Rajiv Sethi writes the above in a discussion of a misunderstanding of the economics of Keynes.
The discussion is interesting. According to Sethi, Keynes wrote that, in a depression, nominal wages might be sticky but in any case a decline in wages would not do the trick to increase hiring. But many modern economics writers have missed this. For example, Gary Becker writes, “Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction. . . . A fall in price stimulates demand and reduces supply until they are brought back to rough equality.” Whether Becker is empirically correct is another story, but in any case he is misinterpreting Keynes.
But the actual reason I’m posting here is in reaction to Sethi’s remark quoted in the title above, in which he endorses a 1975 paper by James Tobin on wages and employment but remarks that Tobin’s paper did not include the individual-level decision modeling that we’d usually expect today in an academic economics paper.
Not including microfoundations—that’s actually just fine with me! My impression is that microfoundations in economics and political science are typically a version of long-obsolete psychological models of human cognition and behavior. Such folk psychology can be helpful at times—I myself have written on the rationality of voting, using a simple utility model—but I think it’s a mistake of many social scientists to suppose that these models are in any sense necessary. Rather than seeing microfoundations as supportive of empirical or theoretical economics arguments, I think the opposite: if the economics is strong, the value of the microfoundations is to give insight into the real results.