Macro-foundations of Micro and Micro-foundations of macro: Income Distribution, Increasing risks and Household Behaviours

Edwin Le Heron

The aim of the paper is to synthesize the stock-flow consistent modelling and the agent based modelling using the EVIEWS software. Then we try to make it compatible the macroeconomic framework of the post Keynesian SFC modelling ("top-down model") and heterogeneous microeconomic foundations ("bottom-up model"). The heterogeneity of agents concerns thehouseholds.
As Boland (1982) explains, Keynes was more concerned with the lacking macro-foundations of microeconomics than the micro-foundation of macroeconomics. Post Keynesian SFC modelling is exactly concerned with the macro-foundations of micro.
The orthodox critics of Keynesian theory have a formal micro-foundation, but they get this by modelling a multitude of similar agents, i.e. by using a representative agent. In the real world, agents are heterogeneous in their rationality. In our model, we introduce heterogeneity in the rationality of households. For instance, this heterogeneity can be explained by the unequal income distribution, but also by different mindset or mood of households. There is not a representative household.
With Keynes' approach and in a complex system, the action of the whole is more than the simple sum of the actions of its parts. Notably the accounting system is a medium through which economic interaction takes place, and through which the feedback from macro to micro works. But with a SFC model, you stabilize the economy on a steady state and then it is difficult to understand endogenous crisis without an exogenous shock. And somehow, the macroeconomic behaviour of each sector likes that of a representative agent. Interaction between heterogeneous agents in a SFC macroeconomic model can provide interesting solutions.