Find out how macroeconomics works with an overview of Adam Smith and the invisible hand, the Keynesian approach and the Chicago school
Macro (big) is the opposite of micro (small). So macroeconomics is the opposite of microfinance, right? Sorry, things are never that simple in banking. Listen to our episode on microfinance to see what that’s all about. And listen to this episode so you’ll know how macroeconomics works. In fact, you’ll see that, in a way, the main role of macroeconomics is to simplify economics.
European Investment Bank economist Rozalia Pal tells A Dictionary of Finance podcast that:
Macroeconomics deals with the economic performance of aggregated individual actors (companies, or people). In other words, what you do with your money is microeconomics. What the EU does with its money is macroeconomics.
We also learn about the history and the approaches behind various schools of thought in economic studies:
The classical school of thought, led by Adam Smith, famous for his ‘invisible hand’ metaphor. Smith posited that the invisible hand of the market creates the desired equilibrium.
Keynesian economics: During the Great Depression, Rozalia tells us, many economists came to see the invisible hand as failing to working (or at least failing to work fast enough). So the thinking of John Maynard Keynes rose to prominence. The British economist advocated the use of monetary (meaning, focused on interest rates) and fiscal (focused on government spending and taxation) interventions to stimulate the economy.
Neo-Keynesians: Following Keynes, Paul Samuelson and Franco Modigliani developed his ideas using mathematical models.
Chicago school economics, also called the neo-classical approach, opposed the Keynesian view mostly by showing that government interventions only impact the demand side of the economy. As the supply side is left intact, the effects are only short-term. Milton Friedman promoted what is known as a monetarist approach, proposing a small, but steady expansion of money supply.
Does this sound like a simplification? Well, that’s what macroeconomics tries to do, Rozalia tells us. To take lots of different inputs and create an overarching idea.
Which makes A Dictionary of Finance kind of a “macropodcast”. Because this is what we try to do with financial and economic concepts. Or perhaps that should be “macrocast.” Let us know whether you prefer “macropodcast” or “macrocast” on Twitter (@EIBMatt or @AllarTankler).
