Must-Read: I confess I have sometimes thought that new classical macro is nothing but a circuitous way of pretending that the Sonnenschein-Mantel-Debreu-theorem does not exist via the following road:
- We can only study models we can solve.
- Macro models are complex to solve.
- If we can restrict our study only to models we can transform into a planner's problem, we can simplify our models.
- Therefore we study only models which have one optimal equilibrium.
"The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics...:
...and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals. To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have 'microfoundations'... has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if--after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem--these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world. That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous.