Transformation from Microeconomics to Macroeconomics

Read this article to learn about the transformation from microeconomics to macroeconomics.

It would be of great use to understand that both micro and macroeconomics have been studied by various economists from time to time.

Mercantilists, Physiocrats and classical economists like Adam Smith, Ricardo and Marx were concerned with total income in the community and the behaviour of the economic system over a period of time.

The great Depression (1929-32) and unemployment endangered by it. Second World War and the desire of the underdeveloped countries to develop quickly attracted the attention of the economists towards the study of macroeconomics, which led finally to aggregative thinking and Keynes’ General Theory.

Thus, J.M. Keynes became the chief advocate of macroeconomics in recent times. In fact, his book ‘General Theory’ may well be described as ‘Aggregative Economics’. The desire to control business cycles and rapid economic growth of backward economies led economists like L. Walras, K. Wicksell, I. Fisher to contribute their mite towards the development of macroeconomic studies. There are certain branches of modern economic theory which could be classed wholly under macroeconomics, like Public Finance, International Trade, Banking etc.

Three distinct but related developments laid the foundations of the modern macroeconomics:

(i) In the 1920s and 1930s Simon Kuznets (the Nobel Prize winner of 1971) and the U.S. Department of Commerce laid the conceptual and statistical framework of national income accounts without which current macroeconomics would have been impossible. They provide the basic theoretically meaningful variables of macroeconomics, e.g., estimates of saving, investment, consumption etc., that play a vital role in short run macroeconomics.

(ii) According to Schumpeter, Walras’ work proved the magna charta, for general equilibrium theory. Similarly, Keynes’ ‘General Theory’ has been the theoretical magna charta for macroeconomics. He effectively inaugurated explicit macroeconomic model building and showed how the equilibrium of the economy as a whole could be described. It was as a result of Keynes’ work that the more elegant mathematization of his theory by Hicks and others became possible, who unleashed a vast quantity of latest model-building energy. This is the medium in which macroeconomics has been taught, discussed debated, or advanced ever since.

(iii) Finally, macroeconomics has shared the benefits of accelerated application of mathematical techniques to economic theory. As a result, both short-run and long-run macroeconomics have undergone vast mathematical development, so much so that static equilibrium models of Keynes have given way to dynamic sequential models both of growth and fluctuations.

The pre-Keynesian neglect of macroeconomic theory followed from its views that departures from full employment were strictly temporary. It argued that automatic forces of competitive markets will bring employment and output back to full employment level.

The fact that there were relatively few severe or prolonged depressions (at least during the first half of the nineteenth century) gave support to the above belief. Lapses from full employment being infrequent and short-lived could be easily explained away as exceptions to the full employment rule. Keynes was the first economist to present successfully an alternate macroeconomic theory of the determination of employment and output that explained why the forces of a free market economy did not assure sufficient aggregate demand that would automatically generate full employment. His ‘General Theory’ offered an explanation of the economic disaster of the 1930s that the U.S.A. and many other countries suffered.

As a result, during the decade following the appearance of the ‘General Theory’ economists engaged themselves to refining, building, analyzing and upholding the pioneer work of Keynes. Keynesian macro- economic theory was successfully applied during and after World War II to the problems of tackling inflation. From this macro theory flowed policy measures designed to lift the economy to the level of full employment to which automatic forces of free market economy failed to carry it. For these reasons macro-economic rose to prominence through the 1940s and 1950s from its earlier relative obscurity.

This large scale acceptance of the major parts of Keynesian macroeconomics over the past quarter century meant widespread rejection of large parts of classical macroeconomics. The self satisfaction that the economists felt in Keynesian macroeconomic theory proved to be short-lived ; because the various policy measures adopted during 1960s in U.S.A. and other countries failed to check ‘inflation’ or ‘stagflation’. In view of the experience during the 1960s to early 1970s, economists who believed that Keynesian macroeconomic know-how was sufficient to cope with the problems were greatly disillusioned.

Apparently, final solutions for the basic macroeconomic problems mentioned above had not been found. As such, Keynesian macroeconomic theory which started as a revolution against the classical orthodoxy and ended up with such success that by the beginning of 1960s it had itself become a new orthodoxy. Keynesian macroeconomics or revolution has in recent years been confronted with what has been called the monetarist counter revolution.

It seems safe to say that Keynesian orthodoxy is in the midst of facing a challenge that began in the early 1960s and as a result has been forced to recognize and correct its intellectual short-comings. It is not right to conclude that the Keynesian macroeconomics which has risen to such great prominence has been dislodged by the challenge of monetarism. It will, in other words, be granted that the monetarist attack led to some substantial qualifications, rethinking and amendments to Keynesian macroeconomics but no more than that.