Microfoundations — contestable incoherence

24 August, 2016 at 15:46 | Posted in Economics | 2 Comments

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Defenders of microfoundations and its rational expectations equipped representative agent’s intertemporal optimization often argue as if sticking with simple representative agent macroeconomic models doesn’t impart a bias to the analysis. I unequivocally reject that unsubstantiated view, and have given the reasons why here.

These defenders often also maintain that there are no methodologically coherent alternatives to microfoundations modeling. That allegation is of course difficult to evaluate, substantially hinging on how coherence is defined. But one thing I do know, is that the kind of microfoundationalist macroeconomics that New Classical economists and “New Keynesian” economists are pursuing, are not methodologically coherent according to the standard coherence definition (see e. g. here). And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductivity is the hallmark of science tout court.

The fact that Lucas introduced rational expectations as a consistency axiom is not really an argument to why we should accept it as an acceptable assumption in a theory or model purporting to explain real macroeconomic processes (see e. g. here). And although virtually any macroeconomic empirical claim is contestable, so is any claim in micro (see e. g. here).

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  1. This may be a naive question, but if the null hypothesis is that expectations are not rational and agents do not optimize utility intertemporally, and if observation is insufficient to reject the null hypothesis, why are we even having the conversation?

    Isn’t the point of a rigorous scientific methodology to optimize the ultimate return on time and resources invested in research?

    I would appear that research into non-falsifiable intertemporal optimization models irrationally fails to optimize future utility, and therefore seems prima facie self-refuting.

  2. I support these ideas and explain more about the differences between the theory of macroeconomics and its differences to microeconomics in my recent book “Consequential Macroeconomics”. There is no foundation for the idea that macro- is simply scaled up micro- . Macro- is a very different subject and it needs to be studied by people who are sufficiently open-minded to accept this premise. Are you one of them?


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