December 16 - The representative agent in macroeconomics
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.
The intellectual rationale was partly pragmatic. As James E. Hartley (1997) notes, the early generations of macroeconomists adopting rational expectations and intertemporal optimisation required a manageable framework to demonstrate theoretical consistency. The representative agent allowed for analytical clarity, enabling clean aggregation from microeconomic first principles to macroeconomic dynamics. In doing so, it offered an elegant solution to a pressing concern: how to anchor Keynesian or post-Keynesian macroeconomic modelling in the microfoundations demanded by the “Lucas critique.” Robert Lucas and his contemporaries criticised earlier macroeconometric models for lacking behavioural rigor, and the representative agent became a convenient way to impose such rigor.
The representative agent also served an interpretive role. By assuming that the economy could be treated as if it were guided by the decisions of a single rational, forward-looking agent, economists could use familiar optimisation techniques to address questions about consumption, investment, labour supply, and the effects of policy shocks. This move was not purely technical but also methodological: it represented a deliberate narrowing of macroeconomics to the terrain of neoclassical theory, sidelining institutional, historical, and distributional concerns. In J.E. King’s (2012) account of the history of macroeconomic thought, the representative agent embodies the post-Lucas turn towards formalism and internal consistency over empirical realism.
Yet, despite its utility, the representative agent has been subject to extensive criticism. The most fundamental objection is that it suppresses heterogeneity. Real economies are composed of diverse households with different preferences, incomes, and constraints, as well as firms with varying technologies and market power. Aggregating all this into a single agent erases the dynamics of inequality, class conflict, and institutional variety that shape macroeconomic outcomes. The Sonnenschein-Mantel-Debreu results in general equilibrium theory already demonstrated that aggregate demand cannot, in general, be represented by a single rational agent without imposing highly restrictive assumptions. Critics argue that the representative agent therefore distorts rather than simplifies reality.
A second line of criticism targets the political implications of the construct. By abstracting away from differences in wealth and power, representative-agent models implicitly depoliticise distributional issues. As Duarte (2005) stresses, this limits the capacity of macroeconomics to analyse unemployment, financial instability, or structural crises, phenomena that are fundamentally about coordination failures among heterogeneous actors. Post-Keynesian and evolutionary economists have long argued that the representative agent blinds mainstream theory to genuine macroeconomic problems, particularly those arising from uncertainty, bounded rationality, and institutional evolution.
Another critique concerns empirical adequacy. Representative-agent DSGE models have often struggled to account for observed business cycle dynamics, especially in the wake of the 2008 global financial crisis. The inability of these models to anticipate or explain systemic instability highlighted the limits of an approach that treats the economy as if it were reducible to the decisions of a single, perfectly rational actor. Subsequent moves towards heterogeneous-agent DSGE models (HANK) reflect the recognition, even within mainstream macroeconomics, that the representative agent is too blunt a device for the complexities of modern economies.
In sum, the representative agent arose as a pragmatic solution to the demand for microfounded macroeconomics, offering clarity and tractability at the expense of realism. It allowed economists to formalise rational expectations and optimisation in ways that satisfied the methodological concerns of the 1970s and 1980s. Yet the very simplicity that made the representative agent attractive has also been its undoing. By ignoring heterogeneity, distribution, and institutional complexity, it has been criticised as an ideological construct that obscures more than it reveals. Contemporary macroeconomics is increasingly moving beyond it, but its legacy remains central to understanding both the strengths and limitations of the dominant neoclassical paradigm.
References
Duarte, P. G. (2005). “The construction of the representative agent in macroeconomics.” History of Political Economy, 37(2), 241–273.
Hartley, J. E. (1997). The Representative Agent in Macroeconomics. London: Routledge.
King, J. E. (2012). The Microfoundations Delusion: Metaphor and Dogma in the History of Macroeconomics. Cheltenham: Edward Elgar.
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Prompt: “Can you write a 600 essay on the representative agent in macroeconomics, where does it comes from, what does it do, and what are its main critics? Use academic sources if needed, for example James E Hartley, J.E King and Duarte. Avoid bullet points, but write a free-flowing essay. Can you list all your sources at the end in classic Cambridge referencing.”