Wednesday, April 26, 2006

Micro versus Macro

An ec 10 student emails me:

I really enjoyed microeconomics, but have not enjoyed macroeconomics nearly as much. I feel like it's all thrown together haphazardly, with random connections being made without much justification being given for them.

One thing that particularly bothers me is the long term - short term distinction. In micro, the distinction made sense because when looking at firms one could focus on an individual firm and see over what time frame all costs were variable. In an economy as a whole, no such abstraction is even feasible for me.

Isn't the long term just a series of short term decisions? Don't central banks just decide each year what trade off they want to make on the phillips curve, and over the course of 20 years those 20 decisions will determine inflation and unemployment?

When I first studied economics as a freshman, I had a similar reaction. I liked micro a lot more than macro. Given this initial reaction, it may seem odd that I ended up a macroeconomist. Two things happened.

First, macro started to make more sense to me over time. The pieces started fitting together a bit better in my second course in macro (the intermediate course, which is ec 1010b and 1011b at Harvard). Because macro involves the whole economy at once, it is harder for introductory students to see immediately how the pieces fit together. But the more a person thinks about the issues, the clearer the overall picture becomes. I don't want to overstate things, however: Macro is less fully developed than micro. There is simply more we don't know, and so the field is intrinsically messier.

Second, even if the models of micro were more appealing to me, I became attracted to the questions of macro. When you read the newspaper, most of the big economic issues are macro issues, not micro issues. I know some microeconomists will take offense at this claim, but I think it is true. Consider: Economic growth, the business cycle, inflation, unemployment, fiscal policy, monetary policy, trade imbalances--these are things that laymen think economists should have insight into. And they are right: We should. I think this is what draws a lot of macroeconomists into the field.

On the other issue raised in the email: Isn't the long run simply the result of a series of short runs? Yes, that is true, but that is not always the most fruitful way to think about it.

Let me give you an analogy. Biological phenomena are simply the result of things happening at the level of subatomic particle physics, aggregated up. But that is not a particularly useful way to proceed if you are a biologist. Instead, biologists ignore particle physics (for the most part) and start with theories more directly useful for the things they want to study. Similarly, long-run economic models (such as growth theory) can ignore much of what is crucial for understanding short-run economic fluctuations (such as sticky prices and monetary nonneutrality).

Nonetheless, it would be nice if you could see one mega-model that incorporated both short-run and long-run forces. If you keep you studying macroeconomics, you will get there. (For a taste of more complete macro models, see my next post.)