Macroeconomic Systems

Krish Bhaskar, David F. Murray

• Publisher: Routledge
• Year: 2015
• Print ISBN: 9780367239824
• eBook ISBN: 9781317387046
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This volume, originally published in 1976, creates a basis from which the specialist topics of macroeconomics can be approached. The first section deals exclusively with a simple classical and Keynesian model within a single common framework to facilitate easy comparison. Although simple models, they provide a sound starting point for the more advanced ideas which make up the second part of the book. Recognizing tht one of the crucial purposes of macroeconomics is to provide advice for central government policy makers, the policy implications of the models are discussed.

INTRODUCTION AND HISTORICAL PERSPECTIVE

This book has been written for the student who has completed a basic introductory macroeconomics course and is now taking a more advanced course. Its main aim is to create a basis from which the specialist topics of macroeconomics can be approached. The first section deals exclusively with a simple classical and a simple Keynesian model within a single common framework to facilitate easy comparison. These models are simplistic but they provide a sound starting point for the more advanced ideas which form the bulk of section 2. The second aim is to recognise that one of the crucial purposes of macroeconomics is to provide advice for central government policy makers. Throughout the book, therefore, we return to the policy implications of the models which are discussed.

As far as possible, the use of mathematical analysis has been kept to a minimum and the models and theories have been explained both verbally and diagrammatically. In most cases, however, we have provided a mathematical specification of the model in order to show that mathematics is merely a shorthand means of expressing ideas. In addition there are a few points where we have considered it necessary to use a mathematical analysis. The student who has only a limited understanding of mathematics should have no trouble with the vast majority of the text but it is important to stress that much of the newer theoretical and empirical work utilises mathematical and econometric techniques. An understanding of at least basic linear algebra, calculus and statistics is a very great advantage in reading the literature.

Although a study of macroeconomics has a long history it was not until the early part of this century that the ideas began to be formalised. The views of economists such as Fisher, Marshall and Pigou were based largely on Say’s law and the quantity theory of money and their ideas all fell within the broad category of what we now term classical economics.¹ Included in the ranks of these classicists was Keynes: his gradual break away from the classical tradition began with his Treatise on Money² in 1930 and continued more importantly with The General Theory of Employment, Interest and Money³ in 1936. In this latter work Keynes switched the emphasis of macroeconomics from the determination of the price level to the determination of output and employment. This change was stimulated by the great depression of the early 1930s and because his work showed a way of dealing with this depression it quickly gained wide acceptance.

The General Theory, however, did not present a logical system of ideas but rather was a statement of a general view of particular elements of the macroeconomic system. Indeed Keynes did not favour mathematical models because of their alleged inflexibility. It was, therefore, open to interpretation and by the early 1950s the Keynesian income-expenditure approach had been derived from the original work and formed the mainstream of Keynesian thinking. Typical of this approach was the Hicks-Hansen ISLM analysis. For many years the income-expenditure interpretation of Keynes was almost universally accepted by academics and central governments alike.

Classical economics, however, had not been completely forgotten and in the late 1950s and early 1960s Friedman⁴ produced a restatement of the quantity theory on a more rational basis. The basic conclusion of this work, which was supported by much empirical evidence, was that the stock of money is the major determinant of the level of economic activity. This was the start of the revival of interest in monetary economics and monetary policy. At the same time there was increasing disillusionment with Keynesian fiscal policies which reached a head in the middle to late 1960s. The increasing emphasis on monetary policy was rather more noticeable in the US than the UK although neither has abandoned the use of fiscal policy. The doubts which were cast on Keynesian economics have also led some economists, such as Leijonhufvud⁵ to return to Keynes’ original writings and consider alternative interpretations of his ideas. This reexamination seems to lead to the conclusion that in some areas Keynes own work is closer to the classical economics from which it was derived than the Keynesian economics which followed.

Before we start our discussion of particular macroeconomic systems we shall consider the model framework we intend to use. It was Keynes who first brought all the components of a macroeconomic model together and our framework is derived largely from his work and the income expenditure interpretation of it. We shall also consider at this stage the allied problems of aggregation and introduce the range of problems facing central government policy makers.

Notes and References

1. Some of the economists that we have brought into the classical net are often called neo-classicists. The distinction is not really important at this stage.

2. J. M. Keynes, A Treatise on Money, Macmillan, 1930.

3. J. M. Keynes, The General Theory of Employment, Interest and Money, Macmillan, 1936.

4. M. Friedman, Studies in the Quantity Theory of Money, Ed. M. Friedman, University of Chicago Press, 1956.

5. A. Leijonhufvud, On Keynesian Economics and the Economics of Keynes, Oxford University Press, 1968.

1 MODELS AND ANALYTICAL TECHNIQUES

Models

In any economic system there are an immense number of variables which appear on a priori grounds to be of interest to an economist. These variables relate to all the economic activities of firms, households, the government and other sectors of an economy. Economists are essentially concerned with two features of this complex system. Firstly, they try to understand the relationship which exists between the variables in the economy and hence find explanations for the economic decisions which are made. Secondly they endeavour to use this understanding to make predictions about some aspect or other of the economy. It is because modern capitalist economies are so complex that it becomes necessary to consider a simplified version of the real world; that is to make ad hoc decisions about which features of the economy are most significant and then consider the simplified relationships which result. This simplified abstract from the real world is called a model. Its advantages stem largely from the way in which it brings a complex economy within the scope of the understanding and analytical techniques of the economist. Its disadvantages result partly from the way in which the important elements of the economy are chosen on a priori grounds rather than as a result of empirical testing and partly because it is often difficult to establish the exact nature of the relationship between the simplified model and complex reality.

From the foregoing it is clear that the economic model builder is faced with a trade-off problem. The more simplified his model the easier it is to understand, analyse and manipulate but the further removed it is from the real world, the less rel...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Dedication
• Introduction and Historical Perspective
• 1 Models and Analytical Techniques
• 2 The Framework of a Macro Model
• 3 Macroeconomic Policy
• 4 The Classical System
• 5 The Keynesian Islm System
• 6 The Full Keynesian System
• 7 Keynes and the Classics
• 8 Keynes and Keynesians
• Introd@uction to Section 2
• 9 The Consumption Decision
• 10 The Investment Decision
• 11 The Demand for Money
• 12 The Supply of Money
• 13 The New Monetarism
• 14 The Labour Market1
• 15 Inflation1
• 16 Foreign Trade
• 17 Introductory Dynamic Analysis
• Index