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Macroeconomics and microeconomics

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).

  • Paul Marks

    Why should one assume that "macroeconomics" is correct and try and adapt everyday reality ("microeconomics") to it?

    Surely, if there is a contradiction between "microeconomics" and "macroeconomics", it is more likely that it is "macroeconomics" that is wrong.

  • BillWoolsey

    Thank you for both links. The excerpts from Why Wages Don't Fall was interesting.

    I think it would have been helped by more reflection on the statistics for layoffs, quits, and hires.

    In my view, most of the problem is with the slowdown of new hires rather layoffs.

    Why do firms layoff workers when there is no recession?

    Why don't firm cut the wages of current and prospective workers and lower prices enough to continue to expand production and employment when spending on output falls?

    Why don't firms slow the increase in wages and prices enough so that they continue to expand production and employment like normal when spending on output grows more slowly?

  • Bill Stepp

    Some firms lay off workers when there is no recession because of falling demand for their products and a weakened financial position. An example was Interstate Bakeries when a low carbohydrate diet became more popular and people consumed less bread. Other examples were private mail firms and printers, which produced and delivered less hard copy mail due to the growth of emailed communications.