Macroeconomic Problems

In exploring the nature of the wealth of nations (measurement of national product) and the causes of the wealth of nations (economic growth) we have been tracing lines of thought that emerge in a pretty obvious way from the work of Adam Smith. And, with some turnings we have noticed, economics did that for almost a hundred years after 1776. In the late nineteenth century, however, economics found a new focus that gave rise to the branch known as microeconomics. But yet another change of focus was to come in the 1930's.

In our study of macroeconomics, we are following the change of focus that happened in the 1930's. To get ahead of the story a bit, it was not a change in the minds of economists which caused this change of direction of economic thinking, but a change in the world. Production dropped sharply over a few years that came to be known as "The Great Depression." At the same time, "unemployment" emerged as a crucial social problem for market economies, one which at first threatened their survival. It appeared that microeconomics was not very suited for understanding the depression and unemployment, and many economists turned back to the macroeconomic focus of the founders of political economy a century before. A great leader in this change of orientation was John Maynard Keynes, who drew especially on the ideas of Thomas Malthus. Keynes' contribution was so crucial that a central school of thought in macroeconomics has ever since been called "Keynesian" economics. Keynes proposed a limited, but increased and very controversial, role of government planning and intervention in the economy as a means of solving the problem of unemployment, and most governments of noncommunist industrialized countries have followed that advice, though often with great reluctance. But because it has become central to economic policy in many major nations, Keynesian economics (right or wrong!) has had an important impact on the world. Thus, considerable attention will be given to "Keynesian" economics.

This is not to say that microeconomics has been abandoned. Microeconomics is still a vigorous and growing field within economics, and many economists still regard macroeconomics as less reliable and more controversial than macroeconomics. But in modern economics, macroeconomics is recognized as equal in importance with microeconomics.