Some Issues Surrounding the Reduction of Macroeconomics to Microeconomics

Abstract

This paper examines the relationship between modern theories of microeconomics and macroeconomics and, more generally, it evaluates the prospects of theoretically reducing macroeconomics to microeconomics. Many economists have shown strong interest in providing “microfoundations” for macroeconomics and much of their work is germane to the issue of theoretical reduction. Especially relevant is the work that has been done on what is called The Problem of Aggregation. On some accounts, The Problem of Aggregation just is the problem of reducing macroeconomics to microeconomics. I show how to separate these problems and then try to determine to what extent particular kinds of solutions to The Problem of Aggregation succeed in reducing macroeconomics to microeconomics as well. I argue that reduction is not possible by this means given the current state of microeconomics. I also describe how reduction may be possible by means of (dis)aggregation if microeconomics is supplemented in a certain way with the results of experimental research on individual economic agents.

Post-Popperian Methodology of Economics: Recovering Practice

“…Also see Nelson (1984) for discussion and a review of some of the most important literature. Some traditional problems about aggregation can also be profitably examined in this way.…”

“…1 Elsewhere, I have argued that important aspects of the program of providing microfoundations for macroeconomics are illuminated by a general philosophical analysis of scientific reduction 2 (see Nelson, 1984). Histories of physics, chemistry, and biology show that reduction is one of the most important theoretical activities in science.…”

Reductionism in Economics: Causality and Intentionality in the Microfoundations of Macroeconomics

“…His preferred approach was to view microeconomics and macroeconomics as both explanatorily successful and as each employing a distinct set of conceptual categories. He then asked whether there was a formal aggregation procedure consistent with the constraint of simultaneous consistency with both conceptual structures (see Nelson 1984 andHoover 2010 for a discussion of this approach to aggregation).…”

Microfoundational Programs

“…Empirical practice is paramount in Klein's view, and his approach to microfoundations does not suppose that we build up from secure microdata, but that we start with the available data and a feasible macroeconomic 21 Nelson (1984) discusses the alternative aggregation strategies from the point of view of methodology or philosophy of science. A more recent, though theoretical example, is provided by equation defining the aggregate price level in Blanchard and Fischer (1989, p. 376) which is an aggregate price level related to underlying prices set by monopolistically competitive firms according to a highly nonlinear function nothing like the typical Laspeyres or Paasch indices.…”