Hallo! From the outset, one would think that macro-economics of a given region is an aggregation of economic activity at the micro level. However, it's not the case. As microeconomics pre-dates macro economics, if one were to study its uses carefully, one would see that it basically relies on Smith's "invisible hand" to do its deed for the country as whole. Pure microeconomics essentially assumes there is a price tag for everything (commodifies) and does not make room for political impacts, policy influences or the larger role of money; it takes an approach useful for analysing markets in isolation. However, markets are not isolated from macro variables.

It took a few hundred years to realize that being efficient at the micro level is not the same as growing the economy. For instance during Great Depression micro-markets were working efficiently (basically, output>input) but the macro-economy as a whole was under performing. Fallacy of micro-economics was that it assumed that whenever unemployment was high(er) a worker would be willing to work for less which would automatically restore the economy to "optimal employment" level. Clearly, it's not that simple -neither was it the case. As Keynes observed, if everyone (unemployed) undercuts the other's wage, the overall aggregate demand would suffer -thereby dragging down economic growth and trigger a dangerous deflationary spiral (economic shrinkage). Hence the beginning of macro-economics -a subject primarily intended to deal with unemployment, inflation and monetary policy. (Glaringly, micro-econ misses out importance and role of money in overall economy.) By combining policy measures in these three areas, macro-econ hopes to boost aggregate demand which eventually grows the economy. If one were to consider the economy to be open (open to international trade and capital mobility) then efficiency at the micro-level (industry-wise) and policies effectiveness at the macro level -relative to that of trading partners' -together would influence the size and growth of economy.

Would the answer not be more easy if there was a possibility of really seeing the real size of the macro economy?

Beside of any methodology - if you could put the macro economy as a whole on a weighing machine and see a true value on a real scale - you would directly see the economy growing.

Would it therefore not be of interest of thinking about this direct weighing or measuring of an economy?

And a comment to your answer:

The idea you describe at the end, that an open economy together with better policies at macro economics will result in a situation that efficiency at micro economic level influences the macro economic level - well, I think, i not the final answer.

Any economy is defined by a border line - and accounting means always to deal with a slight inaccurancy both on the border of the area and of the time border.

You are saying that inside of the "world" economy a perfect open market would lead to a situation where efficiency goes from micro to macro level.

But isn't it the very same situation in all given smaller economies?

It is not the effect of an open market - inside of each economy the market is open. You describe just a situation which you say is valid for an open market only - but you already have such an open market inside of each economy.

I think you describe more of a hope that such a combination would work - there is no guarantee for such a mechanism.

A second answer:

"From the outset, one would think that macro-economics of a given region is an aggregation of economic activity at the micro level. However, it's not the case."

Well, that is a strong word, but how could that be possible? Any macro economy is, as far as I understand it, the sum of all economic activity in that given region over a given timeframe. And I clearly would see any economic activity inside of that regioon as a micro economic activity - of course influenced by larger policies, rules and so on.

But you say there is some part of macro economic activity which is accounted as a part but not a micro activity in itself?

My understanding of a micro economic activity is maybe different. I understand it as an activity (doing something) which is by part of the portion of "economic activity" and not just some unworthy activity in money terms.

In my understanding the definition of being a portion of the economic activity is done by the fact that it is somehow paid from another subject inside of that economy with some money.

This results also in the problem that not everything is counted since not every activity is paid by money. But this is another problem. Most of the activities are paid by money and therefore are a part of the economy at the micro level.

And at the macro level - it is just the sum of it. Political impacts, the larger role of money or else ... is not part of the accounting of the GDP resulting in the GDP as the tag for that given economy in that region and given timeframe.

The fact that all economic activity is influenced by policies, by the larger role of money (what ever that means here) is in my understanding clearly part of the picture. .

One of the issues is defining what the real size of the economy is. And even if we did, it would not make the job of measuring the size of macro economy any easier. Activities may be conducted with or without the formal use of money, but cannot escape the use of real resources.

Even if we could put the entire economy on a scale, we would measure the growth of only the physical economy. What about development aspect of economy? Or quality of environment? On our assumed scale for weighing the economy, both pollution and life saving drugs have mass, but not equal value. Such a measurement would be pretty much as generalized as using GDP; it would likely conceal more downsides than reveal upsides.

Of course it was not meant to be a final answer. I was conveying that when micro-economies (e.g. industries) are fostered in the right macro-economic policy environment, a country may get an edge in achieving absolute advantage in cross-border trade until such time the industry is subjected to disruptive innovation.

Let me clarify that I didn't say that efficiency at micro level would translate to efficiency at macro level. No. In fact, the point I'm making is that they're two different things. A macro economy which promotes growth is "conducive", while a micro economy which is making profit is termed "efficient".

Well, yes. The macroeconomy is not a summation of microeconomies. Assuming the corrollary is true (macroeconomy is simply the sum of microeconomies) then, there would be no need for a central bank or for that matter, fiscal stimulation as we have been having for the last 75+ years. Keynesian economics (and by extension almost all of macroeconomics) is in principle based on macroeconomy being different from sum of micro economies. A sum of micro economic activity is measured by the GDP -which is just one important aspect of macro economy.

However, GDP is just one of the components that is of interest. The time during which it was constructed was a different era altogether (ca. early 1900s). At the time material improvement as measured by the GDP also indicated improvement in the general quality of life -it is not the case today. Especially in the West. A kilogram of gold weighs the same as a kilogram of steel -but their value is different; weight alone does not tell us the value of material. GDP as a measure has such flaws and more. GDP alone does not indicate quality or efficiency of micro economies. Microeconomies may very efficient but GDP may adversely impacted.

Macro economy policy making was essentially invented to bridge such gaps and promote economic growth. Hence, its policies take into account things such as price of money (interest), value of money (inflation), asset prices, unemployment, fiscal requirement and banking regulation. These are pretty much left out in classical microeconomic analysis framework.

Citation: "One of the issues is defining what the real size of the economy is. And even if we did, it would not make the job of measuring the size of macro economy any easier."

Well, that depends very much from the result.

And I would better say: It is important to define the real character of the economy. The question is: What is the least common denominator of all economic activity?

If you get an answer for that question you have your scale. Then just define a unit or take the existing unit if it is the case and go and measure.

Citation: "Assuming the corrollary is true (macroeconomy is simply the sum of microeconomies) then, there would be no need for a central bank or for that matter, fiscal stimulation as we have been having for the last 75+ years."

I would say that is not correct. A central bank has different kind of jobs to do - and you can all name them "definition and setting of boundaries and rules".

That is important for all players running their micro economic projects ... and the central bank get also paid by the resulting sum of real products for this job. (The central bankers do not produce but get lots of expensive cars and big penthouses from the society for doing their job.)

Citation: "A kilogram of gold weighs the same as a kilogram of steel -but their value is different; weight alone does not tell us the value of material. GDP as a measure has such flaws and more. GDP alone does not indicate quality or efficiency of micro economies."

Right, GDP has such flaws. But one big flaw is of importance: There is no possible way of really measure the "price". You have to wait until someone name it a product and buys it inside of this economy.

There is no definition of "economic value" to a real physical unit.

And the value:

Measuring the total economy includes all different values - they all end up at the total sum of "1".

There can never be more of any given percentage of value than the size of 100% of the economy.

Value is always relative - to the 100% of the economy.

Therefore it is valid: If you measure in real physical terms the TOTAL products of the economy, you get the physical relation for your defined 100% of value.

That does not tell anything about the value of one given part of inside of this economy - but it is still valied: all together end up at 100% of value and physical meaurement.

And one comment: Of course, weight is NOT the right unit. Weight is by far not the "product" of any economic doing. Weight is nothing but already existing matter.

Ref.: "It is important to define the real character of the economy. The question is: What is the least common denominator of all economic activity?"

If I understand correctly what you mean by this, then you are probably referring to the

physical economy ("brick and mortar" economy) at the foundational level. With regard to finding the least common denominator (lcd) for all economic activity, one may be tempted to use 'Energy' as the measure. And yes it would be mostly correct to use energy as a driving force for all economic activity -in fact, it is the driving force for all things in the world. However, it makes for a good lcd but how do we measure value of output from inputs of energy? A doctor driving a car to get to hospital uses far less energy is provides a more valuable service than a billionaire flying his pets to his summer home. However, the latter adds to more aggregate demand in the economy, which from an economic perspective adds to growth. Measuring individual quantity inputs or outputs are not the same as measuring economic value.

Secondly, let me reiterate there is no need for a central bank in a free market economy. But the real question is -when was the last time markets were free? In most parts of Europe markets have not been working as free markets for about 300 years or so. Central banks came into existence centuries before a subject called macroeconomics was invented. In fact, it was in operation even before the Smith's seminal work. Macroeconomics was constructed and cradled in an era of central banks; which meant the subject's proponents considered existence of Central banks as a "natural" phenomenon of the economy, which is incorrect. Historical studies show that Central banks were conjured-up not for the good of society but to rescue bankers and to establish monopoly over money (antithetical to free market principles). Additional mandates of fighting unemployment and restraining inflation were added during the FDR's "New Deal" reforms to quell the dissatisfaction of masses. It is a bit amusing to note that standard textbooks treat money as a commodity, but Central bankers enforce monopoly over it.

Ref.: "There is no possible way of really measure the "price"."Yes, you're right about that. There is no inherent connection between physical quantities and price. As the Austrian economists say: "value does not exist outside of human consciousness". This means that value of commodities is not arbitrary but a necessary consequence of (relative) human need to maintain wellbeing.

Coming to measuring of real, physical economy. I'm not sure that using monetary value relative to total size of economy (100%) demonstrates its importance to economy. For instance, if you take agriculture it contributes to about 1% to US GDP. It would not be right to say that agriculture's importance in US economy is 1%. (Unfortunately, Nobel economists have even said US can do without agriculture because its share is just too low.) In the non-textbook, real world economy it is a fact that food security for a people of country directly contributes to economic stability and growth and its importance is more than 1%.

Ref: "However, it makes for a good lcd but how do we measure value of output from inputs of energy? [...] Measuring individual quantity inputs or outputs are not the same as measuring economic value."

This seems to be true - but think again with the closed loop of every part of the macro economy summing up to 100% - either of value or of any physical measurement.

Well, it seems to be unbelievable. But how can it be possible to measure value not as a relative thing? And to be clear: Value has different levels of understanding. The normal economic theory says the value is expressed by the prices. This is different from the saying that teaching a child by paying a teacher is maybe of more value than killing some enemies by a soldier - this could be a discussion, but as long as we talk about price values the answer is said by the monthly payment. Of course, you can change that, but it does not change the price level valuation. You just use the tool.

And for this price level valuation: Whatever you say about some part of work in any society or economy: This work can only get a value as a part of all values in this economy. And a part can not exceed the 100% of all value.

I mean: every value adds up to 100% - you can not express "some better work" by a higher price as the expression for the value.

Measuring the total size does not value anything. It is measuring, not valuation of something. I just measure all physical work done. Whatever the society in that given economy is using this amount of work - I am not judging or valuing any kind of their decisions. I just measure how much work they have done in a year.

This is totally different from any former historic economic theory. I searched for such an theory for now five years - I did not find one.

The society has worked (by humans and by machines) a given amount of work load. WHAT they do with this ability of doing work ... I do not care while I just measure.

If the society has decided to pile up massive stones - well, their decision.

The result may be a pyramid, standing in the desert for few thousand years now ... well.

If the society has decided to pile up flat screen TVs in every household, few cars for each inhabitant, and an industry which is relying of buy it, use it, throw it away ... well. It is the societies decision.

But the amount of work necessary just to produce again and again new flat screens, new cars, and new stuff which you have used just once ... is a bit stupid if you look at the amount of work you have invested to produce all this stuff - and use it only once.

I do not judge farmers. They produce of course our most important stuff - food. (No, they do not produce, the let the organisms produce the fruits, the corn, etc. by the energy of the sun. They just harvest the resulting products.)

The amount of work done by farmers (and of course the much biger amount of work done by farming machines!!!) is in fact not that big. If you calculate the amount of energy productively used in our modern economy it is much less than 1%.

One example: Getting ore out of the earth, transport it, process it and make steel out of it consumes alone 7% of total worlds energy consumption.

Think about this amount of energy you need to process one billion ton of steel with just human body work.

You end up in the iron age in history. They had no machines doing all necessary work - and at the end of the year they did not had one billion ton of steel, it was probably 0,001% of this or much less.

Value is relative to total sum of value in a given year. One Kg of steel ... what is it worth?

Today .. maybe a few dollar.

Substract the energy to process all steel and you get the final answer: It is worth its share of the total sum of all work done in an economy.

Each affect other becuase the economic is linked , and all the activity depende the micro -economic and marco -economic than the efficiency gain it is effect in marco- economic

Ref: "Each affect other becuase the economic is linked , and all the activity depende the micro -economic and marco -economic than the efficiency gain it is effect in marco- economic."

Are you sure? What is the macro economic effect of using less material or less energy?

For the company (the micro economic level) buying less material or using less energy it is a positive effect - but at macro economic accounting level - what is the positive effect?

I think, efficiency is giving one competitor an advantage in the market. But at macro economic level - where is the positive effect in the economic accounting?

(Of course you can say it is better in some kind of moral aspects ... but here i am talking about economic theory accounting).

Olaf- I agree with you on all your comments on the role energy above. You'd be right in your perspective of not judging the resulting output of work done in the society. No doubt, technical measures of work and energy consumption is a right approach for computing physical growth limits.

However, the discussion was about impact of efficiency on micro and macroeconomic levels. And to that I do let me sum up my view -in a national economy, efficiency gains at the micro level provides relative advantage to firms within a microeconomy and does not have a decisive bearing on the "size" of macroeconomy as measured in GDP. To put it colloquially: what's good for the individual is not the same as what's good for the society. There are many examples of this in economics. Just to go by what you mentioned -if a company (individual) uses less energy to produce the same output it is a good thing; efficiency has increased. The same cannot be said for oil companies of the country for whom the demand has come down. Proper scientific knowledge tells us that oil is a limited resource which needs to be used carefully. (It's also a cause for GHG pollutant, but let's not get into that.) While proper science considers it to be "absolutely scarce" resource, economics only looks at relative scarcity of resource. Hence the price doesn't capture the true value of oil. When we buy oil what we pay for is the resources spent in getting the oil out; exploring, finding, leasing, mining, transporting, refining and distribution of it. NOT for the process of creating oil; that was done by nature. What's WORSE we are not even bearing the price of oil for replacement cost component. Intellectuals like Soddy and Georgescu-Roegen have pointed out the importance of energy in creating value -so far in vain.

Our economic system (and definitely mainstream economic theory) is full of flaws, inconsistencies and self-contradictions -a fragile system built on wrong assumptions. In macroeconomics -common sense for individual good is affront to economic orthodoxy.

Economics is not a hard science. (Some would argue it's not even science.) It's a social science with an incredible degree of political influence around it. It's no accident it's original name was Political Economy. When we combine findings or hard science with teachings of economics we are bound to have dissonance. Unlike the real natural sciences, economics conveniently shifts from being descriptive (so called 'positive economics') to prescriptive (policy making) in its approach. It's ironic that for a subject dealing with allocation of resources due to scarcity, what economics actually promotes is the idea of indefinite growth.

Dear Abhijith,

I think we are very in line with the perspective on seeing economics.

You are right, the question here was about micro economics and macro economics - are they necessarily linked if there is an efficiency gain at micro level.

As you said, I think there is no direct link.

The problem of putting economics into the right place of the "science bookshelf" is quite interesting.

The first problem in economics is the fact that there is no defined unit for "an economy". Economics USE money for describing all products - but there is no definition of HOW MUCH MONEY is ONE PART OF ECONOMY. And even more strange, there is no definition of ONE PART OF ECONOMY.

The simple question of "What is the core unit, the core characteristic of economic doing?" is still unanswered or undefined in a measurable unit.

That is the question I am working on - I want to give that answer. And I think I already did it - it is "WORK". But not only human work - it is physical work in all differend forms of existence.

Following this there is no real "productivity enlargement" of workers. It is just a switch to a different source of productive work. From human workers to harvesting machines and so on.

Following this I state that this amount of productive used Energy should be used as the numéraire of any given economy.

And coming back to the efficiency question: The efficiency gains at micro economic level in my point of view just put that economic subject into a better competition position compared to his competitors. For the macro economy it is just not relevant.

It changes one characteristic of that given economy - the characteristics of "how much stuff they create with a given amount of work" - but it does not change the macro economy in its size.

Because any efficiency gain at micro level leads to an enlarged production until the available working power is in use again. That means, the macro economic level stays the same ...

Dear Olaf,

Ref.: [The first problem in economics is the fact that there is no defined unit for "an economy". Economics USE money for describing all products - but there is no definition of HOW MUCH MONEY is ONE PART OF ECONOMY. And even more strange, there is no definition of ONE PART OF ECONOMY.]

I agree and you are very much right about that. Let me add a few points and elaborate.

To put it straight-up and cutting out the unnecessary jargon, economics deals with means of livelihood of people: the ways to find food ("production") and eat it ("consumption") for survival. Everything that happens in between -how much (food) we find, consume, save, exchange, or is taken away -also forms part of economics.

By extension, the lowest unit of economics will have to have at least two people. In the formative years of economics, many economists just copied theories from Physics and gave it different names. For instance an electron subject to force of EM field was substituted by a person under the influence of money in the economy. Electron=person; energy field=money. The assumption of rationality was added to eliminate unfeasible behaviour that might complicate economic theory. To this add some mathematical notations and substitute some equations here and there, you've got yourself a ready made "scientific theory"!. That's how Walrasian economics came into existence.

There are too many such simplifying (false) assumptions/analogies made by classical theory to get into here. (Most of the so called financial/economic models are just copied from Physics and Mathematics.) In recent decades the economic theory has improved with contribution by behavioural psychologists, complexity scientists, ecologists and energy economists -but they're all pretty much at the fringes since they would depose cult-like mainstream beliefs.

Coming to energy aspect of an economy, probably the worst part is that mainstream economy refuses to acknowledge WORK done by Nature. Humans continue to live because nature is carrying out a lot of processes for us -plants produce food as micro organisms fix nutrients; pollutants are absorbed in oceans of water and air; soil is replenished by degrading waste and so on. If all these processes are attached a value -either in terms of energy or monetary- it cannot be met by humans. The energy cost of work is simply too high to ignore; economics says it's "free" because ecology is a subset of economy (yes, foolish I know).

Ecology exists independent of humans; monetary economy cannot.

Ref.: [Following this there is no real "productivity enlargement" of workers. It is just a switch to a different source of productive work. From human workers to harvesting machines and so on.]

True, I would broadly concur with your assessment. There is no real increase in productivity of labour if you end up using machines which can transform more energy and more material faster than before. Compression of time is more than offset by increase in real resources consumed.

To add a few observations: over the centuries Jevon's Paradox, which states that the improvement in technology efficiency is offset by increased consumption of resources, has been valid. It is this paradoxical outcome that has resulted in growth of macroeconomy even when efficiency gains are made at the micro level.

Dear Abhijith,

wow. Thank for your comments. I very much like the Jevon's Paradox ... that was absolutely new for me.

And at the end I am thinking of a theory of economics of having a logical and complete answer, setting all these flaws into the right corner of the picture of economics.

Today we have a virtual and closed picture - without money value there is nothing which exists in the perspective of neo classical economists.

In my theory I want to redefine economics as a real world phenomenom, I want to define what the core characteristic of "ONE PART OF ECONOMY" is, and then describe how to measure it (which is then quite easy after having such definition) ... and what are the resulting changes in the definition of micro and macro economics.

I think it is possible to describe a new theory having better answers than todays flawy theory of a virtual money description of the world ...

Objective of your theory is a very useful matter to pursue. It'll certainly be interesting to see it develop.

Hi Olaf, please clarify what is meant by efficiency in this thread. When I looked at the question title I thought of market price efficiency (efficient market hypothesis) but looking over the discussions I get a sense of equal parts productivity, and also physics (energy use efficiency).

Hi Robert,

thanks for the question. Efficiency is meant in physical terms first, but I propose that a (physically) more efficient production will also result in a "cheaper" product at the end. I my idea it is the driver of higher efficient production processes - the competition between two firms.

And i look on the physical units first - because that is one basic factor below a monetary efficency.

Any "efficiency" in saving some money could also be caused by just a "cheaper" energy source instead of a lower energy consumption.

I think the monetary view blinds out this fact ...

And the question I search about is: does this higher phyiscal (energy) efficiency result in a higher or lower macro economy?

I know that this is a unusual question ... maybe you have some remarks to it?

Hmm, interesting question and probably very relevant to the development of a high energy civilization, as for example one capable of star travel. I did an analysis recently that suggests practical (continuing and commercial, not one of a kind stunts) interstellar travel requires 30 doublings of today's per-capita energy consumption. At 20th century energy growth rates, that's approximately 2000 years. Looking at progress milestones of the past 4000 years as an intuitive cross-check, it seems like a reasonable guesstimate. This is can be found in the last charts before the backup slides in this presentation which I gave recently: http://mc1soft.com/papers/Inertia%20First%20INNOWAR.pptx

Scientific projects of course can use energy incredibly inefficiently. Consider the Large Hadron Collider. And in separate projects, fusion power has been demonstrated, but much of the remaining problem is that it is too inefficient for a practical self-sustaining reaction.

As for the coupling of efficiency and productivity based on commercial competitive business applications, I have not seen the numbers but someone has presumably run them. Industrial farming, for example, is very energy intensive. However the production is large. Is human labor farming energy efficient? According to this article, yes, dramatically so, perhaps 20 times more, though there are many caveats (e.g. only the muscle work to actually do the farming is used in computations - you might get a factor of 2 or 3 back by including the laborer's off-time activity): http://veganorganic.net/2012/06/what-is-efficient-agriculture/ The article points out efficiency and productivity were moving in opposite directions.

I have reached a lot of conclusions about the effect of productivity on the macro-economy lately, and have posted them here (the equity premium paper in my pubs), but have not looked at energy. Hope this discussion is useful to your thread.

Here is the productivity analysis I mentioned.

An even later answer to the previous post:

I desagree to the post. 

For now there is no well understood and accepted method of measuring efficiency of economic systems, well, that is true. But it does not implicate that this measure is not possible or not already existing today.

The bigger disagree is in the distinct differential perspective in the understanding of micro- and macro economics.

I state that the sum of all microeconomic doing is always exactly 100% of the given macro economic system.

And in this field it must be true, that efficiency gains do have an impact on the microeconomic structure inside of the given macro economic system in the relation to other micro economic structures (competition advantange) ...

... but since any units used to measure microeconomic systems are of relative size ... the macroeconomic system in total remains untouched in its dimension.