Microfoundations: A Critical Inquiry

by Maarten Janssen

Overview

All economists are familiar with the division of the subject into microeconomics and macroeconomics. However, few economists are able to give an accurate account of what distinguishes micro and macro. The increasing interest in the ‘microfoundations of macroeconomics' has typically attracted those who feel that economics is about the rational behaviour of individuals and who regard macro propositions as a consequence of the intentions of individuals. As a result, ‘microfoundations' have come to be synonymous with theories of individual behaviour. However, Maarten Janssen argues that it is microeconomics' concern with the functioning of markets that underlies theories of microfoundations. This claim is substantiated by an analysis of the aggregation problem, of the foundations of equilibrium theories, of the rational expectations hypothesis, and of a model from the New Keynesian literature.

Product Details

ISBN-13:	9780415756051
Publisher:	Taylor & Francis
Publication date:	03/25/2014
Pages:	224
Product dimensions:	5.44(w) x 8.50(h) x (d)

Table of Contents

Preface ix

Introduction xiii

Part I Micro and macro in economics: definitions and relations

1 The Meaning of Micro and Macro in Economics 3

Two ways to distinguish micro from macro 3

Alternative definitions 6

The terminology used in this book 8

2 Individual Behaviour and Aggregate Relations 10

Explaining individual behaviour 11

Explaining aggregate relations 15

Explaining aggregate relations in terms of individual behaviour: two examples from other sciences 17

Explaining aggregate relations in terms of individual behaviour: the theory of reduction 21

Methodological individualism and reduction in economic theory 26

An introduction to some game theoretic concepts 29

Methodological individualism and game theory 35

3 General Equilibrium Analysis and Macroeconomics: Alternative Programmes 41

General equilibrium analysis 42

Mainstream macroeconomics 44

'Micro' foundations of macroeconomics: interacting programmes? 48

4 Economics and the Real World 57

Economic models as approximations of the real world 58

Economic models as caricatures of the real world 63

Economics without the real world 65

Part II Aggregation issues

5 Aggregation, Analogy and the Representative Agent 71

The Klein/Nataf approach 75

The May/Pu approach 77

The two approaches reconsidered 79

Empirical restrictions on aggregate excess demand functions 82

On the differences between individual and aggregate relations: against reductionism? 84

Aggregate relations and the representative agent 92

6 On the Probability Distribution of Aggregate Demand 94

Individual demand 96

The distribution of aggregate demand 96

Discussion and conclusion 100

Appendix 102

Part III Equilibrium and expectations

7 Individualistic Foundations for Market Equilibrium 107

An individualistic explanation of competitive equilibrium prices? 110

An auctioneer with an objective function 113

The limit points of the core 114

Strategic market games 119

Competitive equilibria and Bertrand competition 122

The limit points of Cournot competition 124

Discussion and conclusion 129

8 The Individual Rationality of Rational Expectations 131

The government and the public as two rational agents 135

'Rational' expectations as an equilibrium assumption 137

Rationalizable expectations of other agents' expectations 140

Discussion and conclusion 142

Part IV Microfoundations

9 What is this Thing Called Microfoundations? 147

New classical microfoundations 148

New Keynesian microfoundations 152

Cooperating and competing programmes 156

10 Rationalizable Animal Spirits 160

A model 162

Nash equilibria and rationalizable strategies 165

Welfare implications 167

Government policy 168

Discussion and conclusion 173

Conclusion 174

Notes 177

References 185

Author index 194

Subject index 197

Editorial Reviews

‘It is well written and has a host of clear illustrations drawn from a wide range fo contemporary economic theory. It is stimulating, and well worth a read by those who would like to take a little time to reflect on what we are doing.' - The Economic Journal

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