Microfoundations Reconsidered

Microfoundations Reconsidered

The Relationship of Micro and Macroeconomics in Historical Perspective

Pedro Garcia Duarte and Gilberto Tadeu Lima

The highly regarded contributors to the book argue that the standard narrative of microfoundations is likely to be unreliable. They therefore re-examine the history of the relationship of microeconomics and macroeconomics, starting from their emergence as self-consciously distinct fields within economics in the early 1930s. They seek to go beyond the conventional history that is often told and written by practicing economists. From different perspectives they challenge the association of microfoundations with Robert Lucas and rational expectations and offer both a more complete and a deeper reading of the relationship between micro and macroeconomics.

Chapter 3: The Rise and Fall of Walrasian Microeconomics: The Keynesian Effect

D. Wade Hands

Subjects: economics and finance, history of economic thought, radical and feminist economics


1 D. Wade Hands2 We may digress to point out that the general point of view and habit of mind reflected in the Hicks–Slutzky analysis has wide ramifications in recent literature and has led to utter confusion in the whole body of economic thought. We refer, of course, to the huge corpus of discussion beginning with Keynes’s General Theory and following the lead of that work. (Frank Knight, 1944: 300) 1. INTRODUCTION Pronouncements of the death of Walrasian microeconomics have become quite common in recent years. For a growing number of economists, the research program that was once the discipline’s showpiece of rigor and technical sophistication “has finally run out of gas” (Rizvi, 1998, 274) and should be moved from the front lines of economic research to the backburner of retrospective reflection (Bowles and Gintis 2000). In many cases the target for the narrative of demise is narrowly-focused on the most abstract version of Walrasian general equilibrium theory, and in such cases the story is usually that it succumbed to a host of internal technical difficulties, particularly those associated with stability analysis and the Sonnenschein–Mantel–Debreu (SMD) theorems on excess demand functions (Kirman 1989, 2006, Rizvi 1998, 2003). In other cases the target is much broader – neoclassical economics or rational choice theory in general – and here the downfall is often associated with the theory’s questionable empirical record and the recent development of alternative approaches such as behavioral economics, experimental economics, and the economics of complexity (Colander 2000, 2006;...

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