ABSTRACT
Introduction Since the 1970s, mainstream economics has attacked Keynesian macroeconomics for not being a science in the proper sense of the term. The latter lacks realistic microfoundations, according to the orthodoxy, and is generally inconsistent with the Walrasian system. This chapter argues that the problem lies deeper than the absence of a choice theoretic framework in the Keynesian model. The main problem with macroeconomics of any theoretical flavor is aggregation and because macroeconomics aggregates ex ante it arrives at an indefensible position of using aggregates as policy instruments. Aggregation is an intractable problem and is at the root of controversies that run from Marxian value theory to the capital controversy to the negative result of Sonnenschein, Mantel and Debreu (SMD), that no coherent microfoundations for aggregate economics exists. There have been various responses to the inability to unify macro and micro theories. The rise of “clean identification” methods in econometrics is an effort to restore scientific credibility to economics. Many of the traditional problems central to the discipline, however, were abandoned as the literature focused on “cute and clever” microeconomics. It is argued here that it is possible that macroeconomics can be rescued by way of agent-based models. These models require no ex ante aggregation and provide a platform for policy intervention since the “representative agent” is no longer required. Outcomes can be then be measured by aggregating the heterogeneous individuals ex post. Familiar macroeconomic characteristics arise from these complex systems as emergent properties. What is sacrificed as we turn to computer simulations is the elegant formal mathematical analysis that characterized the Walrasian system of the past. The chapter is organized as follows: the next section reviews the problems of Keynesian economics and the reaction of heterodox economists and asks why the project of the unification of micro and macro has largely been abandoned. The subsequent suggests that agent-based models may be a way to recover realistic microfoundations for macroeconomics. The final section concludes with some comments on the nature of big problems in economics and science generally.
