Fritz Machlup, Der Wettstreit zwischen Mikro- und Makrotheorie in der Nationalökonomie (1960)

Machlup’s lecture dismantles the terms of the micro-macro contest. It opens by refusing an easy opposition between “small” and “large” models: general equilibrium may be macro in scope yet micro in construction, while aggregative models often omit individual relations and combine heterogeneous magnitudes. Thus the first problem is semantic and methodological:

Was man unter Mikro- und Makrotheorien verstehen soll, ist keineswegs klar.

English translation: What is to be understood by micro- and macrotheories is by no means clear.

He reviews possible criteria—observer’s scope, individual versus group behavior, forms of aggregation, and the role of relative prices—and finds the last especially useful: macro models typically bracket relative prices, while micro theory turns on them. But because economists draw the boundary differently, many disputes are pseudo-disputes. The central thesis follows: macro theory is indispensable, but not self-sufficient in the deeper explanatory sense; aggregate relations invite inquiry into the micro relations hidden beneath them.

The first chapter historicizes this claim. Macro theory did not begin with Keynes: Machlup finds it in Quesnay, quantity theories of money, Ricardo, Böhm-Bawerk, and Wicksell. Keynes made aggregative model-building dominant, but not original. The decisive issue is the “hidden” microstructure of functions such as $C=c(Y)$. A consumption function may serve immediate macro purposes, but the economist naturally asks how household decisions aggregate into a stable relation. Machlup turns this into a methodological maxim:

Die Theorie darf nicht stehenbleiben, wo die Meßbarkeit aufhört.

English translation: Theory must not stop where measurability ends.

Part II then attacks supposed proofs of macro superiority. Aggregate constraints do not make micro analysis irrelevant: if investment plans exceed available capital or labor, theory must explain disappointed expectations and price-mediated plan revisions. Nor is equilibrium a peculiarly micro concept:

Der Gleichgewichtsbegriff spielt in der Makrotheorie die gleiche Rolle wie in der Mikrotheorie.

English translation: The concept of equilibrium plays the same role in macrotheory as it does in microtheory.

Equilibrium is only a device for thought experiments, not a description of historical reality or a disguised political ideal.

Das Gleichgewicht ist weder etwas Gutes noch etwas Böses

English translation: Equilibrium is neither something good nor something evil.

The static/dynamic contrast is likewise false: Keynes’s original macro model was static, while micro theory has its own dynamic models. Machlup’s main logical criticism concerns ex ante and ex post magnitudes. Macro theorists sometimes infer causality from accounting identities such as $Y=C+I$ or $S=I$; for Machlup this confuses classification with explanation.

Eine Definition mit einer Gleichgewichtsbedingung zu verwechseln, ist ein arger Denkfehler.

English translation: To confuse a definition with an equilibrium condition is a grave error of reasoning.

Causal theory requires behavioral functions among planned, dated variables. Measurement gives macroeconomics no decisive advantage either: neither micro nor macro constructs are directly measurable, only their operational counterparts are. Macro functions may be more often estimated, but Machlup doubts their stability. Application is equally shared: history, forecasting, and policy require both relative-price analysis and aggregative analysis.

Part III clarifies micro theory by contrasting it with business administration. The firm of price theory is not the real firm of Betriebswirtschaftslehre, but a deliberately thin fiction inserted between changed data and changed prices or quantities:

Die Unternehmung in der volkswirtschaftlichen Mikrotheorie ist ein Idealtypus, ein Konstruktionsbegriff

English translation: The firm in economic microtheory is an ideal type, a theoretical construct.

This fiction works especially well under competition, where deviations average out. Monopoly and oligopoly complicate matters, since strategic discretion requires closer knowledge of real firms. Machlup’s distinction is subtle: models need not be realistic, but they must be relevant.

Part IV explains why macro theory had gained prestige. Depression shifted attention from optimal allocation to unused capacity; war planning displaced price allocation; postwar economics elevated growth. Yet growth itself cannot remain purely aggregative: saving incentives, technical knowledge, entrepreneurship, taxation, and risk-bearing all require micro analysis.

The conclusion refuses a theatrical victory. Machlup rejects macro triumphalism without rejecting macroeconomics:

Dennoch muß mein Urteil so lauten: kein Sieger und kein Unterlegener.

English translation: Nevertheless my verdict must be as follows: neither victor nor vanquished.

Micro and macro have always coexisted and will continue to do so. Still, he grants micro theory a philosophical primacy: scientific curiosity should not rest with aggregate functions when they can be understood through individual plans, expectations, prices, and responses. The work remains relevant as an early, balanced statement of the microfoundations problem—one that defends macroeconomics while warning against treating aggregates as self-explanatory.