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Why Are the Standard Microfoundations Wrong?

In: Reconstruction of Macroeconomics: Methods of Statistical Physics, and Keynes' Principle of Effective Demand

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  • Hiroshi Yoshikawa

    (University of Tokyo)

Abstract

Chapter 1 explains why standard microfoundations are wrong. Modern microfounded macroeconomics rests on representative agent assumptions. Some models, such as the Lucas rational expectations model, labor search theory and recent mean field game, assume apparently heterogeneous agents. However, in these models, economic agents differ only to the extent that realizations of relevant stochastic variables are different. They are assumed to share a common stochastic distribution with which they optimize. As such, standard microfounded macro models are stochastic versions of representative agent models. Real micro shocks are fundamentally different. They make micro optimization exercises meaningless.

Suggested Citation

  • Hiroshi Yoshikawa, 2022. "Why Are the Standard Microfoundations Wrong?," Advances in Japanese Business and Economics, in: Reconstruction of Macroeconomics: Methods of Statistical Physics, and Keynes' Principle of Effective Demand, chapter 0, pages 1-27, Springer.
    • Handle: RePEc:spr:advchp:978-981-19-5264-7_1
    DOI: 10.1007/978-981-19-5264-7_1
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