Chapter Summary
Most economists like microeconomics better than macroeconomics. One prominent macroeconomist has gone so far as to say that there is no such thing as macroeconomics -- only price theory (microeconomics) and monetary theory. Most economists probably wouldn't go that far. It is a bit quixotic to say that a field does not exist when there are hundreds, perhaps thousands, of people working in it and it is one's own field of specialization -- but many economists remain of the opinion that macroeconomic thinking, somehow, does not come up to the standard of microeconomic thinking.
This is no mystery. Microeconomics has a clean and clear logic that macroeconomics lacks. This is not to say that the logic of microeconomics is easy -- it is not -- but once one has spent some time with it, and it becomes second nature, it gives a reassuring coherence to microeconomics as a whole.
No wonder, then, that so many economists have tried to get rid of macroeconomics by reformulating it so as to make it a part of microeconomics. The New Classical ideas are one example of this. Since New Classical economists concede there are still unsolved problems with their ideas, and have not come up with solutions to those problems that even the New Classical economists themselves can agree are the solutions, it seems fair to say that New Classical Economics has not succeeded. At least not yet.
Nor should that be a surprise. Any attempt to bring macroeconomics within the logic of microeconomics faces a very difficult barrier. The assumption that gives microeconomics its tight logic is the assumption that no resource goes to waste -- that we are always on the production possibility frontier. And that means there can be no unemployment, at least in the sense of an excess supply of labor, since that would mean that we are not on the production possibility frontier. But unemployment, and the failure to get onto the production possibility frontier, are the central issues that macroeconomics is supposed to help us understand. If unemployment exists as an objective fact (and I believe it does) then the attempt to make macroeconomics part of microeconomics can never succeed.
That doesn't mean that the effort is wasted. New Classical Economics, in particular, has given us some important insights. The idea that expectations should be no less rational than other decisions that people might make in the economy is important, and one important aspect of that insight -- that expectations are unbiased -- seems to be true, to a good approximation. This has important applications in finance, as well as macroeconomics. The idea that unemployment can be understood as search has given us at the least a good model of one component of unemployment, frictional unemployment. In the latter part of this chapter, I have tried to show that this insight can be of some value, also, in dealing with other components of unemployment, at the cost of giving up some simplifying assumptions. In short, the Reasonable Dialog between the New Classicals and the Keynesians, new and old, has been productive; it has given light as well as heat. No doubt a committed New Classical economist would see the New Classical contributions in an even more positive light than that.
If some economists have wanted to get rid of macroeconomics, others have proposed to get rid of microeconomics. (This is a pretty old-fashioned view -- I have not heard it much lately). They claim that since microeconomics is based on an assumption that ain't so, we should throw the baby out with the bathwater -- "and burn the bassinet, too," as I heard someone say -- because macroeconomics is the only kind of economics worth having. But this is also too extreme. Once the overall level of employment is determined by macroeconomic equilibrium (Aggregate Supply and Demand), the allocation of the given amount of resources employed is important, and here microeconomic supply and demand have their key role. And there are very important problems and developments that only microeconomics can help us to understand.
So (I'm persuaded) both microeconomics and macroeconomics are here to stay -- and the Reasonable Dialog goes on, and we have much more to learn from it.
Chapter Summary
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