One of the defining features of neoclassical economics is the belief that macroeconomic analysis has to be not merely compatible with, but derivable from, microeconomic analysis. The development of economic theory has been driven far more by this belief than by the desire to make the theory compatible with the observed behaviour of the economy.
This ‘reductionist’ aspect of economics – the attempt to reduce the higher level topic of macroeconomics to an applied version of the lower level topic of microeconomics – is at odds with the last 50 years of genuine sciences, where complexity has ruled the roost, for reasons that were eloquently put by Physics Nobel Laureate Philip Anderson in a highly readable paper entitled “More Is Different”.
In that paper, Anderson asserted that reductionism did not work, because though it is possible to rank sciences in a hierarchy in which “The elementary entities of science X obey the laws of science Y, … this hierarchy does not imply that ‘science X is just applied Y’… At each stage entirely new laws, concepts, and generalisations are necessary, requiring inspiration and creativity to just as great a degree as in the previous one. Psychology is not applied biology, nor is biology applied chemistry.”
Economics violates this by its belief that “macroeconomics is just applied microeconomics”, but recent blogosphere debates have confirmed that there is a limit to how far neoclassical economists will take reductionism: it stops at microeconomics.