Abstract

The purpose of this chapter is to explain the evolution of macroeconomic theory from a methodological standpoint. In doing so, my argument will be twofold. First, any theoretical explanation regarding the causes and consequences of macroeconomic phenomena cannot be understood without an underlying theory of microeconomics, whether explicitly or implicitly stated. To state this in modern parlance, all macroeconomic theory, both past and present, has entailed an underlying set of “microfoundations” of one form or another, entailing a theory of individual action (or inaction for that matter). Secondly, if the purpose of theory for the macroeconomist is to reason out a set of macroeconomic consequences from a set of assumptions, then the purpose of methodology is to understand how the selection of particular assumptions drive not only the questions that motivate different theories, but also the answers that flow from different macroeconomic theories. Thus, from a methodological standpoint, macroeconomic theory and its policy implications are a by-product of choosing different microeconomic foundations, not vice-versa. The central theme that undergirds my argument focuses on the methodological foundations of what is known as “Say’s Law” (or the fundamental law of markets), its various interpretations, and the policy implications that flow from its microfoundations.