Kwame Anthony Appiah’s take on microfoundations

A macroeconomic theory is said to be microfounded if it can be reduced to the actions of individual economic agents (that being what microeconomics focuses on). A short while ago, the topic of microfoundations ripped through the economics blogging community. Most of the heavy hitters in the community weighed in on whether microfoundations really matters or not. I missed out on that discussion at the time, but here is what Kwame Anthony Appiah says about the relevance of microfoundations in his famous book The Ethics of Identity:

Whether we count a theory as false simpliciter or approximately true turns out to be a question of judgment, a judgment that may legitimately depend on what we’re interested in. A chemistry whose practical focus is on the development of industrial dyes might accept the idealizing assumption that filtered river water is H20; a chemistry interested in energy regulation at the cellular level could not. An idealization is a useful falsehood: and useful always means “useful for some purpose.” Depending on our practical purposes, we may need to proceed as if planes were frictionless and firms were profit maximizers. We may suppose that, from the point of view of the universe, everything observable could be reduced to particle physics; but this is not a point of view available to us, and our theories, like all our products, are imperfect things. Indeed, the history of science is a catalog of the errors that flow from premature attempts to constrain theories of one level by the demand that they postulate only phenomena that can be understood in terms of theories at a lower level. Since we do not have perfect theories, we proceed with the best theories we can muster: and the best theory for some purposes may be better — for those purposes — than the best theory that meets this demand for methodological reductionism. We wouldn’t want to jettison whatever useful insights we might get from economics or meteorology, say, just because we can’t give an account of those disciplines in terms of the movement of molecules.

Here, Appiah is arguing for the possibility and usefulness of a concept of agency and autonomy that does not delve into the biological and physical mechanics of human action. Nonetheless, the basic point applies in the economic microfoundations debate as well. When theories are aimed at solving problems on a certain level, there is nothing problematic about focusing those theories on that level. In fact, all theories that do not start from fundamental physical particles and the laws that govern them are necessarily not totally microfounded. That of course includes microeconomics.