A Macroeconomic Equilibrium as Captured in the AD-AS Framework CONCEALS Microeconomic Disequilibria

In all of the conventional macroeconomic approaches using the usual macro aggregates, there is only the vaguest of connections to the actual individual consumption and investment decisions responsible for movements of the aggregates usually captured through representative rather than heterogeneous agents. A shortcoming of using a representative agent as a microeconomic foundation is to overlook differences across economic agents. It is not through a representative agent that resources are allocated, but rather through interaction among different individuals and firms. Namely, a macroeconomic equilibrium as captured in the AD-AS framework conceals microeconomic disequilibria. It is not just the level of output that matters, but the composition of relative output and how goods and services are being produced (too much roundaboutness?) that matters for macroeconomic stability.

—Peter Lewin and Nicolas Cachanosky, “A Financial Framework for Understanding Macroeconomic Cycles,” Journal of Financial Economic Policy 8, no. 2 (2016): 273.