Please say after me – Sonnenschein-Mantel-Debreu

20 March, 2012 at 16:01 | Posted in Economics | 1 Comment

Can you say Sonnenschein-Mantel-Debreu?

Good!

Because that probably also means that you can understand why new-classical, real business cycles, dynamic stochastic general equilibrium and new-Keynesian micro-founded macromodels are such bad substitutes for real macroeconomic analysis.

These models try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And - worse still - something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.

Opting for cloned representative agents that are all identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. After all – as Nobel laureate Robert Solow noted in “The State of Macroeconomics” (Journal of Economic Perspectives 2008:243-249) - “a modern economy is populated by consumers, workers, pensioners, owners, managers, investors, entrepreneurs, bankers, and others, with different and sometimes conflicting desires, information, expectations, capacities, beliefs, and rules of behavior.” So, representative agent models are rather an evasion whereby issues of distribution, coordination, heterogeneity - everything that really defines macroeconomics – are swept under the rug. 

Conclusion – don’t believe a single thing of what these microfounders tell you until they have told you how they have coped with – not evadedSonnenschein-Mantel-Debreu!

Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing. It reminds – not so little – of the drunkard who has lost his keys in some dark place and deliberately chooses to look for them under a neighbouring street light just because it is easier to see there!

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