The problem of micro-imperialism in economics

A couple days ago, in this blog post, I asked which of three labor markets were in a recession. My answer is - "I don't know, I don't have enough information". Hopefully, this revised figure helps explain why (assume, as the last piece of information, that every one of these economies has 15 people in it):

We have been trained to think that "unemployment" means "labor surplus". It doesn't. "Unemployment" means "the amount of people who want to work that aren't working". That is not the surplus gap between labor supply and labor demand. That is, in micro-speak, every point on the labor supply curve to the upper right of the labor market equilibrium. They don't know that their reservation wage is above equilibrium, and even if they did know that, since when has having your wage above the market equilibrium disqualified you from being considered "unemployed"? This is one of many examples of the intellectual imperialism of microeconomics in economics. Labor surpluses have nothing to do with unemployment or recessions - employment levels do. Labor surpluses tell you something about the likely behavior of wages and employment in the future, and perhaps about social welfare. There's nothing about labor surpluses that is of necessity relevant to the business cycle.

One of the problems with the way macroeconomics is thought about and done is that people have taken "understanding the business cycle" to mean "understanding what causes labor surpluses". This leads them down the path of sticky wages or minimum wages. These things may indeed influence the business cycle, but that is not automatically implied by the fact that they create a microeconomic labor surpluses. Which economy would you rather live in? I'd rather live in an economy with higher welfare, higher dead-weight loss, and higher employment, than in an economy with lower welfare, lower dead-weight loss, and lower employment.

This mentality has even creeped its way into where it shouldn't: Keynesian macroeconomics. Ryan Murphy has a further discussion of my 1920-21 paper and one of the things he says is: "Keynes believed that full employment is the special case, but Keynes didn’t develop IS-LM. One of the most surprising developments in the development of IS-LM was that its “general” case WAS full employment, and it took special things to get you to unemployment. This is really where I fundamentally disagree with Kuehn." He then links to the New School for Social Research's history of thought website which also claims that the Neoclassical Synthesis version of the IS-LM "tended to yield the Neoclassical result of "full employment"". I realize I am going somewhat out on a limb by criticizing the team at the New School on this, but I think it's the wrong interpretation of the model. The IS-LM model tends to microeconomic labor market clearing. That is quite different from saying that it tends to full employment.

I don't think much of "microfoundations", at least as any kind of theoretical obligation. Clearly if we can produce a correspondence between microeconomics and macroeconomics, that's fantastic. But "macrofoundations" are just as important. Even someone interested in "microfoundations" shouldn't pursue that by trying to superimpose microeconomic concepts onto macroeconomic concepts inappropriately. "Labor surplus" has to do with (1.) welfare/efficiency questions, (2.) questions about equilibrating tendencies, and (3.) match efficiency questions (because there is a pool of workers ready to work at a given wage). It has nothing directly to do with the problem of unemployment (although certainly point (3.) in that list will indirectly impact unemployment).

UPDATE: Another good way to think about the microfoundation obsession in economics is to look at other sciences. In physics, for example, we don't say "relativity is inadequate because it isn't derived from particle physics". The search for a unified theory of physics isn't a search to reproduce relativity from particle physics - it's an effort to find a consistency between relativity and particle physics, so physicists don't have to say "we know relativity is true and we know particle physics is true, and we can talk about both of them but we don't know a good unified way of talking about how they're both true". That should be how economics should approach the question. We oughta explore a lot of macrofoundations of microeconomics, a lot of microfoundations of macroeconomics, and also simply some new ideas. In the meantime, it's silly to consider some ideas tentative because we haven't hit on a correspondence. So why do we obsess over microfoundations? I think it's because microeconomics happens at the individual level, so our brains privilege that and assume any knowledge of what happens at the individual level necessarily has a sort of priority over other knowledge. You don't have this in physics because neither particle physics nor relativity happen at "our level". You did have this in biology for a while - it took a lot of pushing to get biologists to stop thinking about the selection of specific organisms and instead think of selection of what was actually being reproduced: genes. We have a bias towards that which we know best: ourselves. That cognitive bias can lead to bad economics if it generates an obsession with microfoundations.