Lars Syll — Macroeconomics and the microfoundationalist programme

This is an extremely important point and even though the post is long it well worth the read.

Short translation: Neoclassical and New Keynesian models are built on the atomistic assumption of a representative agent (atom) that pursues maximum utility (Bentham's "calculus") based on rational expectation (perfect knowledge). Then the invisible hand of the perfect market in which there is no friction (field) operates completely efficiently in the same way as the law of least action in (ergodic) physical systems, based on perfect competition (single force) of equal participants.

Of course, this is a ludicrous assumption. Social scientists in other fields that aim at explanation with microfoundations use agent-based modeling. Neoclassical and New Keynesian economists are reluctant to accept this, however, since 1) abandoning present economic assumptions undermines key neoliberal assumptions, thereby throwing the entire ideology into question if not into the trash can, and 2) admission of complexity makes econometric modeling difficult if not intractable.

Lars P. Syll's Blog
Macroeconomics and the microfoundationalist programme
Lars P. Syll | Professor, Malmo University