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A Much-Better (but Unfortunately Overlooked) Distinction Between Microeconomics and Macroeconomics

Daniel Kuehn's comments on this post prompt me to reprise this post from September 2005:

Micro Contrasted with Macro

Don Boudreaux

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:

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.

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.

On these definitions, Hayek was a macroeconomist (even though he emphatically rejected the use of Keynesian and monetarist aggregates).  Behavioral economists — including the John Maynard Keynes who argued that investors are fickle — do what Lindahl called "microeconomics."  Both "micro" and "macro" are important — and understanding people accurately at the "micro" level is useful for doing good work at the "macro" level.


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