The representative agent has long been a central device in modern macroeconomics, providing a simplification of economic behaviour by collapsing the diverse decisions of millions of individuals into the choices of a single “stand-in” actor. Its roots lie in neoclassical economics, where general equilibrium theory required tractable models of consumer and producer behaviour. By assuming a single household and a single firm, theorists could impose rational optimisation and equilibrium conditions without the complexities of heterogeneous agents and institutions. This abstraction gained prominence in the postwar era, particularly through the development of dynamic stochastic general equilibrium (DSGE) models, which crystallised around the representative agent as their core behavioural assumption.
Read MoreDo you remember what you were taught in introductory economics? Do you remember how much math you had to chew through in graduate school? Do you want to relive that? Alternatively, you might just have wondered why macroeconomists write and speak like they do, why they use complex math to explain seemingly simple concepts, and why they don't seem to agree on anything?
In this first part, I pick apart the traditional undergraduate story of macroeconomics, and try to explain why Keynes and Friedman maybe weren't as different as everyone would like you to believe. In doing so, I am setting up the big plunge into why on earth macroeconomics has come to rely on a fusion of math and representative agent models to make theories of the world, a story that I will grapple with in part 2 of this show.
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