Chapter 6: ‘Microfoundations’ in the literature of economics, part II: 1975–2012
6.1 INTRODUCTION We saw in the previous chapter that there was no coherent, generally accepted microfoundations project in 1975, when the International Economic Association held its conference on the issue (Harcourt 1977). Within a decade all this had changed, and there were two such programmes, both apparently thriving. The ﬁrst was the real business cycle project, which assumed continuous market-clearing (in product and labour markets), and drew its RARE (representative agents with rational expectations) microfoundations from Frank Ramsey’s (1928) model of optimum saving in a socialist economy. The second was the New Keynesian project, which had the same RARE microfoundations but relied upon wage and price rigidities to rule out continuous market-clearing in the short run. Like the real business cycle theorists, however, the New Keynesians endorsed the Solow neoclassical growth model, which committed them to market-clearing in the long run. The ﬁrst real business cycle papers were published as journal articles in the early 1980s, though in some cases they had been circulated as National Bureau of Economic Research working papers since 1980, or slightly earlier. Thus 1982 is something of a milestone in the history of microfoundations. The ﬁrst New Keynesian papers were published at the same time, or even a year or so earlier. The shared microfoundations principle of the two projects was very widely adopted, so much so that in 1987 Robert Lucas – who had by now abandoned business cycle theory in favour of research into the theory of economic growth – could proclaim the death of...
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