The Microfoundations Delusion

The Microfoundations Delusion

Metaphor and Dogma in the History of Macroeconomics

J. E. King

In this challenging book, John King makes a sustained and comprehensive attack on the dogma that macroeconomic theory must have ‘rigorous microfoundations’. He draws on both the philosophy of science and the history of economic thought to demonstrate the dangers of foundational metaphors and the defects of micro-reduction as a methodological principle. Strong criticism of the microfoundations dogma is documented in great detail, from some mainstream and many heterodox economists and also from economic methodologists, social theorists and evolutionary biologists. The author argues for the relative autonomy of macroeconomics as a distinct ‘special science’, cooperating with but most definitely not reducible to microeconomics.

Chapter 1: Introduction

J. E. King

Subjects: economics and finance, history of economic thought, post-keynesian economics

Extract

1.1 THE NATURE OF THE PROBLEM Take any advanced text in macroeconomics, written from a mainstream perspective. Wickens (2008) is a good example: it is an authoritative graduate text published by an Ivy League university press (Princeton). Here are the opening words of Chapter 1: Modern macroeconomics seeks to explain the aggregate economy using theories based on strong microeconomic foundations. This is in contrast to the traditional Keynesian approach to macroeconomics, which is based on ad hoc theorizing about the relations between macroeconomic aggregates. In modern macroeconomics the economy is portrayed as a dynamic general equilibrium (DGE) system that reflects the collective decisions of rational individuals over a range of variables that relate to both the present and the future. These individual decisions are then coordinated through markets to produce the macroeconomy. (Wickens 2008, p. 1) Wickens proceeds by setting out a formal model of the behaviour of a RARE individual (a representative agent with rational expectations), a model that is supposedly derived from the work of Frank Ramsey (1928), to provide the purported microfoundations of the macroeconomic analysis that follows. (Lance Taylor (2004) denotes them as ‘MIRA microfoundations’: methodological individualism with representative agents.) I say ‘supposedly derived’, because Ramsey himself was quite clear that he was modelling the decisions of a socialist government and made no claim that his analysis might be applied to individual economic agents under capitalism. The reference that Wickens makes to ‘the collective decisions of rational individuals’ unwittingly points to the difficulty: it...