Some Intellectual History for Matt Yglesias
By Arnold Kling
the decision has been made to somewhat arbitrarily impose the view that macro models must be grounded in micro foundations.
Readers of this blog know that I would be the last person to defend economic methods in macro for the last thirty years. But the demand for micro foundations was not originally “arbitrary.” It came about more or less like this:
1. In the 1960’s, macroeconomists made predictions based on a Phillips Curve, which was a stable trade-off between inflation and unemployment.
2. Milton Friedman developed a “microfoundation” of the Phillips Curve in which it was not stable. In his theory, the attempt to exploit the trade-off–by using higher inflation to reduce unemployment–would cause the trade-off to break down, leading to mostly inflation with unemployment simply tending toward its “natural rate.”
3. In the 1970’s, the predictions of the models of the 1960’s went awry. In particular, we had a lot of inflation without seeming to affect unemployment.
As a result of these developments, a consensus developed that Friedman had been vindicated. Furthermore, the consensus view became that macroeconomic models without microfoundations would necessarily be unreliable, because only models with proper microfoundations would capture enduring relationships.
I am not saying that the consensus got it right. On the contrary, I have been outside of the consensus, to my detriment in the game of academic prestige. My own view of what went wrong with macroeconometric modeling has more to do with hubris and the inherent inadequacy of the data. My views are sketched in my Lost History essay.
The obsession with microfoundations looks pretty silly, and it is. But it was not arbitrary. It reflected the way the profession tried to overcome the traumatic failures of the 1970’s.