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Macroeconomics and microeconomics

Posted By Kurt Schuler On December 30, 2012 @ 9:57 pm In Economic History,Financial Markets,Recommended Reading | 3 Comments

David Glasner’s latest post concerns the state of macroeconomics. He observes that

“An especially pretentious conceit of the modern macroeconomics of the last 40 years is that the extreme assumptions on which it rests are the essential microfoundations without which macroeconomics lacks any scientific standing. That’s preposterous. Perfect foresight and rational expectations are assumptions required for finding the solution to a system of equations describing a general equilibrium. They are not essential properties of a system consistent with the basic rationality propositions of microeconomics.”

Since the post is worth reading in its entirety, I will add only a few words. A recent related paper that I found valuable was Anwar Shaikh’s “Rethinking Microeconomics: A Proposed Reconstruction” (last paper listed on the page, currently). Shaikh points out that multiple microeconomic approaches are compatible with a body of macroeconomic facts (or what we think are facts) that economists are trying to explain. I add that economic history, and our understanding of current events, give us a way of judging among multiple approaches: we can compare which ones fit the available evidence best, a difficult but worthwhile endeavor. An attempt to do so that particularly impressed me was Truman Bewly’s survey of employers to find out Why Wages Don’t Fall during a Recession (published 1999; excerpt here, Amazon link here).


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