Reader's Guide and Discussion Questions on Kevin Hoover's "Does Macroeconomics Need Microfoundations?"
First a glossary:
microeconomics: economics focusing on consumption and production decisions by consumers and firms
macroeconomics: economics focusing on features of the whole economy such as the rate of inflation, rate of growth of GNP, unemployment, etc.
microfoundations: the reduction of elements of macroeconomics or all of macroeconomics to microeconomics or the elimination of macroeconomics in favor of microeconomics
methodological individualism: the only "rock bottom" or fully satisfactory explanations in the social sciences must be in individualistic terms
ontological individualism: only individuals are "real" and have causal power
representative agent models: models that attempt to explain some features of the economy in terms of the choices of some single hypothetical agent (who is sometimes pictured as eternal)
reduction: A theoretical account T is a reduction of some other theoretical account T' if and only if (1) T plus certain "bridge principles" permits one to derive the observable implications of T' and (2) T and the bridge principles show how the entities and properties of T' are composed of or derive from the entities and properties of T.
supervenience: Some macro property P supervenes on some micro property M if and only if P may obtain without M obtaining, but whenever M obtains, P obtains. For example, suppose that my current net worth were $10,000 and the current state of the world described in terms of fundamental physics is S. There are many physical states of affairs besides S that correspond to the economic state of affairs in which my net worth is $10,000; so my net worth being $10,000 cannot be reduced to any description of the world in terms of atoms and molecules. But whenever the physical state of the world is exactly S, my net worth is $10,000.
perfect aggregation: if some economic variable x that characterizes individuals bears relation R to some other individualist economic variable y, then X bears R to Y, where X is the sum of x over all individuals and Y is the sum of y over all individuals.
1. For what reasons are economists so committed to microfoundations? (Note that there is not just one reason.)
2. What is the relationship between ontological individualism and methodological individualism?
3. Hoover points out that microeconomic analyses rarely if ever provide the sort of explanations that methodological individualists seek. (Consider his account of his choice of how much to save for his child's college education.) Why not?
4. In what ways do those, like Robert Lucas, who demand strong microfoundations demand more than the sort of reduction of the gas laws provided by Newtonian mechanics?
5. What does Hoover mean by "the Cournot problem"? (p. 321)
6. What, according to Lucas, does it take to make a model safe from the Lucas critique?
7. How can Hoover reject ontological individualism (p. 323) while at the same time insisting that entities such as GNP depend on the properties and actions of individuals?
Don't worry about the equations on pp. 326 and 328. If you do consider them, note that the "a's" at the bottom of page 326 should be alphas.