From Keynesian to New Classical Macroeconomics Theories: The Critical Role of Microfoundations for Macro
The rise of New Classical Macroeconomics (NCM) in its various forms since the 1970s, instituted it as the hegemonic position in macro theory by the end of the twentieth century. Thus, the Keynesian approach that was adopted after 1936 General Theory for the analysis of whole economies, was largely reversed. With it, the consensus about a theoretical split in economics between microeconomics and macroeconomics, was shattered. The split was first a response to the creation of the sub-field of macroeconomics after 1936, but later a major change occurred when macroeconomists tried to introduce microeconomic foundations to macroeconomics. The early literature - produced over the years 1936-1975, i.e. from the GT up to the initial phases of NCM - and the later literature, covered many themes. Whereas during the early period the emphasis was on the differences between two perspectives - the new macro approach associated with Keynes and the old micro perspective - in the later period, a new research program emerged. The program, known as Microfoundations for Macro, sought to establish macroeconomics on what its practitioners perceived as the only proper method for macroeconomics. The debate between a Micro perspective and a Macro one during the early period was not identical, as I would argue, to that presented while macroeconomists were promoting the microeconomics foundations in macro in the later period. During the second period, the focus on having microfoundations for macro became the sine qua non for proper macroeconomics for NCM. This paper will review the theoretical positions of various tendencies on microeconomics, macroeconomics, and the microfoundations for macroeconomics.
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Keywords: Macroeconomics, Keynes, New Classical Macroeconomics, microfoundations