Micro Contrasted with Macro

by Don Boudreaux on September 26, 2005

in Uncategorized

Russ Roberts invited me to blog on an unconventional distinction between "microeconomics" and "macroeconomics."  Our GMU colleague Dick Wagner alerted me to this distinction, and I find it to be far more helpful than the familiar textbook distinction (which remains, in my view, still a distinction between Alfred Marshall’s approach and John Maynard Keynes’s approach).

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.

So a typical microeconomic insight, for example, is the recognition that a price cap on gasoline reduces suppliers’ incentives to supply and increases the quantities buyers’ seek to purchase.  A (confessedly simple) macroeconomic insight is the recognition that an unintended consequence of the price cap will be queues at gasoline stations and black-market dealings in gasoline.

A more elaborate macroeconomic insight is Carl Menger’s explanation of how money was not the creation of a conscious mind but, instead, evolved into use.

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