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Question from Past Macroeconomics Qualifying Exam (Fall, 2002 - Question one) at George Mason UniversityEdit

Since the 1970s macro theorists have generally supported the idea of grounding macro theorizing on acceptable micro foundations. The recent history of economics offers two broad desiderata for such foundations. One is the rational choice approach that individuals have intentions and pursue plans. The second is the notion that individual interactions, both cooperative and competitive, generate unintended consequences that are incorporated in a spontaneous order. How would you assess these alternative approaches to the micro foundations of macroeconomic theory?

AnswerEdit

Micro foundations are an important part of understanding how individuals realte to one another at the aggregate level. Where Keynesianism assumed that you could start with an aggregate, many economists seek a concrete relation to the generally excepted foundation of microeconomics. New Keynesianism is a result of this pursuit.

Rational choice describes the predictable outcome of agents with explict criteria to maximize. This is predictable, and thereby is efficient. We can assume that the model agent is acting predictably.

The idea that there are cooperative and competitve agents does not eliminate our basic assumptions about the predictable nature of the agents. In a game of survival, the "winners" will behave as if they had planned it this way. Alchian (1950) says this is even true with plants enjoying the sun they need to grow.

If both the rational expectation and the spontanious order solutions give you a way of predicting success, what is the difference. Alchian tells us that maximizing profit is not a neccesary objective. It is enough that profit is made, it is not neccesary to try to determine where the global maximum lies. From period to period firms interpret different information and respond. The only requirement is survival.

SourcesEdit

  • Alchian, AA, Uncertainty, Evolution, and Economic Theory, Journal of Political Economy 58 (1950), 211--222.

Other QuestionsEdit

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