Basics

from Peter Radford

For a variety of reasons I pulled Olivier Blanchard’s macroeconomics textbook off my shelf yesterday — I have the fifth edition which dates back to 2007. Or at least that’s how he begins his opening paragraph, he says he’s writing in mid-2007. So it would be easy to plunge into the book and start to look for evidence that Blanchard’s version of economics led us all to expect or predict the crisis that unfolded only a year later.

But that’s no what caught my eye. No I was interested in another aspect of the book: it has no introduction to what an economy is.

I find that strange. Very strange.

This is supposed to be a textbook about macroeconomics. The subject matter of macroeconomics is the economy, or, rather, aspects of the economy, but there’s no attempt to describe the economy. Instead it plunges in as if we all know what an economy is and that it is uncontroversial. It begins thus:

“When macroeconomists study an economy, they first look at three variables:

• Output — The level of production of the economy as a whole — and its rate of growth

• The unemployment rate — The proportion of workers in the economy who are not employed and are looking for jobs

• The inflation rate –the rate at which the average price of the goods in the economy is increasing over time”

So when macroeconomists study an economy they dive right in and study some variables. Do those variables describe what an economy is? They are clearly important, but why these three? 

I realize these first few paragraphs are just to introduce a student to the journey, so I went further to look what happened in the more detailed sections. A few pages on we get to read a description of those three key variables. Here’s the start of the ‘output’ description:

“Economists studying economic activity in the nineteenth century of during the Great Depression had no measure of aggregate activity (aggregate is the word macroeconomists use for total) on which to rely. They had to put together bits and pieces of information, such as the shipments of iron ore, or sales at some department stores, to try to infer what was happening to the economy as a whole.”

Blanchard then goes on to describe the accounting system that measures GDP.

But GDP is not the economy. It is a measure of some aspects of an economy. GDP provides grist for the analytical mill, but is far from being a description of what an economy is. It is roughly akin to a corporate income statement — it tries to measure what went on in a particular period, but it omits tons of interesting stuff and misses entirely anything akin to a balance sheet.

I won’t belabor the point further: economics, when it is taught, ought to begin with a discussion of what an economy is. This is especially important for students who are not going to delve much further and who will, thus, miss the detailed elaborations that Blanchard et al presumably give later on.

Economies are people doing stuff: stuff we all do. They are not time-series, accounting conventions, lines on charts, or equations in models. They are people going about ordinary life. How that activity then gets expressed — some of it — in the collective we call a market is something to talk about. Why is some activity in that collective and not in another collective such as a family? And so on.

The problem with diving straight into macro variables such as output, unemployment rates, and inflation is that it elides any contention in our arriving at the importance of those variables. It elides the conversation about what to count and what not to count. It avoids the entire discussion about the richness and diversity of real economies, about their complexity, about their inherent uncertainty, and thus about our need for humility in our study of them. Plunging in is an expression of the hubris of economists who want the world to imagine that we have a deeper understanding than we do.

It is an avoidance of reality. Students would do well to confront that reality early on. It makes what follows both more interesting, contextual, and human.

Blanchard, of course is not alone. His book is excellent — if you are in his camp of economists. It’s just that it begins in the middle and not the beginning. It describes only part of the journey. It’s rather like having a map where the cartographer omitted to tell you what it’s a map of. Instead the cartographer simply lets you know there will be roads, rivers, and mountains each of which will be discussed at length. They are what cartographers like to put on maps. That’s true. But it always helpful to know what place the map is of.

Isn’t it?