The Microfoundations of Macroeconomics: A Critical Survey

THERE iS little need to justify an interest in general equilibrium theory from the standpoint of resource allocation proper. The analysis, which begins with assumptions about individual behavior and given endowments, leads inexorably to propositions about equilibria, steady states, and efficient choice and thus provides a benchmark for both partial equilibrium analysis and empirical testing. This literature, often mislabelled "Walrasian," is large, is growing, and continues to be taught as the central core of what economists believe can be said about the allocation of scarce goods. Functionally, it does not enable one to assume, or conclude, that the world works like the Walrasian Bourse, but rather it forces economists to turn their attention to their implicit assumptions when they would assert, for instance, that depletable resources can be intertemporally allocated in an efficient manner. "This negative role of the Arrow-Debreu equilibrium I consider almost to be sufficient justification for it, since practical men and illtrained theorists everywhere in the world do not understand what they are claiming . . . when they claim a beneficient and coherent role for the invisible hand" [50, Hahn, 1973, pp. 14-15]. There is another face of general equilibrium theory that is less well-understood, although it has engaged the talents of many able economists. Students are taught (1) choice theory for given quantities of output as microeconomics, (2) aggregate supply and demand analysis to determine the level of output as macroeconomics, and (3) distribution theory, which partakes of both micro and macro as their linkage. It does not take long for students to become aware that general equilibrium theory is an integrative intellectual framework for all three theories. Indeed questions of multimarket interaction must be faced in each sub-discipline, and the formal structure of the inquiry appears the same in microeconomics and macroeconomics: equilibrium, stability, systematic linkages, subsystems, and feedback can be recognized at any level of aggregation. So viewed, general equilibrium theory is coextensive with the theory of the mi-