9 What Is This Thing Called Microfoundations?

After having discussed aggregation problems in economics and individualistic foundations for equilibrium notions we come back to the question of whether the microfoundations literature provides macroeconomics with individualistic foundations that are in line with methodological individualism. Here, we will supplement the general discussion about microfoundations in chapter 3 by going into some details of new classical ¹ and new Keynesian models. In the context of specific models it will be argued that ‘microfoundations’ does not mean ‘foundations in the theory of individual behaviour’. The argument I will put forward essentially is that many models in the microfoundations literature employ the concepts of (competitive) equilibrium and rational expectations. In the previous part of the book we saw that only under special conditions can these concepts be considered as consequences of a theory of rational individual behaviour. In most of the new classical and new Keynesian models that will be considered in this chapter those conditions will not be fulfilled. Hence, the conclusion with which I started follows.