ABSTRACT
In this chapter and in the two following I focus on the debate that has been taking place in macroeconomics since the publication of the second edition of Patinkin’s Money, Interest and Prices (1965). It is generally agreed that this debate has revealed that the consensus once commanded by the Neoclassical Synthesis in both theory and policy no longer exists. As Solow points out, it is useful to make a distinction between an external and an internal reason for this. The external reason was ‘the stagflation of the 1970s and the failure of the prevailing macroeconomics to come up immediately with a plausible analysis of it, preferably one with painless policy implications’ (Solow, 1986:196), while the internal reason was ‘a failure of intellectual purity. The profession was seized with an irresistible urge that macroeconomic theory should have microeconomic foundations and more than merely proforma’ (ibid.: 96).1 Solow goes on to explain what this actually meant:
What the modern macroeconomist wanted [in the 1970s] was that aggregative statements should be rigorously derived from a completely specified microeconomic model. How could anyone be against that? … Deep down we all accept a sort of economic atomism. Everything that happens must ultimately be understood as the outcome of the actions of individual agents in a given technological and legal environment.
