Some Issues Surrounding the Reduction of Macroeconomics to Microeconomics Author(S): Alan Nelson Source: Philosophy of Science, Vol

Some Issues Surrounding the Reduction of Macroeconomics to Microeconomics Author(s): Alan Nelson Source: Philosophy of Science, Vol. 51, No. 4 (Dec., 1984), pp. 573-594 Published by: The University of Chicago Press on behalf of the Philosophy of Science Association Stable URL: http://www.jstor.org/stable/187976 Accessed: 25-02-2018 19:34 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms Philosophy of Science Association, The University of Chicago Press are collaborating with JSTOR to digitize, preserve and extend access to Philosophy of Science This content downloaded from 152.3.10.159 on Sun, 25 Feb 2018 19:34:59 UTC All use subject to http://about.jstor.org/terms SOME ISSUES SURROUNDING THE REDUCTION OF MACROECONOMICS TO MICROECONOMICS* ALAN NELSONt Department of Philosophy University of California, Los Angeles This paper examines the relationship between modem theories of microeconomics and macroeconomics and, more generally, it evaluates the prospects of theoretically reducing macroeconomics to microeconomics. Many economists have shown strong interest in providing "microfoundations" for macroeconomics and much of their work is germane to the issue of theoretical reduction. Especially relevant is the work that has been done on what is called The Problem of Aggregation. On some accounts, The Problem of Aggregation just is the problem of reducing macroeconomics to microeconomics. I show how to sep- arate these problems and then try to determine to what extent particular kinds of solutions to The Problem of Aggregation succeed in reducing macroeconomics to microeconomics as well. I argue that reduction is not possible by this means given the current state of microeconomics. I also describe how reduction may be possible by means of (dis)aggregation if microeconomics is supple- mented in a certain way with the results of experimental research on individual economic agents. It is unfortunate that the fertile field of mainstream economic theory has been ignored as a source of insights about what may be involved in reducing one theory to another. 1 This paper is, in part, an attempt to begin remedying this deficiency. In particular, I want to explore the nature of the relationship between the modem mainstream theories of microeconomics and macroeconomics (hereafter just "microeconomics" and "macroeconomics"). The possibility of reducing at least parts of macroeconomic theory to microeconomic theory is especially exciting for two reasons. First, a natural objection to any proposed reduction or reductive program which involves a formal notion of reduction is that one or both of the *Received July 1983; revised November 1983. tI must thank Gilbert Bassett, Arthur Fine, Daniel Hausman, Alexander Rosenberg, Julius Sensat, referees for Philosophy of Science, and especially Paul Teller for helpful suggestions. Although many of these suggestions have found their way into this paper, I alone am responsible for any remaining errors or misconceptions. 'The very extensive bibliography on reduction in Wimsatt (1978) does not include a single reference to economics despite the fact that "detailed philosophical and historical case studies in the various sciences . have grown enormously in the last decade . ." (p. 353), and the similarly comprehensive bibliography on the philosophy of social science in Michalos (1978) does not cite any work on reduction in economics. Rosenberg (1976) at least mentions the topic of reducing microeconomics to other sciences. Philosophy of Science, 51 (1984) pp. 573-594. Copyright ( 1984 by the Philosophy of Science Association. 573 This content downloaded from 152.3.10.159 on Sun, 25 Feb 2018 19:34:59 UTC All use subject to http://about.jstor.org/terms 574 ALAN NELSON theories in question cannot be adequately formalized. That is not a problem here because both of these theories are adequately formalizable. Sec- ond, it might be thought that the relationship between microeconomics and macroeconomics ought to be quite transparent just because they are micro- and macrotheories. The formulation of the bridge laws or other mechanisms for relating terms (and entities) has posed substantial obsta- cles in other sciences when "direct" reductions have been considered, ". in which the basic terms (and entities) of one theory are related to the basic terms (and entities) of the other and the axioms and laws of the reduced theory are derivable from the reducing theory" (Schaffner 1967, p. 138). It is natural to suppose, however, that bridging mechanisms between microeconomics and macroeconomics may be relatively easy to find. It seems that the large-scale phenomena dealt with in macroeconomics must be the results of the total effects of the small scale phenomena dealt with in microeconomics. Therefore, one might expect that bridges could be built by merely adding up the microeconomic laws describing the microphenomena to obtain the macroeconomic laws describing mac- rophenomena. In fact, the conditions for reduction look so ripe that it is very often assumed that at least parts of macroeconomics have been reduced to microeconomics. John Beare writes in a popular textbook (1978, p. 7): Macroeconomics deals with relationships between aggregate vari- ables, the rigorous derivation of which now tends to be based on relationships implied by microeconomic theory. (emphasis added) Although it turns out that this much confidence cannot be based on any available economic results, it does seem that a reduction of macroeconomics to microeconomics would not be plagued with the kind of onto- logical difficulties which might attend schemes for reducing, say, cog- nitive psychology to neurophysiology. Consequently, the manner in which this prima facie highly plausible reduction falls short is particularly re- vealing of the problems facing reductive strategies in general. Before getting started, I want to set aside two issues which will not get any attention in this paper. First, it has been persuasively argued in Fodor (1974), and in Putnam (1973) that successfully reducing one theory to another need not entail that the reducing theory explains what the reduced theory explains. This issue will not arise explicitly in what follows because I shall be arguing that the prospects for a certain form of reduction are not good for other reasons. Second, there is an important dis- tinction between the way in which a theory might reduce a prior theory which it replaces as the most acceptable treatment of some phenomena, and the way in which one theory might reduce a contemporary theory which is not rejected. Although the history of economics provides some excellent case studies of reduction by replacement (including for exam- This content downloaded from 152.3.10.159 on Sun, 25 Feb 2018 19:34:59 UTC All use subject to http://about.jstor.org/terms REDUCTION OF MACROECONOMICS TO MICROECONOMICS 575 ple, what are referred to as the marginal and Keynesian revolutions), it is the other kind of reduction which will be treated in what follows. Economists use the term microfoundations to refer to schemes which can be broadly regarded as attempting to reduce macroeconomics to microeconomics. I shall follow suit because I want to concentrate on facts about reduction which I think will be of special interest to economists as well as philosophers without becoming embroiled in the standard contro- versies over the precise form that reductions should take. Economists have had a good deal to say about microfoundations; in this paper I want to examine the part of the economic literature which bears most directly on what philosophers have said about theoretical reduction. Let us look at some quotations to help us understand this one reason (described below) why economists are interested in microfoundations. Again, there are other reasons, but they have been less influential among economists and I think that they have less philosophical import. In an influential early paper, Lawrence Klein (1946a, p. 93) stated that these aggregative theories [i.e., macroeconomic theories] have often been criticized on the grounds that they mislead us by taking attention away from basic individual behavior. The problem of bridging the gap between the traditional theories based on individual behavior and the theories based on community or class behavior is, to a large extent, a problem of proper measurement. Donald McCloskey writes (1982, p. 7): Although its Greek meaning is "small housekeeping," microeconomics is not the little or trivial portion of economics. On the con- trary, it comes close to being the whole. Not all fields of economics are based on microeconomics, but all strive to be. Most of the lasting advances in economic thinking over the past century or so have con- sisted of reducing one or another piece of economic behavior to microeconomics. Compare Gary Becker (1976, p. 5): The combined assumptions of maximizing behavior, market equilib- rium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it. In the same vein, Arthur Okun writes (1980, p. 818): Keynes . departed from classical microeconomics only by modi- fying the labor supply function to include a wage floor. But this bridge between micro and macro was defective; none of the explanations flowed directly from the implications of optimization by economic agents. This content downloaded from 152.3.10.159 on Sun, 25 Feb 2018 19:34:59 UTC All use subject to http://about.jstor.org/terms 576 ALAN NELSON Finally, Lawrence Boland (1982, p. 80) concludes that the demonstration of the existence of microfoundations for macrotheories is considered essential by many leading economists.

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