(from Paul Krugman's Imperial sounding board)
Wren-Lewis’s first post concerns the obsession with microfoundations. As he says, this obsession is at this point deeply embedded in the academic incentive structure:
If you think that only ‘modelling what you can microfound’ is so obviously wrong that it cannot possibly be defended, you obviously have never had a referee’s report which rejected your paper because one of your modelling choices had ‘no clear microfoundations’. One of the most depressing conversations I have is with bright young macroeconomists who say they would love to explore some interesting real world phenomenon, but will not do so because its microfoundations are unclear.
So where does this come from? The “Lucas critique” has been a big deal in the profession for more than a generation. This says that even if you observe a particular relationship in the real world — say, a relationship between inflation and unemployment — this relationship may change when policy changes. So you really want to have a deeper understanding of where the relationship comes from — “microfoundations” — so that you won’t be caught off guard if it does change in response to policy.