Aggregation problem

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The aggregation problem in economics refers to the difficulty of treating empirical or theoretical aggregates as though they reacted analogously to the behavior of optimizing individual agents as described in general microeconomic theory (Fisher, 1987, p. 54). Examples of aggregates in micro- and macroeconomics relative to less aggregated counterparts are:

• food vs. apples
• the price level and real GDP vs. the price and quantity of apples
• the capital stock for the economy vs. the value of computers of a certain type and the value of steam shovels
• the money supply vs. paper currency
• the general unemployment rate vs. the unemployment rate of civil engineers.

Standard theory uses simple assumptions to derive general, and commonly accepted, results such as the law of demand to explain market behavior. An example is the abstraction of a composite good. It considers the price of one good changing proportionately to the composite good, that is, all other goods. If this assumption is violated and the agents are subject to aggregated utility functions, restrictions on the latter are necessary to yield the law of demand. The aggregation problem emphasizes:

• how broad such restrictions are in microeconomics
• that use of broad factor inputs ('labor' and 'capital'), real 'output', and 'investment', as if there was only a single such aggregate is without a solid foundation for rigorously deriving analytical results.

Franklin Fisher (1987, p. 55) notes that this has not dissuaded macroeconomists from continuing to use such terms.

[edit] See also

• Cambridge capital controversy
• The Methodology of Positive Economics
• Neoclassical economics
• Price index
• Real versus nominal value
• Social choice theory

[edit] References

• Franklin M. Fisher (1987). "aggregation problem," The New Palgrave: A Dictionary of Economics, v. 1, pp. 53-55.
• John R. Hicks (1939, 2nd ed. 1946). Value and Capital.