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Learning Macroeconomics

February 14, 2013

Macroeconomics is sometimes presented as if it is half of all economics. But macro is a rather small field of inquiry: What causes business cycles? Growth is sometimes lumped in, but it is really completely different and contains many non-overlapping concepts. You need to learn micro before you learn macro. It doesn’t make any sense to try to figure out recessions without knowing how the economy is supposed to look when it’s working right. No one would hire a car mechanic who had never seen a properly functioning engine. Business cycles are not the most important question which economics addresses – growth is. However, it is a fun subject to learn and I think I understand it pretty well.

The problem I have with macro textbooks is that they focus on the toolkit of PhD economists and not on the basics of how to tell what type of a recession the economy is in and what they appropriate policy responses are. Microeconomics is clearly useful for the average person in explaining the world. Macro is a lot more esoteric. While your entire class will be able to use micro to improve their everyday lives, how many will grow up to be central bankers? And for that matter, of the 12 members of the FOMC, 3 have no formal training in macroeconomics, two only have bachelors, and most with PhDs aren’t “world class” macroeconomists. Perhaps that speaks to the uselessness of formal economics training, or perhaps it just means unqualified candidates are chosen to be on the FOMC. But the questions which are asked of economists in the media, and the questions which I think students are interested in are predominantly macro: “Why is there inflation?”, “Why is there unemployment?”, “Why is the stock market so volitile?”, “Can you predict (some variable)?”, etc.

Here is the order I recommend learning macroeconomics:
Microeconomics – Take a class or read a text book or something until you understand supply and demand, comparative advantage, trade theory, incentives, all that biz.
Supply side theories of the business cycle – This stuff follows from micro and provides a pretty coherent view of how recessions could happen. Every recession has some micro-related problems associated with it, so why not learn this stuff first?
Money – How does adding it change how we analyze that economy.
Demand side theories – Once you have money, you can talk about how it can screw things up.
Finance and prediction markets – Learn about the stock market, banks, debt, EMH.
Case studies – Look at actual recessions through the lenses of various theories. Have students debate which theories might be the most applicable to each. IMO this is where the bulk of the class should be spent. Learn the basic toolkit, and dive right into the real world.
Other oddball theories? Minsky, MMT, Austrian, etc. Macro is full of theories which never gained widespread acceptance. I think every new theory you learn adds another way to think about the world and even if you decide that they are wrong, they can nonetheless refine your thinking.

Update:
Nick Rowe did a post on this topic.
Scott Sumners intro to money

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8 Comments leave one →
  1. December 10, 2013 8:46 pm

    Hi there.

    Great blog!

    I am an engineer who have commenced a self-study in economics.

    I started out by reading through the book: Intermediate Microeconomics: A Modern Approach by Hal Varian, which I found to be quite a good book that touches upon many subjects in microeconomics.

    I would now like to transition into macroeconomic theory and have decided that I will try to follow your recipe for doing so. Do you know of a book that you would recommend for a guy like me with no background economics, which will teach you some of the basics of macroeconomic theory? I am thinking of something that deals with definitions of measurements like cpi, gdp and other basic concepts which are necessary to know of before diving into different macroeconomic theories.

    Thank you in advance!

    /eds

    • December 11, 2013 12:36 pm

      Once you’ve read the articles I linked to, you could read N. Gregory Mankiw’s textbook. Be sure to get an older edition, because they are much cheaper and not that much different. I would also suggest listening to some Econtalks, especially Scott Sumner’s interviews.

      One thing to keep in mind through all this is that economists simply don’t understand the macroeconomy very well. Compared to physics or chemistry, we’re still wraping our heads around Newton’s laws and figuring out what atoms are. That sort of ambiguous environment can be exhiliarting, but also unsatisfactory to those who want concrete answers. Beware anyone who claims to have all the answers, and continually ask if the theories that people are peddling fit reality.

      • trovaerdig permalink
        December 13, 2013 10:10 am

        Thank you James.

        Your advise is much appreciated. I’ll look into Mankiw’s book and Sumner’s econtalks interviews.

        One of the reasons I started gaining interest in economics was precisely because I’ve run into people who claims that “mainstream economics” is fundamentally wrong, but I just don’t have the knowledge necessary to assess whether or not such claims are valid. I hope gain some more insights soon.

        Anyways, thank you very much for your time!

        /eds

  2. December 13, 2013 10:36 am

    If someone sounds like a crank, they probably are a crank. Read people with economics PhDs from Harvard, Chicago, MIT, or peer reviewed journals, etc. There are plenty of Austrians, Keynesians, RBCers, Monetarists, and new Keynesians in those categories, so you don’t need to dredge the depths of the internet to hear a variety of viewpoints.

    • trovaerdig permalink
      December 15, 2013 5:32 pm

      Hi again.

      Thank you for the response.

      Good point. In most cases it is indeed obvious whether or not an individual making statements about economic theory are cranks. Though in a few cases I do not think it is obvious to the layman.

      What is for instance your opinion on people like Steve Keen and Michael Hudson? Both have been attributed with having predicted the 2008 crises. Steve Keen seems to be of the opinion that close to all of mainstream economics is fundamentally wrong. This seems to me like an extraordinary statement and it seems a bit hard to believe. On the other hand it also seems like you can not ignore the guy completely, due to him being somewhat successful in predicting an event that most economists did not see coming. Michael Hudson is really harsh and at some point gets downright nasty when it comes to Chicago economists, but also he had some success in predicting the crisis.

      Thanks again.

      /eds

      • December 16, 2013 9:42 am

        No one who is not a billionare “predicted the crash”. Permabears like Steve Keen, Zero Hedge, and Nouriel Roubini aren’t really insightful. If you really think that an asset will fall in value, you can short it. If you are right, you will make money. If you are not, you will lose money. Read this article. It is a wonderful profilactic against bullshit.

        As far as theory goes, Keen is fine, but just try to get a variety of viewpoints. Both he and the Austrians spend far too much time engaging in abusive ad hoc attacks on their intellectual opponents rather than grappling with their ideas and coming up with counterarguments. You don’t learn anything from “this guy is wrong” articles. Focus on the core questions: what causes inflation, what causes unemployment, what causes financial crisises, etc.

  3. trovaerdig permalink
    December 22, 2013 7:32 pm

    Thank you.

    That makes sense. Good article – it helped clearing things up.

    Well, I’m grateful that you have taken the time to answer my questions. Now I have plenty of material for my self-study.

    Thank you again and I will definitely be visiting your blog regularly in the future!

    /eds

    • December 26, 2013 2:14 pm

      These days, I don’t post much macroeconomics unfortunately. Feel free to add my blog to an RSS feeder, but honestly, I wouldn’t recommend visiting the site manually on a regular basis. I just don’t blog that much anymore.

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