I don't always find David Glasner's post that insightful, though they are always sincere and reflect a commitment to rendering an accurate history of the discipline of economics and political economy. Therefore, I subscribe to Uneasy Money and am alerted when a new post goes up. Today's post was a reflection on modern macroeconomics taking off from the Paul Krugman and Stephen Williamson back and forth last week. But a particular passage from Glasner's post is worth thinking about in a serious way --- and that relates to the question of which microfoundations for macroeconomics. As Glasner states:
An especially pretentious conceit of the modern macroeconomics of the last 40 years is that the extreme assumptions on which it rests are the essential microfoundations without which macroeconomics lacks any scientific standing. That’s preposterous. Perfect foresight and rational expectations are assumptions required for finding the solution to a system of equations describing a general equilibrium. They are not essential properties of a system consistent with the basic rationality propositions of microeconomics. To insist that a macroeconomic theory must correspond to the extreme assumptions necessary to prove the existence of a unique stable general equilibrium is to guarantee in advance the sterility and uselessness of that theory, because the entire field of study called macroeconomics is the result of long historical experience strongly suggesting that persistent, even cumulative, deviations from general equilibrium have been routine features of economic life since at least the early 19th century. That modern macroeconomics can tell a story in which apparently large deviations from general equilibrium are not really what they seem is not evidence that such deviations don’t exist; it merely shows that modern macroeconomics has constructed a language that allows the observed data to be classified in terms consistent with a theoretical paradigm that does not allow for lapses from equilibrium. That modern macroeconomics has constructed such a language is no reason why anyone not already committed to its underlying assumptions should feel compelled to accept its validity.
Perhaps what we need, to paraphrase Lin Ostrom, is a behavioral approach to the rational expectations theory of macroeconomic activity. A close reading of Mises and Hayek, I would contend, already produced such a conceptual framework for modern economists to work within and build upon. As has been pointed out long ago by William Jaffe, from Carl Menger onward, the Austrian tradition did not treat man as a lightening calculator of pleasure and pain, but instead as the central actor in the human drama of economic life caught as he is negotiating constantly between alluring hopes and haunting fears.
It is man's predicament as a fallible yet capable human chooser making decisions within an uncertain though not unimaginable world of economic possibilities that brings forth the entrepreneurial market process that leads to economic growth and development, results in the dynamic instability of governmental interventionism, and also the ideological excesses of political power brokers that resulted in death and destruction. We live in a world of imperfect human actors, interacting in the world with imperfect knowledge and within imperfect institutions. One of our primary tasks as political economists is to explore what institutions enable us to cope with those imperfections, curb delusions, and channel behavior toward peaceful and productive social cooperation; and also to identify those institutions that leave us plagued with imperfections, vulnerable to the whims of others, and unable to navigate the world without conflict and coercion.
This last paragraph is ultimately about comparative instituitonal analysis and it has been a hallmark of the discipline of political economy throughout its history -- e.g., from Adam Smith's critical examination of mercantilism to Ludwig von Mises's critical examination of socialism. But the "big" question of economic systems, also are relevant for the "smaller" questions of macroeconomic and microeconomic performance. The great German sociologist Hans Albert once wisely remarked to the founders of New Institutional Economics that 'neocloassical economics will never be able to repair its institutional deficiency until it repairs its behavioral deficiency.' Eventually this resulted in the deployment of Herbert Simon's model of human decision making, rather than the more stripped down optimization exercise of textbook micro; what Vernon Smith refers to as 'ecological rationality' rather than 'constructivist rationality'. Or to those in the Austrian tradition, what Mises's went at great lengths to argue substantively (don't read exclusively methoodlogically) for in the first 100 pages of Human Action, or what Israel Kirzner would later stress as the Misesian actor in contrast with the Robbinsian maximizers. And these Misesian actors interact with one another within a diversity of institutional contexts -- each structuring incentives and providing a flow of information and feedback.
Focusing on purposeful human action, and specified instituitonal contexts, is also microfoundational in economic and political economy analysis. But it is a different microfoundation than what has dominated modern macroeconomics. Time to fix that -- Steve Horwitz should get the nod as the first mover within the contemporary Austrian school to explicitly pick up that challenge of answering which microfoundations of macroeconomics.