Microfoundations: A Kaleckian Perspective

Abstract

Like the relationship between the grin and the cat, the relationship between macroeconomic and microeconomic theory has left many puzzled. Over the last few decades there has been much debate as to the nature of the relation between microeconomics and macroeconomics, the so called problem of microfoundations.¹ In particular, the question of how one moves from analysis at the level of the individual or of the firm to analysis of the economy as a whole, has invited much controversy. The discussion about ‘micro-foundations’ has been about the exact way in which the microeconomics fits in with the macroeconomic theory for which it is the foundation. Not surprisingly, there is a strong relationship between the type of theory being examined and the relationship posited between the microfoundations and the macrotheory. In particular, the problem seems to be greatest for neoclassical theorists, for whom the tranquil waters of microeconomic equilibrium bear a strong contrast to the swiftly moving currents of macroeconomic unemployment. As noted in the Palgrave entry on ‘macroeconomics: relations with microeconomics’: ‘The lack of clear connection between macroeconomics and microeconomics has long been a source of discontent among [neoclassical] economists. Arrow called it a “major scandal” that neoclassical price theory cannot account for such macroeconomic phenomena as unemployment’ (Howitt 1987, 273).