"Microfoundations": I Do Not Think That Word Means What You Think It Means: Friday Focus
"Microfoundations": I Do Not Think That Word Means What You Think It Means: Friday Focus
**David Glasner:** Microfoundations (aka Macroeconomic Reductionism) Redux | Uneasy Money:
>In this [UCLA] context microfoundations meant providing a more theoretically satisfying, more micreconomically grounded explanation for a phenomenon--“sticky wages”--that seemed somehow crucial for generating the results of the Keynesian model.
>I don’t think that anyone would question that microfoundations in this narrow sense has been an important and useful area of research. And it is not microfoundations in this sense that is controversial. The sense in which microfoundations is controversial is whether a macroeconomic model must show that aggregate quantities that it generates can be shown to consistent with the optimizing choices of all agents in the model....
>If the model is not derived from or consistent with the solution to such an intertemporal optimization problem, the macromodel is now considered inadequate and unworthy of consideration. Here’s how Michael Woodford, a superb economist, but very much part of the stifling microfoundations consensus that has overtaken macroeconomics, put in his paper “The Convergence in Macroeconomics: Elements of the New Synthesis.”
>>But it is now accepted that one should know how to render one’s growth model and one’s business-cycle model consistent with one another in principle, on those occasions when it is necessary to make such connections. Similarly, microeconomic and macroeconomic analysis are no longer considered to involve fundamentally different principles, so that it should be possible to reconcile one’s views about household or firm behavior, or one’s view of the functioning of individual markets, with one’s model of the aggregate economy, when one needs to do so....
>If the world--the data generating mechanism--is not like the world assumed by modern macroeconomics, the estimates derived from econometric models reflecting the worldview of modern macroeconomics will be inferior to estimates derived from an econometric model reflecting another, more accurate, world view.... Rather than optimize, agents may simply follow certain simple rules of thumb. But, on methodological principle, modern macroeconomics treats the estimates generated by any alternative econometric model insufficiently grounded in the microeconomic principles of intertemporal optimization as illegitimate....
>Now let us compare the methodological demand for microfoundations for macroeconomics, which I would describe as a kind of macroeconomic methodological reductionism, with the reductionism of Newtonian physics. Newtonian physics reduced the Keplerian laws of planetary motion to more fundamental principles... achieved an astounding increase in explanatory power and empirical scope. What has the methodological reductionism of modern macroeconomics achieved?... Carlaw and Lipsey... [see that] methodological reductionism in macroeconomics has resulted in a clear retrogression in empirical and explanatory power. Thus, methodological reductionism in macroeconomics is an antiscientific exercise in methodological authoritarianism...
