Lessons in Macroeconomics 1

In accordance with the pedagogical mission of this blog, and also in accordance with the desire to create a canonical heterodox text, which could serve as a focus point for a united opposition to orthodoxy, I am planning create a series of lessons, targeted at students with some minimal knowledge of conventional macro and micro. The first lession is given below:


This textbook takes a historical approach to macroeconomics. We will first teach the CLASSICAL ECONOMIC THEORY (CET), dominant before Keynesian economics. Then we will explain the events that created doubts about this theory. Then we will see how Keynes developed a new theory to explain these events. Then we will discuss further developments on this story, about how Keynesian economics was attacked, and something more or less equivalent to CET re-enthroned as the dominant economic paradigm. At all times, the economic theory will be related to actual historical events which were taking place, so that the relation between theory and practice becomes clear. Although we will try to provide the most elementary treatment possible, some familiarity with basic economic concepts will be very useful in following this textbook.

We will start by discussing one of the most basic laws of economics — price determination via equilibrium in supply and demand. This law tells us how prices are determined. As we will see later, this law is false. The student might ask: Why should we study this law, if it is false? To understand the behavior of the economic system, it is essential to understand how human beings react to the events around them. The theory of price as being determined by equilibrium between supply and demand is widely believed. Economists, policy makers, and others use this theory to understand what is happening in the world, and then take actions in accordance with this understanding. To understand how people who believe in these false theories behave, we must understand what these theories are. We will also try to understand how it happened that this false theory came to be widely believed.

The MAIN POINT here is that human beings take actions according to the theories that they believe in. To understand human behavior, we must understand the theories that guide this behavior. Whether the theory is true or false does not matter for this purpose. It is very important to note that in assigning this role to theories, we have already deviated drastically from the conventional methodology of economics. According to the conventional methodology embodied in CET, human beings act to maximize a utility function, regardless of what theories they believe in. Thus, according to conventional methodology, economic theories actually describe human behavior. We are operating at a meta-theoretical level; we consider economic theories as beliefs of some human beings, which guide their behavior. In terms of the framework that we are using here, we can describe conventional economic theory as follows [some of the terms are not defined precisely, because the precise specification does not matter for present purposes.]

Fundamental Axiom of CET: All human beings believe that the goal of life is to maximize lifetime utility of consumption, and they act to try to achieve this goal.

We will refer to people who satisfy this axiom as homo economicus. According to CET, human beings are robots who behave according to the law prescribed by the fundamental axiom. In contrast, our framework gives human beings choice and agency. People chose their beliefs, and can change these beliefs. They are free to act, according to the choices they make about their belief-systems.  We replace the fundamental axiom of CET by the idea that different people may have different goals in life, and they act to try to achieve these goals. The Zen Buddhists believe that desires to have and to not have are the source of suffering, and so the goal of life is to achieve indifference to consuming or not consuming. Muslims believe that moderation in consumption is best; excess consumption is harmful and prohibited, while abstaining from enjoying the gifts of God is also not recommended. Obviously, people with different beliefs would act very differently from homo economicus. More generally, people act in the world according to their belief systems. Thus we study belief systems in order to understand how people act, and not in order to decide whether the belief systems are true or false. Classical Economic Theory (CET) is a particular specialized belief system about the world which has a powerful grip on minds of an extremely powerful and influential group of people. Furthermore, this belief system is widely propagated via textbooks in university, as well as other media, so that various aspects and implications of CET have come to be widely believed. Therefore, it is important to study this belief system, because without knowing it, we would be unable to understand a lot of events which are happening in the world around us.

1 comment
  1. David Chester said:

    This is not the right way to teach macroeconomics. Its history is not as important as to what it is and how it works. Without fair exchange using money (as a replacement for barter) the value of the exchanged goods could not work properly hence the so called “laws of supply and demand” are less relevant to a more basic concept of equal value of exchanges, and we do not need to show variable on graphs to the student. Supply and demand are equal (have equal equivalent values) should be enough to begin.

    What is needed is a discussion of the various parts of the whole social system and how they fit together. Thus my kind of presentation in my recent book is more useful to a student than the patches of the system being given first (often with some missed out). The diagram and model found in my SSRN 2600103 (its open literature) are a good way for introducing the big picture and supply and demand come later, much later after money has been properly described and for which a history is worthwhile.

    These different approaches are all in my new book “Consequential Macroeconomics”, which I believe is a better and suitable way for students to learn what goes on, before they become confused with the detailed pieces. Can I send you an e-copy? write to me at chesterdh@hormail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: