Chapter 2: Microfoundations as a (bad) metaphor
2.1 INTRODUCTION In the 1980s the BBC screened a series of lengthy interviews with leading philosophers (a programming decision that is almost inconceivable today). I have fond memories of one of these broadcasts, in which the interviewer, the philosopher and Labour (later, Social Democrat) MP, Bryan Magee, put a very pertinent question to the great A.J. Ayer. ‘What’, Magee asked him, ‘do you regard as the main difﬁculty with logical positivism?’ ‘Well’, said Ayer, after a slight pause, in an answer that appeared to be spontaneous but must have been very carefully rehearsed, ‘I suppose I’d have to say that the main difﬁculty with logical positivism is that it is nearly all wrong’. The main difﬁculty with the microfoundations dogma, I believe, is that it, too, is nearly all wrong. There are two reasons for this: the fallacy of composition and downward causation. The fallacy of composition entails that an entire economy may behave in ways that cannot be inferred from the behaviour of its individual agents. In Keynesian macroeconomics the classic example is the paradox of thrift: a decision by any individual to save a larger proportion of her income will lead to more saving by that individual, but (in the absence of increased investment) this will not be true of an increase in everyone’s savings propensity, which will simply reduce their incomes and leave the volume of aggregate saving unchanged. This proposition is at least three hundred years old; as Keynes (1936, pp. 359...
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