The Relationship of Micro and Macroeconomics in Historical Perspective
Introduction: Privileging Micro Over Macro? A History of Conflicting Positions
Pedro Garcia Duarte and Gilberto Tadeu Lima1 1. THE STANDARD NARRATIVE Mainstream macroeconomists agree that we live in the age of microfoundations. The worldwide financial crisis of 2008 to the present may have emboldened critics of this microfoundational orthodoxy, but it remains the dominant view that macroeconomic models must go beyond supply and demand functions to “the level of objective functions, constraint sets, and market-clearing conditions” (Sargent 1982: 383). Only by doing this, the argument goes, can we truly understand “the way in which optimizing agents make their decision rules”, which in turn “depend on the dynamic environment in general, and the government policy rules in particular” (Sargent 1982: 383). The goal of the microfoundations project, as articulated in the 1980s, was to reincorporate “aggregative problems such as inflation and the business cycle within the general framework of ‘microeconomic’ theory” (Lucas 1987: 107). Microeconomics on this view is prior to macroeconomics, because “only when macroeconomic aggregates are explicable as consequences of well-formulated optimization problems for individuals … will macroeconomic reasoning be secure” (Hoover 1988: 87; see also Backhouse 1995: ch. 8). The ultimate aim is the “euthanasia of macroeconomics” (Hoover 1988: 87; 2010: 331). As Robert Lucas puts it, if the microfoundations project succeeds, “the term ‘macroeconomic’ will simply disappear from use and the modifier ‘micro’ will become superfluous. We will simply speak … of economic theory …” (Lucas 1987: 107–108). The priority of microeconomics appeared to the proponents of microfoundations as the inevitable consequence of the very notion of economics understood,...