The new chairman of the FED will be Ben Bernanke, (analysis from Tyler Cowen), who appears to be a jolly good choice. What better moment for me to share with you thoughts on macroeconomics.
Traditional and typical textbooks distinguish between microeconomics (indiduals and firms) and macroeconomics (nations). There isn't any real difference between the optimization decision of an individual or a nation: variables such as savings and investment are equally applicable. If Alfred Marshall is the father of micro, then Lord Keynes is the emperor of macro.
Although efforts in the 1970s were made to inject choice (or "microfoundations") into macroeconomics, the result is a fairly mechanical distinction between the two: micro is lowercase letters, and macro is uppercase. If you have a micro solution, like "this", it's easy to turn it into a macro one, like "THIS". Just shout a little louder...
There is an alternative.
According to Erik Lindahl, back in 1939, microeconomics refers to the choice action of individuals, whereas macroeconomics is the often unintended consequences of when individual actions combine. Under this distinction we should be looking at emergent phenomena rather than free floating abstract aggregate variables. Instead of assuming a certain relationship between income and saving (a relationship that might be captured within a single number, like "MPS=0.2") we should instead focus on the more complex meshing of human plans, and the institutions within which plans can be reconciled.
Perhaps the best modern example of the Lindahl vision of macroeconomics is found in Thomas Schelling's book Micromotives and Macrobehavior, but the same analysis is evident in the works of Austrian economists such as Carl Menger and FA Hayek.
For more information on the fusion of Austrian-Swedish traditions, have a look at Richard Wagner's book projects.
I don't want to imply that I think modern macroeconomics is wrong, and should be abondoned. Because people think it matters, it does matter (ironically a subjectivist argument that macroeconomists might deny)... If ever I am in the position to teach a macroeconomicst course I will have three options:
- A history of macro thought, using The Red Book
- "How to read the Economist", a beginners guide to interest rates, exchange rates, international trade and stock markets
- A course in spontaneous order, building on Menger, Hayek, Schelling and Wagner, and applied to developing countries
I'd be happy to do any, but I believe the third option would be by far the more stimulating and enjoyable for students, and is the most necessary advance for the science of economics.
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