Does having lots of economists ensure good macroeconomic policies?
No, since politicians, not economists, make major decisions
Macroeconomic research
Goal: to make general statements about how the economy works
Theoretical and empirical research are necessary for forecasting and economic analysis
Economic theory: a set of ideas about the economy, organized in a logical framework
Economic model: a simplified description of some aspect of the economy
This is a good point for you to talk about your own research interests. It has been found that students are very interested in learning about the kind of research their instructors do. You may want to talk about your research later, if and when you come to a section of the textbook that discusses the topic on which you do your research.
Usefulness of economic theory or models depend on reasonableness of assumptions, possibility of being applied to real problems, empirically testable implications, and theoretical results consistent with real-world data
Theoretical Application
The classic discussion of research issues by Milton Friedman is, “The Methodology of Positive Economics,” Essays in Positive Economics, Chicago: University of Chicago Press, 1953.
Analytical Problem 3 is an exercise in how to formulate and test a theory.
Data development—very important for making data more useful
Ill. Why Macroeconomists Disagree (Sec. 1.3)
Positive vs. normative analysis
Analytical Problem 4 gives students practice in distinguishing positive from normative analysis.
Classicals vs. Keynesians
The classical approach
The economy works well on its own; the “invisible hand” leads
people, acting in their own best interests, to maximize the general welfare
Wages and prices adjust rapidly to get to equilibrium
Result: Government should have only a limited role in the economy
Theoretical Application
At this point in the discussion, you may want to talk about philosophies of economics. Students are often fascinated by how philosophical differences arise and what they mean, especially for policy. This helps to reinforce the idea that the Keynesian and classical models are very different in their implications. You might suggest the idea that economists who are skeptical of government’s role in the economy are more likely to believe in a classical model, while those who believe the government can do good are more likely to become Keynesians. You can point out, however, that things are changing; some New Keynesians seem skeptical of government intervention.
The Keynesian approach
The Great Depression: Classical theory didn’t appear to work
Keynes: Persistent unemployment occurs because wages and prices adjust slowly, so markets remain out of equilibrium for long periods
Result: Government should intervene to restore full employment
Analytical Problem 5 asks students to distinguish between how a classical economist and a Keynesian economist would think about the same issue.
Theoretical Application
You may wish to add a discussion of the recent progression of research. You could start by a brief discussion of how the failure of Keynesian models in the stagflation of the 1970s led to the growth of rational-expectations modeling, with its focus on the importance of microfoundations. Then you could discuss New Keynesian macroeconomics (discussed in greater detail in Chapter 13) and its attempts to provide some microfoundations for wage and price stickiness in Keynesian models.
Although the textbook presents just a few versions of classical models and Keynesian models, it is difficult to find a prototypical classical or Keynesian economist who believes fully in that particular model. The lack of convincing evidence on which model is correct has led macroeconomists to be eclectic, so that they often hedge their bets. As a result, a one-armed macroeconomist is hard to find; analysis tends to be of the “on the one hand, and on the other hand” variety. And, of course, that means that if you laid all the macroeconomists on the earth end to end, they still wouldn’t reach a conclusion!
A unified approach to macroeconomics
Textbook uses a single model to present both Classical and Keynesian ideas
Three markets: goods and services, assets, labour
Model starts with microfoundations: individual behaviour
Long run: wages and prices are perfectly flexible
Short run: Classical case—flexible wages and prices; Keynesian case—wages and prices are slow to adjust
ADDITIONAL ISSUES FOR CLASSROOM DISCUSSION