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The messy methods of macroeconomics
December 2017 / January 2018

I appreciate that this minority exists and is a nuisance; I also admit that every self-styled “social scientist” (including myself) has hidden political commitments. But, if the labour theory of value had to be accommodated in standard instruction and thinking, much of microeconomics and welfare economics would become moot. The overwhelming majority of economists — in the universities as well as in the worlds of government, finance and business — have rejected old-style Marxism, and accept the same body of microeconomic theory and the consequent doctrines of welfare economics. There is enough agreement here that — if economics were comprised only of microeconomics — its votaries could aspire to the status of a profession. They could do so, despite the Left’s far from silly attempts to intrude politics into subjects that purport to be technical and value-free.

Economists’ assertion of professional status is spurious not because of the relatively minor intellectual tensions in microeconomics, but because of the utter shambles that is macroeconomics. Macroeconomics is often seen as beginning with Keynes’s 1936 book The General Theory of Employment, Interest and Money. Whereas microeconomics looks to determine the prices and quantities of individual products in particular marketplaces, macroeconomics is about the determination of aggregates of demand, output and employment for an entire economy. While Keynes’s book was certainly a classic that pointed in new directions, it was also so badly written and abstruse that it was unintelligible except to experts. Most students have learned macroeconomics not from The General Theory, but from Paul Samuelson’s textbook Economics, which first came out in 1948. The Samuelson textbook has had 15 or so editions, as well as many imitators, and is by far the best-selling economics book of all time.

Samuelson avoided the harder parts of The General Theory, distilling its essence in a handful of equations that present “the Keynesian theory of national income determination”. To elaborate, output depends on aggregate expenditure, and aggregate expenditure is equal to the sum of consumption, investment and government spending. These identities are vacuous by themselves, but behaviour and meaning are introduced by making a sweeping claim. According to Samuelson interpreting Keynes, investment and government spending do not depend on national income, and in that sense are “autonomous”. Their autonomous character allows them to have a causative role in the determination of aggregate demand. (They are unlike consumption, which is said to depend on income.) A few lines of algebra are sufficient to show that national income is a multiple of autonomous expenditure, where the multiplier is the inverse of one minus the marginal propensity to consume.

If you want better to understand the notions of “the multiplier” and “the marginal propensity to consume”, you need to attend a first-year university economics course. At any rate, it should be obvious — even from the brief account in the last two paragraphs — that Samuelson’s interpretation of Keynes blesses government spending because of its supposed ability to regulate aggregate demand. Assume that omniscient, forward-looking economists know the value of the multiplier. Then they can tell politicians how much to change government spending in order to achieve particular levels of aggregate demand, national output and employment. All being well, the dials of fiscal policy can be set so perfectly that full employment becomes permanent and unquestioned.
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