Re: Query on teminology, was Re: . . .labor/gender issues/corporate...

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

At 05:42 PM 09/14/2000 -0500, you wrote:
> Could someone explain for non-economists the terms Micro- and
> Macro-economics. When did they arise? Are they tied to any particular
> theory/theories of economics or of the purpose of economics? Etc?

Micro deals with individual firms, consumers, markets, and goods, whereas
Macro deals with the national economy as a whole. I don't know who invented
this distinction.

Many economists -- usually of the laissez-faire-leaning neoclassical school
-- call the latter "aggregate economics," assuming that we can simple "add
up" individual elements to get the whole. There's a certain amount of truth
to this view, since Macro does deal with aggregates -- like total spending
on consumer goods -- and aggregate averages -- like the average price of
consumer goods.

Those who see themselves as "aggregate economists" are usually monetarists
(followers of Milton Friedman), new classicals (who believe that the
economy is always at full employment), or so-called "new Keynesians" (who
see unemployment and the like as arising from incomplete adjustment of
prices, especially wages, in the face of shocks that hit the system from
the outside). {Brad's article on monetarism in the _Journal of Economic
Perspectives_ recently shows that monetarism and new Keynesians are very
similar.)

One place where these economists go astray is when they treat the whole
economy as nothing but microeconomics writ large, as when the
"representative agent" (a modern version of Robinson Crusoe) is seen as
making consumption decisions for the economy or when an aggregate
"production function" is posited, in which "total labor" is combined with
"total capital goods" to produce "total output" in a regular and
predictable way. The latter fallacy was exposed by such authors as Piero
Sraffa and Joan Robinson (of Cambridge, England), but her views have
generally been ignored by the profession until recently, when the former
fallacy has begun to be rejected more and more. (Even so, the Cambridge
school doesn't get any credit.)

I think that reducing Macro to "aggregate economics" is a big mistake, as
do Keynesians (especially the minority "post Keynesians"). Marxian
economists should go along with this, but as usual, we're not very united.
Many Marxians, such as Doug and myself,  learn from Keynes and the more
enlightened Keynesians.

The reasons for rejecting "aggregate economics" include the fact that
shifts in the mixture of output between sectors affects the level of total
output, while redistribution between consumers (say, between capitalists
and workers) affects consumption. The world is essentially heterogeneous,
so we can't treat the economy as one big Crusoe.

Further, the various individuals interact with each other, according to
what some call "pecuniary externalities." This refers to the way in which a
plant closure doesn't simple affect the employees, but also affects the
businesses that sell to those employees, and thus the employees of those
latter businesses, and thus further businesses and employees. This latter
story is the famous "multiplier effect" which was invented by Richard Kahn
in the 1930s and made popular by Keynes. Marx says some similar stuff,
about how a slowdown in one sector can spread to others.

Third,  Macroeconomic events feed back and determine Microeconomic events.
For example, to me, a persistently low profit rate (calculated at the Macro
level) hurts what Keynes called "the state of long-term expectations"
(expected profitability), which in turn discourages large numbers of
capitalists from expanding, so that they don't spend on real investment in
factories and machines. (Keynesians would start with an analysis of
expectations, since their emphasis is on the subjective element.) In turn,
the slowdown or fall in real investment spending leads to a multiplier
effect, which hurts income and employment in many places in the economy.
With incomes falling and jobs less available, microeconomic behavior
changes radically.

Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine