Arrow on Microfoundations

9 January 2007 at 10:20 pm 1 comment

| Peter Klein |

Michael Greinecker shares this illuminating comment by Kenneth Arrow, quoted in Colander, Holt, and Rosser, ed., The Changing Face of Economics: Conversations with Cutting Edge Economists, (University of Michigan Press, 2004):

I’ve never understood [macroeconomics]. What I mean by this is that my idea of understanding is having a model that captures what is going on. In macro we don’t have that; instead we have empirical generalization, and those generalizations tend to break down rather quickly. The question is, can you get some understanding of the empirical evidence from the models? One attempt has been to generate empirical work out of very simplistic models- essentialy they are micro models blown up. I don’t give much credence to those models. One of the things that microeconomics teaches you is that individuals are not alike. There is heterogeneity, and probably the most important heterogeneity here is heterogeneity of expectations. If we didn’t have heterogeneity, there would be no trade. But developing an analytic model with heterogenous agents is difficult.

This sounds a lot like our critiques of “macro”-level explanations in organization theory (1, 2, 3, 4, 5, 6). Macroeconomics, labor economics, and industrial organization have become increasingly “micro” in the last two or three decades. Will organization theory follow, or is the resistance to economics in some quarters strong enough to block the move?

Entry filed under: - Klein -, Management Theory, Methods/Methodology/Theory of Science.

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1 Comment Add your own

  • 1. Teppo  |  10 January 2007 at 3:00 am

    I concur with Arrow, and think the implications for organizations apply as well…

    I simply don’t see how we can explain collective phenomenon without reducing (to lower levels), particularly when trying to understand the origins of collective matters (rather than taking them for granted).

    Interestingly, though, strategy (and, org theory for that matter) has of late seen significant ‘drift’ to even higher levels of analysis (alliances, networks, community etc.) when trying to explain (for example) performance heterogeneity, rather than lower, micro-levels, but the result of this upward drift, from my perspective, has not been very good. I think the answers lie at lower, micro levels, intuition that just now is beginning to seep (in any significant way) into strategy (beginning with Coff [1999] and other’s work).

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