Incentives and their aftermath

Don Boudreaux points to and explains an appealing alternative definition of the distinction between Micro- and Macroeconomics:

Dick attributes the distinction to the Swedish economist Erik Lindahl, who spells it out in his book Studies in the Theory of Money and Capital.

The distinction, as I understand it, is this:

Microeconomics focuses on the actions of individuals; it examines how individuals respond to incentives, as well as studies the various incentives that individuals in different circumstances confront. Gary Becker is a living example of a premier microeconomist.

Macroeconomics involves tracing out the unintended consequences of various actions and sets of individual actions. It studies the logic of the spontaneous, unintended order (or disorder, as the case may be) that emerges when each of many individuals respond to the incentives identified and classified by microeconomics. On this definition, Hayek is certainly one of history's greatest macroeconomists.

This reminded me of a long-ago comment on a blog far far away by Sasha Volokh regarding his view of the distinction between Micro and Macro:

[T]he Keynesian cross equations, properly just two equations in two unknowns (at most, three, if you take AD=AS, the statement of equilibrium, as a separate equation) where the next couple of lines are just you writing out the solution, is just algebra. Most undergrad macro is just algebra, while most undergrad micro is multivariable differential calculus.


What micro has to offer as compensation is that it's true.

Sasha's definition fits a bit closer to my old cynical view of the distinction:

Microeconomics is the set of all economics propositions, wrapped in obscurantist mathematics or no, within which one may possibly find the truth.


Macroeconomics is bollocks.

I was in a cranky mood. But certainly Lindahl's distinction seems to provide the most value added yet in determining the big and the small.

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Read Mark Skousen The

Read Mark Skousen The Structure of Production for a 101 course on a grand unification theory of micro and macro. Of course this lead me to read Mises and Rothbard who spell it out in detail in "Human Action" and "Man, Economy, State" respectively.

I've never been a big fan of

I've never been a big fan of macro.

Macro hardly exists apart

Macro hardly exists apart from micro anymore, as it adopts the same ludicrous core principles espoused by micro and insists on considering the behavior of a representative rational firm as the basis for many of it's argument. The main problem has been reducing Keynes theories to IS=LM, which had nothing to do with Keynes. Real Macro should use uncertainty principles to understand investments, should properly understand interest rates as being tied to the money market, and should acknowledge that investment is related to rational expectations of the future and not interest rates. Much of the tautological gobbeldy-goop expoused by Macro economics is a result of eschewing these important principles/

matt