similar game called ‘The Six Degrees of Academic Relation.' This would be done be trying to connect two disciplines together, through there theories or avenues of inquiry with as few steps as possible, for example Economics and Religious Studies. Religious Studies looks at rising violence against Muslims, which is linked to Criminal Justice through their efforts to understand why these crimes occur and collect data on incidents. To do this Criminal Justice relies on the theory of rational agents to understand motives for crime and Economics uses rational agents to understand the underlying forces of supply and demand. Therefore, Religious Studies is linked to Criminal Justice and Criminal Justice is linked to Economics. Thus, Religious Studies would have an Academic Relation to Economics of 2. This may be a simplistic example but it is used as an illustration of where future research into the complexity and interconnectedness of our world will lead.

There are naysayers who think that studying mesoeconomics, let alone complexity theory is an utter waste of time. They "dispute the need for a meso scale theory of economics, arguing instead that rational expectations at infinity can appropriately model price strategies (Wikipedia-A 2006).”

There are also those that think it creates redundancies in the system, as people already engage in research to bridge the gap between micro and macro, so why formalize it. If one is content with an invisible link, they in reality do not want a link. If the meso link is not a visible, where effects can be traced through mirco-meso-macro spheres and through time, many theories we rely upon today will disappear and become as invisible as the link. Dofper argues that without a visible meso link evolutionary economics will suffer, as changes in structures over time which meso allows for are vitally important in their theory.

Fundamentally, mesoeconomics is able to bridge the gap between micro and macro and one of its main properties to help build this bridge is through its bimodality nature. This bimodal nature requires researchers to look forward at the big picture (macro) and back to the people (mirco) within the institutions (meso), doing so in such a way that is equitable to all parties. Mesoeconomics and other meso braches of the social sciences do not ‘play favorites' this framework for analysis allows for equal representation of all sides, that is the beauty of meso and that is why it is absolutely essential for analysis.

One method of mesoeconomic analysis was developed by Yew-Kwang Ng of Monash University, Australia with papers initially published in Australian Economic Papers 1977 and Economic Journal 1980, but in more mature form in Economica 1982. A full analysis is contained in his monograph Mesoeconomics: A Micro-Macroeconomic Analysis, 1986. Later extensions include his American Economic Review 1992 paper and papers by Abayasiri-Silva and Shi in the same issue and his joint paper with Wu in 2004. This method is based on the idea that, most output and pricing decisions in a modern economy are taken by business firms. The price level of an economy is just the (quantity-weighted) average of prices of all firms and the aggregate output is just the (price-weighted) sum of the output levels of all firms. Thus, the pricing and output decisions of an appropriately defined representative firm may represent those of the whole economy in terms of the price level and aggregate output. To justify the methodological validity of this approach, Ng (1986, Appendix 3I) uses a traditional fully general equilibrium analysis (without any of the simplifications used in the mesoeconomic method discussed in the Appendix; these simplications allow analysis leading to many results despite the generalization to non-perfect competition) to show that (1) for any (exogenous) change (in cost or demand) there exists, in a hypothetical sense, a representative firm whose response to the change accurately (no approximation needed) represents the response of the whole economy in aggregate output and average price, and (2) a representative firm defined by a simple method (that of a weighted average) can be used as a good approximation of the response of the whole economy to any economy-wide change in demand and/or costs that does not result in drastic inter-firm changes. This vigorous demonstration provides a solid methodological foundation for mesoeconomics.

This method concentrates on the microeconomics of profit maximization by a representative firm but takes account of the influence of macro variables like the price level, aggregate income/output level, and interactions with other firms on the demand and cost functions of the representative firm. It is called mesoeconomics as it synthesizes micro, macro and general equilibrium analysis. It provides many comparative-static results, including the Keynesian and the Monetarist results on the effects of a change of nominal aggregate demand as special cases.

Mesoeconomic reasoning

Economics focuses on measurable ways of describing social behavior. In orthodox neoclassical synthesis economics, there are two main kinds of recognized economic thinking - micro-economics, which focuses on the action of individual buyers and sellers responding to signals sent by price to set production and distribution of effort, and macroeconomics, which focuses on how whole economies go through cycles of activity, and how different large aggregate sectors relate to each other.

Mesoeconomic thinking argues that there are important structures which are not reflected in price signals and supply and demand curves, nor in the large economic measures of inflation, Gross Domestic Product, the unemployment rate, and other measures of aggregate demand and savings.

The argument is that the intermediate scale creates effects which need to be described using different measurements, mathematical formalisms and ideas.

Areas Claimed to be Mesoeconomic

Political Economy

Political economy is a broad term, but from the perspective of mesoeconomics, it is the study of government incentives, the basis for monetary systems or the veil of money and the expectations of actors with respect to the whole economic system.

Game Theory and Strategy

One area which is claimed to be central to mesoeconomics as a separate field is the use of game theory. Many economists believe that game theory represents a branch of macroeconomic theory, and others that it is an extension of microeconomic behavior. In this context meso economics is said to be a bridge between micro and macro analysis and to provide an evolutionary or competitive/cooperative framework for economics.

Institutional Economics

In the 1950s John Kenneth Galbraith began writing on the effects of institutional inertia and behavior on economics, drawing from work in management and studies in business. Recently it has been argued that such institutional effects cause economic actors to behave in ways differently from rational expectation maximalizing and profit maximalizing.

Information theory

The formalism of sending signals and receiving them or information theory has been used to argue that the mechanics of information transmission lead to behaviors that are not easily explainable as micro or macro economic effects. These include the work of Joseph Stiglitz on unemployment, where information asymmetry is used to profit, contrary to normal economic reasoning where actors profit by increasing the rate of dissemination of information.

Non-linear dynamics

Another argument advanced for the utility of a non-micro and non-macro paradigm is the use of non-linear dynamics. This often rests on models of information flow, for example Didier Sornette and his model of stock market crashes.

Volatility

Instead of price, the focus of mesoeconomic reasoning is on other variables, including volatility and skedasticity of price and volume movement.

Sector and Welfare

In Wealth of Nations Adam Smith observed that different industries would have different rates of expected profit. One area claimed to be mesoeconomic is the distribution of incentives between sectors in an economy, and between different groups of economic actors. For example, are there permanent structural advantages to produce cars instead of trucks, or are some ethnic or racial groups systematically excluded. In this sense mesoeconomics is said to focus on economies at the level of sectors. Since a great deal of investing is done in funds which concentrate on sectors, and seek to engage in sector rotation to achieve above market returns or below market risk, this area has had an effect on some investment strategists.

Criticisms of Mesoeconomics

While many economists using the term use game theory and evolutionary economic concepts, the converse is not recognized to be the case: there are many who dispute the need for a meso scale theory of economics, arguing instead that rational expectations at infinity can appropriately model price strategies. Notable examples of this line of thinking include Robert J. Barro and Thomas Schelling. (See also Infinite time horizon, Ricardian equivalence) hypothesis

Individuals Associated with Mesoeconomics

  • Yew-Kwang Ng - His 1980 article is described by Robin Marris as having marked the beginning in studying imperfect competition. He uses the term in 1986 to describe a hybrid of micro and macro analysis.
  • Markos Mamalakis - He is has written several papers on mesoeconomics and development, particularly in Latin America.
  • Stuart Holland - Author of a 1987 book which argued that market economics was moving from a micro to a meso paradigm
  • He-ling Shi - Advanced a theory that business cycles are the result of mesoeconomic behavior, and not based purely on aggregate demand and real interest rates as implied by General equilibrium and neoclassical economics.
  • Niclas Andersson - Associated with analysis of the construction sector using the mesoeconomics of sectors.
  • Kurt Dopfer - Argues that the failure to link micro and macro economics shows that there is a need for a meso level of economic thinking based on evolutionary concepts.
  • Richard Parker (economist) - Historian of economics who has been a proponent of the need for a mesoeconomic scale in association with Stuart Holland.

Bibliography

  • Dictionary Definition of Meso-. Vol. 4, The American Heritage Dictionary of the English Language, 2004.
  • Dopfer, Kurt. "The Origins of Meso Economics Schumpeter's Legacy." In The Papers on Economics and Evolution. Jena, Germany: Evolutionary Economics Group 2006.
  • Dopfer, Kurt ; Foster, John and Potts, Jason. "Micro-Meso-Macro." Journal of Evolutionary Economics 14 (2004): 263–279.
  • Khanya-aicdd. Sustainable Livelihoods Principles, 2006. Available from http://www.khanya-aicdd.org/site_files/index.asp?pid=54.
  • Mamalakis, Markos J. . "Poverty and Inequaliy in Latin America: Mesoeconomic Dimensiona of Justice and Entitlements." Journal of Interamerican Studies and World Affairs 38, no. 2/3 (1996 ): 181-199.
  • Popov, Evgeny V. "Minieconomics as a Separate Part of Microeconomics " Atlantic Economic Journal 33, no. 133 (2005).
  • Walz-Chojnacki, Greg. Markos Mamalakis: The Man Behind `Mesoeconomics' University of Wisconsin 2006 [cited 8 November 2006]. Available from http://www.uwm.edu/News/report/old/april99/people.html.
  • Wikipedia (A). Mesoeconomics 2006 [cited 8 November 2006]. Available from http://en.wikipedia.org/wiki/Mesoeconomics.
  • Wikipedia (B). Six Degrees of Kevin Bacon, 2006 [cited 8 November 2006]. Available from http://en.wikipedia.org/wiki/Six_Degrees_of_Kevin_Bacon.

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