Micro and Macro: The Economic Divide

Source details

Economics is divided into macroeconomics (the overall economy) and microeconomics (individual markets).
Macroeconomics studies employment, gross domestic product, and inflation; microeconomics studies supply and demand in single markets.
The government is a major object of macroeconomic analysis; macroeconomics often extends to the international sphere through trade, investment, and capital flows.
Microeconomic analysis applies to trade, industrial organization and market structure, labor economics, public finance, and welfare economics.

From the late 18th century until the Great Depression of the 1930s, economics was not split into micro and macro; early figures include Adam Smith (The Wealth of Nations, 1776) and David Hume.
Classical assumptions: markets in equilibrium or quickly returning to equilibrium after transient shocks.
The Great Depression exposed the inadequacy of classical theory to explain prolonged aggregate instability.
John Maynard Keynes’ The General Theory of Employment, Interest and Money (1936) founded macroeconomics as a distinct discipline, introducing the study of simultaneous equilibrium in goods, labor, and finance markets and the concept of "disequilibrium economics".

Microeconomics:
- Based on models of agents (consumers, firms) optimizing behavior.
- Assumes market clearing and ideal conditions in many models.
- Subfields: consumer demand theory, production theory (theory of the firm), market competition, imperfect information, general equilibrium.
Macroeconomics:
- Focuses on aggregates such as national income, savings, and the overall price level.
- Divided into long-run growth, short-run departures from equilibrium, and stabilization policy design.
- Stabilization policies include government spending and taxing actions and central bank monetary policy.
Intellectual organization:
- Microeconomics is described as unified with a common core across economists.
- Macroeconomics contains competing schools of thought (e.g., New Keynesian, New Classical), though divisions have been narrowing (Blanchard, Dell’Ariccia, and Mauro, 2010).

Both fields coexist and complement one another:
- Micro provides detailed behavioral foundations and insights applicable to policy and business decisions.
- Macroeconomics addresses aggregate phenomena that micro alone could not explain, especially when markets deviate from equilibrium.
Economists commonly identify as microeconomists or macroeconomists; scholarly publishing reflects the split (new journals titled Microeconomics and Macroeconomics).

Motivation: valid macro analysis should rest on microeconomic behavior of households and firms.
Approaches:
- Developing microeconomic foundations for macroeconomic models.
- Using very fast computers to simulate aggregates by summing large numbers of households and firms.
Status:
- It is "too early to say anything about the likely outcome of this effort."
- Within macroeconomics, progress continues in improving models, especially after deficiencies revealed by the global financial crisis that began in 2008.

Macroeconomics originated from empirical anomalies that classical theory could not explain; interpretation of those anomalies remains controversial.
Microeconomics evolved steadily from price-determination theory and lacks the same level of competing schools.
Econometrics is widely considered the third core area of economics, applying statistical and mathematical methods; advances in econometrics over the past century have enabled sophisticated analysis in both microeconomics and macroeconomics.

The macro/micro split is institutionalized across teaching and research.
Macroeconomic stabilization tools include:
- Government spending and taxing actions.
- Central bank monetary policy.
Microeconomic analysis illuminates policy effects on individual markets (e.g., minimum wages, taxes, price supports, monopoly) and informs public policy and business decisions.
Historical turning points: The Great Depression of the 1930s led to the rise of macroeconomics; Keynes’s 1936 work formalized the field.
Recent stresses on macro models stemmed from the global financial crisis that began in 2008.

F&D Magazine — "Micro and Macro: The Economic Divide" by G. Chris Rodrigo

spn1003 — Conclusions (excerpt)
- spn1003 — Conclusions (excerpt) (Markdown version)
- spn1003 — Conclusions (excerpt) (PDF)