Must-Read: Yes. The combination of representative-agent modeling and utility-based “microfoundations” was always a game of intellectual Three-Card Monte. Why do you ask? Why don’t we fund sociologists to investigate for what reasons–other than being almost guaranteed to produce conclusions ideologically-pleasing to some–it has flourished for a generation in spite of having no empirical support and no theoretical coherence?
The Methodology of Empirical Macroeconomics: “Given what we know about representative-agent models…:
…there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. While they appear to use the mathematics of microeconomics, the subjects to which they apply that microeconomics are aggregates that do not belong to any [really-existing] agent. There is no agent who maximizes a utility function that represents the whole economy subject to a budget constraint that takes GDP as its limiting quantity. This is the simulacrum of microeconomics, not the genuine article.…
[W]e should conclude that what happens to the microeconomy is relevant to the macroeconomy but that macroeconomics has its own modes of analysis.… [I]t is almost certain that macroeconomics cannot be euthanized or eliminated. It shall remain necessary for the serious economist to switch back and forth between microeconomics and a relatively autonomous macroeconomics depending upon the problem in hand.