The Relationship of Micro and Macroeconomics in Historical Perspective
Chapter 1: Microfoundational Programs
Kevin D. Hoover1 1. THREE PROGRAMS At least since the early 1980s with the ascent of the new classical macroeconomics, only macroeconomic models with explicit microfoundations have been regarded as fully acceptable.2 Typical graduate textbooks – and, increasingly, undergraduate textbooks – open with dynamic optimization problems that are meant to connect the ordinary microeconomics of the consumer and firm to the behavior of aggregate data and to classic macroeconomic concerns such as the business cycle, growth, inflation, and interest rates (see inter alia Romer 1996, Blanchard and Fischer 1989, Barro 1984). How did microfoundations become the sine qua non of sound macroeconomics? There are many ways to tell this story – and, indeed, it has been told before. Here I will tell it from the perspective of the currently dominant practice. This is an exercise in economy rather than in Whig history. The story features neither triumph nor inevitable progress; rather it seeks to know why current practice is the way it is; and, as a result, it omits or minimizes alternative paths, including heterodox programs, such as post-Keynesian macroeconomics, and heterodox criticisms, such as those lodged by the Austrian school, as well as mainly pointing to certain aspects that are already well discussed elsewhere.3 Lucas’s well-known article “Understanding Business Cycles” (1977) exemplified a widely accepted understanding of the emergence of modern microfoundations. In Lucas’s telling, modern macroeconomics began with John Maynard Keynes’s General Theory of Employment, Interest, and Money (1936). Keynes, according to Lucas, rejects a dynamic analysis of business cycles in...
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