More on Matt Yglesias
By David Henderson
Second, the demand for microfoundations, or at least the supply of them, goes back more than 10 years before the date Arnold claims. It goes back at least to Milton Friedman’s A Theory of the Consumption Function, in which he introduced the idea that consumption depends, not as Keynes believed, on current income but on “permanent income,” a theoretical construct that represented what people think the average of their income over a few years will be.
Third, interestingly, Milton Friedman himself would probably agree with Yglesias about the idea that there’s not necessarily a need for micro foundations for macro. In a 1996 interview published in Brian Snowdon and Howard R. Vane, Modern Macroeconomics, Edward Elgar, 2005, Friedman said:
It is less important for macroeconomic models to have choice-theoretic microfoundations than it is for them to have empirical implications that can be subjected to refutation.
In saying this, Friedman was going back to his positivist roots, which he laid out at length in his classic 1953 essay, “The Methodology of Positive Economics,” published in Essays in Positive Economics. There was always an interesting tension in Friedman’s work, which he never resolved, between reasoning as a clear-headed economist about people acting based on incentives and constraints and “positivistly” black-boxing it and trying to come up with predictions.