Micro & Macro Economics
You may have heard of two kinds of economics: microeconomics and macroeconomics. Microeconomics looks at individual choices and incentives, while macroeconomics looks at economy as a whole. Rather than look at individual market supply and demand curves, macroeconomics aggregates (adds up) individual markets into one economy. This book is primarily microeconomic in nature, for a very important reason. All economics is microeconomic at its root. Microeconomics looks at people and how they make their choices. There are macroeconomic (or economy-wide) effects, but there are only microeconomic choices. In my view, the economic profession took a serious detour in the 1930s with John Maynard Keynes’ General Theory, which focused on insufficient effective (aggregate) demand as the source of economic problems. This began the profession’s focus on aggregate demand and aggregate supply analysis, as if these are two knobs that can be pulled by policymakers. Given the introductory nature of this book, it’s doubtful you have heard of aggregate demand and aggregate supply—we’re going to keep it that way for now, since that analytical technique is particularly unfruitful for understanding the real economy. Even macroeconomic policy choices (such as the interest rates set by central bankers) operate through the choices of individual decision makers; we will therefore focus on individual choice. We will, however, highlight how individual choices can have macroeconomic effects where appropriate.
Here are two, parting, introductory thoughts. The great economic journalist Henry Hazlitt, in his book Economics in One Lesson, gave us the mark of a good economist: Everyone can see the immediate effects of a given choice, but only the good economist will see the final effects. As a professor in the field of economics, I will continually work to give you the tools to be able to trace out the final effects of a given action. For instance, when the government raises the minimum wage, everyone can see the initial result: those that have (and keep!) minimum wage jobs get a pay raise. But is that the final effect? You’ll have to wait until chapter 5 to get the details, but that is not the end of the story! Policymakers that make decisions based solely on short-term effects will often see results exactly opposite their intent—in the long run. But we all know what’s said about the road to hell . . . it’s paved with good intentions. I’ll make sure your economic thinking won’t go down that road!
The final introductory thought is about 1st vs. 2nd best worlds. Or you could say, the perfect vs. the good enough. A Christian worldview recognizes that we live in a fallen world; therefore there is no utopia until Christ returns! As we examine economic choices, we will often point out the ideal state (or the 1st best world); but we won’t stop there. We’ll spend quite a bit of time in the 2nd best world because it’s the world we usually live in. For example, when we come to the chapter on money, we’ll see that most countries have central banks and a 1st best world would have no central bank. But since we live in a world with central banks, we’ll see how to make them as effective as possible, while trying to minimize the harm they can do. Maybe you don’t even know what a central bank is at this point. Not to worry, you will! And more importantly, you must, as central bank actions (and many of the other policy choices we’ll study) have a tremendous effect on your life. Maybe you’re not convinced. But most of you would like to have lower interest rates on your future college loans; most of you would prefer your savings account pay a higher interest rate; many of you would like a job when you finish school. Our study will show you how policy actions can affect many of the day-to-day aspects of our lives.
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