Methodological Developments in Economics: The Microeconomic Foundations of Macroeconomics

Abstract

Up to the `70s we can talk of an apparent consensus in economics – in both theory and practice –a consensus much along the lines of the Keynesian doctrine. Since the early ‘70s, however, a state of turmoil has characterized economic science, due to the gap between macroeconomic practice and microeconomic principles and to the economic imbalances of the 8th decade, which the mainstream view could not handle anymore. The present paper aims to investigate whether recent research has managed to successfully reconcile micro and macroeconomic analysis. We assert that the reunification of the two fields was rendered possible either by adapting macroeconomics to microeconomics – the New Classical approach, or the other way round, by adapting microeconomics to macroeconomics – the New Keynesian approach. We use qualitative analyses to assess the methodological progress in economics, using such methods as logical inference, formal analysis and synthesis, but also comparison and interpretation of recent theoretical contributions.We find that recent research has indeed managed to provide solid micro foundations for economics – particularly through the rational expectations assumption – which is one of the very few hypotheses almost unanimously accepted by economists. Today the axiom of rational expectations is firmly established in both economic methodology and economic policy. Despite this theoretical progress, however, in practice, economists have not substantially changed the way they analyse the economy.
Keywords: Macroeconomics, New Classical School, New Keynesian Economics, Rational expectations.