Macroeconomics: Smart Choices for All?

Economics for Life: Smart Choices for All?

Economics for Life: Smart Choices for All?

Macroeconomics for Citizens

The essential concepts for macroeconomics are not as clear-cut. Economists disagree far more about macroeconomics than microeconomics. So I have incorporated that disagreement into the core of (Macro)Economics for Life as “the fundamental macroeconomic question.”

If left alone by government, do the price mechanisms of market economies adjust quickly to maintain steady growth in living standards, full employment, and stable prices?

Not only do economists disagree over this question, so do the politicians our students will be voting for, not only five years later, but for the rest of their lives. I believe the essential macroeconomic concepts students must know to answer that question for themselves — the macroeconomics they need to know as citizens—are included in this textbook.

Economics for Life: Role for Government "Hands-on"

Role for Government "Hands-on"

Where disagreements exists, this book divides economists, politicians, and citizens into two camps based on their answers to the fundamental macroeconomic question.

The “Yes—Left Alone, Markets Quickly Self-Adjust” camp believes that markets effectively channel self-interest to promote efficiency and economic growth, and are the most flexible way for the economy to adjust to changes. The “Yes” camp allows for business cycles, but believes they are caused largely by external shocks or government policies. Because they believe government failure is worse than market failure, they advocate, Chicago-style, a “hands-off ” role for government.

Economics for Life: Role for Government "Hands-off"

Role for Government "Hands-on"

The “No — Left Alone, Markets Fail to Quickly Self-Adjust” camp believes the self-adjusting mechanisms of markets can be slow and weak, so that business cycles, unemployment, and inflation will recur regularly unless the government steps in. The “No” camp believes business cycles are caused internally as unintended consequences of normally functioning markets — due tovolatile expectations, money and banking, and Keynesian-style coordination failures between input and output markets. Because they believe market failure is worse than government failure, they advocate a “hands-on” role for government.

I sympathetically present the strongest case for each camp. These camps, of course, are metaphors for extreme positions. No economist — or political party — fits entirely into either one. Think of the camps as the end points of a continuum along which economists and politicians are located. The extreme answers of the “Yes” and “No” camps are intended to sharpen students’ thinking about macroeconomic issues.

The core concepts include an aggregate supply and aggregate demand framework, complete with shocks and output gaps, that is developed in Macro Chapter 4. But the heart of the framework is the enlarged circular flow diagram, which recurs throughout the book.

Economics for Life: Enlarged GDP Circular Flow

Economics for Life: Enlarged GDP Circular Flow

I believe that most essential macroeconomic issues can be presented simply and intelligently using this diagram.

Concepts not covered in this textbook (the ones I let go) include:

  • Detailed measurement concepts like net domestic income at factor cost, chained-dollar real GDP, and differences between the consumer price index, GDP deflator, and chained price index for consumption.
  • Aggregate production function models.
  • Graphical models of the global loanable funds market.
  • Detailed formulas for the money multiplier and for alternative (Taylor, McCallum) monetary policy targeting rules.
  • Graphical derivation of the aggregate demand curve from the aggregate expenditure model.
  • Algebraic derivations of expenditure, tax, and transfer multipliers.

It is far more valuable, I believe, for most students to understand and apply the core economic concepts well — using the circular flow diagram to understand the “Yes, so government hands-off ” and “No, so government hands-on” answers — than to be exposed to a wide range of concepts they will not master and therefore will likely soon forget.