Demolition work on the rotten edifice of "modern macroeconomics" continues apace. The emperor, it turns out, is not merely without clothes. Upon closer inspection, he appears to be simply an empty cardboard box with the words "Emperor Inside" scrawled across its surface in felt-tip pen. Paul Romer's devastating critique really deserves to be the final word on the matter. But even Paul leaves one stone unturned, an element of modern macro so transparently intellectually dishonest that it may properly be termed a hoax: its so-called "microfoundations."Mean Squared Errors
No modern macro model is complete without a pean to the virtues of its own microfoundations. It seems that the word "microfoundations" is not allowed to appear unaccompanied by at least one self-congratulatory adjective -- "careful," "well-specified," even (shudder) "rigorous." But, as diligent readers of George Orwell will recall, war is not peace, freedom is not slavery, ignorance is not strength, and representative agent models are not rigorously microfounded.
But let's back up a step. What is this "microfoundations" business anyway, and why should anyone not currently seeking a tenure-track appointment in econ care even a tiny bit? Here's a short version of the very long story:
The Microfoundations Hoax