Lars P. Syll — Microfoundations – contestable incoherence

Defenders of microfoundations and its rational expectations equipped representative agent’s intertemporal optimization often argue as if sticking with simple representative agent macroeconomic models doesn’t impart a bias to the analysis. I unequivocally reject that unsubstantiated view, and have given the reasons why here.

I think that a big reason for uncritically accepting assumptions like this is that they seem intuitive. It seems obvious that what happens in aggregate is dependent on the individuals that comprise the aggregate. Being rational implies preferring what one wants to what one doesn't want. Granted. But does that imply the homogeneity regarding utility optimization that proponents of rationality suppose?

A foundational issue in scientific inquiry is about testing intuitions by formulating testable hypotheses instead of receiving them passively as self-evident based on something as nebulous as "intuition" or "common sense". 

For example, if rational expectation about intertemporal optimization is representative enough to be generalized, why do so many people in democratic elections vote contrary to their financial and economic interests and those of their families? The representative agent account may be assuming excessive homogeneity to be a sound basis for modeling.

There nothing wrong with "microfoundations" in itself, but that requires that the assumptions be representative of reality. The actual problem is not so much "microfoundations" as what "microfoundations" is taken to be. Methodological individualism as practiced in conventional economic assume homogeneity among humans similar to atoms as elements in physical systems. It that model transferable from the physical sciences to social science? What is the evidence for it, and what is the evidence against it. Is it simply a modeling convenience?

Such questions cannot be raised in conventional economics, which declares that the controversy over methodology is over, and conventional economics has prevailed as orthodox and everything else is heterodox, that is, "heretical" in the orthodox view.

Lars P. Syll’s Blog
Microfoundations — contestable incoherence
Lars P. Syll | Professor, Malmo University