Lawrence Blume

Paper #: 96-04-022

In most economists' view, aggregate economic activity results from the interactions of many small economic agents pursuing diverse interests. To some, this statement is a normative proposition. It immediately brings to mind Adam Smith's famous metaphor of the invisible hand, an expression of the normative superiority of markets as a resource allocation device. But even among those economists who hold a more cautious view of the superiority of markets, methodological individualism, the emphasis on the primacy of individual agents, has had an enormous impact on research into aggregate economic phenomena. For instance, it has led to the wholesale scrapping of those parts of macroeconomics lacking adqeuate "microfoundations," and to the acceptance of the "new classical macroeconomics," search theories of macroeconomic activity and other micro-based models. Nowadays a model of aggregate economic activity is only acceptable if it can be derived by aggregation from acceptable models of the behavior of individual agents.