Whom or What Does the Representative Individual Represent?

TLDR

Macroeconomic models often assume that the choices of all diverse agents in a sector can be represented by a single utility‑maximizing individual whose decisions match aggregate behavior. The author intends to explore positive alternatives to the representative‑individual approach by emphasizing agent heterogeneity and interactions. This will involve analyzing models that incorporate heterogeneous agents rather than aggregating them into a single representative. Reducing heterogeneous agents to a single representative is unjustified, misleading, and often incorrect, especially for macro problems like unemployment, leading to models that ignore coordination failures and trade, and thus the representative agent approach should be abandoned.

Abstract

Macroeconomic models often assume that the choices of all the diverse agents in one sector— consumers for example—can be considered as the choices of one “representative” standard utility maximizing individual whose choices coincide with the aggregate choices of the heterogeneous individuals. My basic point is that the reduction of the behavior of a group of heterogeneous agents even if they are all themselves utility maximizers, is not simply an analytical convenience as often explained, but is both unjustified and leads to conclusions which are usually misleading and often wrong. First, such models are particularly ill-suited to studying macroeconomic problems like unemployment, which should be viewed as coordination failures. Furthermore these models, instead of being a hive of activity and exchange, are frequently, ones in which no trade at all takes place. And this is just the beginning of a list of problems with this approach. Finally I will consider more positive alternatives to the representative individual approach—approaches that focus on heterogeneity of agents may and interaction between individuals. It is clear that the “representative” agent deserves a decent burial, as an approach to economic analysis that is not only primitive, but fundamentally erroneous.