Macroeconomics

Circulation in macroeconomics.

Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets.  This includes national, regional, and global economies.

CONTENT : A–F , G–L , M–R , S–Z , See also , External links

Quotes

Quotes are arranged alphabetically by author.

A–F

• Macroeconomics is the branch of economics that deals with the whole economy and the big picture. The behavior of smaller units within the economy including households, firms, and consumers is covered within microeconomics.
  • David Anderson, Cracking the AP Economics Macro and Micro Exams: 2004–2005 (2004), p. 225.

• Not only is it possible to devise complete models of the economy on hypotheses other than rationality, but in fact virtually every practical theory of macroeconomics is partly so based. The price- and wage- rigidity elements of Keynesian theory are hard to fit into a rational framework, though some valiant efforts have been made. … But if the Keynesian model is a natural target of criticism by the upholders of universal rationality, it must be added that monetarism is no better. I know of no serious derivation of the demand for money from a rational optimization. … The use of rationality in these arguments is ritualistic, not essential.
  • Kenneth Arrow, "Rationality of Self and Others in an Economic System", 1986
• The dictionary defines "economics" as "a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services." Here is another definition of economics which I think is more helpful in explaining how economics relates to software engineering.

  Economics is the study of how people make decisions in resource-limited situations.

  This definition of economics fits the major branches of classical economics very well.

  Macroeconomics is the study of how people make decisions in resource-limited situations on a national or global scale. It deals with the effects of decisions that national leaders make on such issues as tax rates, interest rates, foreign and trade policy.

  Microeconomics is the study of how people make decisions in resource-limited situations on a more personal scale. It deals with the decisions that individuals and organizations make on such issues such as how much insurance to buy, which word processor to buy, or what prices to charge for their products or services.

  • Barry Boehm, "Software engineering economics," Software Engineering, IEEE Transactions on 1 (1984), p. 4.

• Inflation is bad for growth—this has become one of the most widely accepted economic nostrums of our age. But see how you feel about it after digesting the following piece of information.

  During the 1960s and the 1970s, Brazil’s average inflation rate was 42% a year. Despite this, Brazil was one of the fastest growing economies in the world for those two decades—its per capita income grew at 4.5% a year during this period. In contrast, between 1996 and 2005, during which time Brazil embraced the neo-liberal orthodoxy, especially in relation to macroeconomic policy, its inflation rate averaged a much lower 7.1% a year. But during this period, per capita income in Brazil grew at only 1.3% a year.

  If you are not entirely persuaded by the Brazilian case—understandable, given that hyperinflation went side by side with low growth in the 1980s and the early 1990s—how about this? During its ‘miracle’ years, when its economy was growing at 7% a year in per capita terms, Korea had inflation rates close to 20%-17.4% in the 1960s and 19.8% in the 1970s. These were rates higher than those found in several Latin American countries … Are you still convinced that inflation is incompatible with economic success?.

  • Ha-Joon Chang, "Mission impossible?; Can financial prudence go too far?, There is inflation and there is inflation," ch. 7 of Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008), pp. 139–140.

• Gore Vidal, the American writer, once described the American economic system as 'free enterprise for the poor and socialism for the rich'. Macroeconomic policy on the global scale is a bit like that. It is Keynesianism for the rich countries and monetarism for the poor.
  • Ha-Joon Chang, "Keynesianism for the rich, monetarism for the poor," ch. 7 of Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008), p. 142.

• Macro-economic policy had accelerated the "expulsion" of landless peasants from the countryside leading to the formation of a nomadic migrant labor force moving from one metropolitan area to another.
  • Michel Chossudovsky, "IMF Shock Treatment in Peru," ch. 14 of The Globalization of Poverty and the New World Order (2nd ed., 2003), p. 200.

• Macro-economic reform undermined the legal economy, reinforced illicit trade and contributed to the recycling of "dirty money" towards Peru's official and commercial creditors.
  • Michel Chossudovsky, "IMF Shock Treatment in Peru," ch. 14 of The Globalization of Poverty and the New World Order (2nd ed., 2003), p. 225.

• So-called macroeconomics has never been real economics but rather an endless series of engineering-type models purporting to guide politicians in centrally planning an economy.  In the bizarro world of macroeconomics all capital is the same, and all workers are the same, as one big lump, expressed as 'K' and 'L' in the models.  Relative prices and their role in allocating resources in a market economy are mostly ignored, while 'economic aggregates' are said to influence 'the' price level.

  In macroeconomics it is taken as a given that markets are incapable of allocating resources in an acceptable way; that's why there is supposedly a need for macroeconomic central planning in the first place.  No such 'failures' are assumed on the part of the macroeconomic central planners.

  • Thomas J. DiLorenzo, in "Greenankeism (Or, Beware the New Yellow Peril)," (21 March 2009).

G–L

• While many of the conflicting claims can be reconciled in terms of the short-run and long-run orientation of Keynesians and monetarists, respectively, and in terms of their contrasting philosophical orientations, neither vision takes into account the workings or failings of the market mechanisms within the investment aggregate.

  Austrian macroeconomics is set apart from both Keynesianism and monetarism by its attention to the differential effects of interest-rate changes within the investment sector, or—using the Austrian terminology—within the economy's structure of production.

  • Roger W. Garrison, "Is Milton Friedman a Keynesian?," in Dissent on Keynes, ed. Mark Skousen (1992).

• Accounting for the artificial boom and the consequent bust is not part of Keynesian income-expenditure analysis, nor is it an integral part of monetarist analysis.  The absence of any significant relationship between boom and bust is an inevitable result of dealing with the investment sector in aggregate terms.  The analytical oversight derives from theoretical formulation in Keynesian analysis and from empirical observation in monetarist analysis.  But from an Austrian perspective, the differences in method and substance are outweighed by the common implication of Keynesianism and monetarism, namely, that there is no boom-bust cycle of any macroeconomic significance.
  • Roger W. Garrison, "Is Milton Friedman a Keynesian?," in Dissent on Keynes, ed. Mark Skousen (1992).

• To take what might seem an "objective", macro-economic approach to the origins of the world economy would be to treat the behavior of early European explorers, merchants, and conquerors as if they were simply rational responses to opportunities—as if this were just what anyone would have done in the same situation. This is what the use of equations so often does: make it seem perfectly natural to assume that, if the price of silver in China is twice what it is in Seville, and inhabitants of Seville are capable of getting their hands on large quantities of silver and transporting it to China, then clearly they will, even if doing so requires the destruction of entire civilizations. Or if there is a demand for sugar in England, and enslaving millions is the easiest way to acquire labor to produce it, then it is inevitable that some will enslave them.
  • David Graeber, "Age of the Great Capitalist Empires," ch. 11 of Debt: The First 5,000 Years (2011), p. 314.

• The world probably would have been much better off had macroeconomics never been devised.  Although I have in mind Keynesian macroeconomics above all, I include other types of macro models as well.  I even include, somewhat reluctantly, the whole quantity theory approach descended from David Hume to the Friedmanites, now known as monetarism.
  • Robert Higgs, "Is Macroeconomics Really Economics?," The Beacon (Independent Institute, 14 August 2014).

• Most macroeconomics of the past 30 years was spectacularly useless at best, and positively harmful at worst.
  • Paul Krugman, Lionel Robbins Lecture at the London School of Economics (June 2009).

• It is likely that many modern economists would have no difficulty accepting Hayek's statement of the problem (of macroeconomics) as roughly equivalent to their own. Whether or not this is so, I wish … to argue that it should be so, or that the most rapid progress toward a coherent and useful aggregate economic theory will result from the acceptance of the problem statement as advanced by Hayek.
  • Robert Lucas, Jr., "Understanding Business Cycles," in Studies in Business-Cycle Theory (1981), p. 216.

M–R

• If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes.  Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics.  His insights go a long way toward explaining the challenges we now confront.
  • N. Gregory Mankiw, "What Would Keynes Have Done?" in New York Times (28 November 2008).

• The field of economics is traditionally divided into two broad subfields.  Microeconomics is the study of how households and firms make decisions and how they interact in specific markets.  Macroeconomics is the study of economy wide phenomena.  A microeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effects of compulsory school attendance on workers' earnings.  A macroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy's rate of unemployment, or alternative policies to promote growth in national living standards.  Microeconomics and macroeconomics are closely intertwined.  Because changes in the overall economy arise from the decisions of millions of individuals, it is impossible to understand macroeconomic developments without considering the associated microeconomic decisions.
  • N. Gregory Mankiw, Principle of Economics (6th ed., 2012). p. 27.

• Professor Ohlin also made an important contribution to what now might be called the macro-economic aspects of a country's balance of payments. In 1929 in the Economic Journal he engaged in a famous controversy with Keynes on the problem of transferring payments from one country to another across the foreign exchanges. In this he laid stress upon the income-expenditure effects of the reduced spending power in the paying country and of the increased spending power in the recipient country. In doing so he made use of the usual distinction between a country's imports and exports; but in addition he emphasised the importance of the less usual distinction between a country's domestic non-tradeable goods and services and its tradeable, exportable and importable, goods. I made some use of this latter distinction in my Balance of Payments; but looking back I regret that I did not let it play a much more central role in that book
  • James E. Meade, "The Meaning of 'Internal Balance'," Prize Lecture to the memory of Alfred Nobel (8 December 1977).

• During the relatively brief period in the late 1960s when economists were pondering the possible obsolescence of business cycles, the scholarly discipline of macroeconomics showed signs of becoming fragmented into speciality areas devoted to components of the then popular large-scale econometric models-for example, consumption, investment, money demand, and the Phillips curve. But more recently the revival of severe real world business cycles, together with the revolutions associated with Milton Friedman's monetarism and Lucas's classical equilibrium models, has brought about a revival of interest in economic analysis that focuses on a few broad aggregates summarizing activity in the economy as a whole-nominal and real income, the inflation rate, and the unemployment rate.
  • Robert J. Gordon, ed. The American Business Cycle: Continuity and Change, 1986. p. 2

S–Z

• The basic economic principles involved in discussions of the national economy are not overly complicated but two crucial misconceptions need to be guarded against: (1) the fallacy of composition and (2) assessing economic activity as if it were a zero-sum game, in which what is gained by some is lost by others. There are also sometimes misconceptions of the nature of government, leading to unrealistic demands being made on it and then hasty denunciations of the "stupidity" or "irrationality" of government officials when those demands are not met.
  • Thomas Sowell, Basic Economics, 4th ed. (2010), Ch. 18. Government Finance
• If we are to grasp the dynamics of this unforecasted storm, we have to move beyond the familiar cognitive frame of macroeconomics that we inherited from the early twentieth century. Forged in the wake of World War I and World War II, the macroeconomic perspective on international economics is organized around nation-states, national productive systems and the trade imbalances they generate. It is a view of the economy that will forever be identified with John Maynard Keynes. Predictably, the onset of the crisis in 2008 evoked memories of the 1930s and triggered calls for a return to “the master.” And Keynesian economics is, indeed, indispensable for grasping the dynamics of collapsing consumption and investment, the surge in unemployment and the options for monetary and fiscal policy after 2009. But when it comes to analyzing the onset of financial crises in an age of deep globalization, the standard macroeconomic approach has its limits. In discussions of international trade it is now commonly accepted that it is no longer national economies that matter. What drives global trade are not the relationships between national economies but multinational corporations coordinating far-flung “value chains.” The same is true for the global business of money. To understand the tensions within the global financial system that exploded in 2008 we have to move beyond Keynesian macroeconomics and its familiar apparatus of national economic statistics. As Hyun Song Shin, chief economist at the Bank for International Settlements and one of the foremost thinkers of the new breed of “macrofinance,” has put it, we need to analyze the global economy not in terms of an “island model” of international economic interaction—national economy to national economy—but through the “interlocking matrix” of corporate balance sheets—bank to bank. As both the global financial crisis of 2007–2009 and the crisis in the eurozone after 2010 would demonstrate, government deficits and current account imbalances are poor predictors of the force and speed with which modern financial crises can strike. This can be grasped only if we focus on the shocking adjustments that can take place within this interlocking matrix of financial accounts. For all the pressure that classic “macroeconomic imbalances”—in budgets and trade—can exert, a modern global bank run moves far more money far more abruptly.
  • Adam Tooze Crashed: How a Decade of Financial Crises Changed the World (2018)

• A central concern of macroeconomics is the upswings and downswings in the level of real output called the business cycle. The business cycle consists of alternating periods of economic growth and contraction. Business cycles are inherent in market economies.
  • Irvin Tucker, Macroeconomics for Today, (2008), p. 150.

See also

• Economics
• Gross National Product