Introduction
John Maynard Keynes is credited with discovering the principles of macroeconomics in the 20th Century. This recognition is insufficient and needs to be clarified. It must be acknowledged that Keynes, in effect, discovered the core principles of economics, itself. Up to that point an economy was treated as a governmental business enterprise. Keynes was the first to give evidence that economies operate on principles of their own and outside of market forces.
Keynes turned Say’s Law of the 19th Century on its head to show that demand creates its own supply. He was able to demonstrate that a minimum level of demand was necessary for an economy to produce the economic goal of full employment. He referred to this minimum level as the point of effective demand. Keynes further postulated that producers of goods and services cannot always provide for this effective demand on their own. The only actor available to ensure sufficient demand, in times of economic downturn, for example, was the national government.
Keynesian insights were not welcomed news by all. Entrenched interests saw his work as a threat to their position of authority. Managing an economy outside of financial principles was unacceptable to those benefiting from current policies. This led to a disunity in the profession. Eventually financial interests were successful in dividing the discipline of economics into two competing interests: microeconomics and macroeconomics.
Macro / Micro
In 1941, Pieter De Wolff presented a paper that gave mainstream economists a strategy to remain relevant. He interpreted the mechanics of an economy to be comprised of both a macro level and a micro level dynamic. His paper, "Income Elasticity of Demand, a Micro-Economic and a Macro-Economic Interpretation" set the stage for the bifurcation of the discipline. This was to become the original sin of the newly formulated economic profession.
Up to this point it was assumed that an economy needs little in way of management. Balancing the budget was sufficient for an economy to find its own level of equilibrium. A hands-off approach to economic policy was thought to result in equilibrium and produce full employment or what was thought to be maximum possible employment. The newly revealed need for oversight that Keynes brought forward was seen as heretical, and it tarnished the crown of traditional doctrine.
With the publication of the General Theory in 1936, the economic assumption of a guaranteed equilibrium was dismissed. Keynes was able to show with this publication that economies cannot recover from low demand endogenously without inflicting great harm. Keynes held and was able to show that for economies to maintain full employment, an effective demand must be ensured either by way of business investment and wages or, when necessary, by way of government intervention.
Having experienced the devastation of the Great Depression and the successes of Keynesian type economics in its mitigation of the devastation, financiers scrambled to remain relevant with a redefinition of the discipline. Introducing the tenets of microeconomics as a viable economic strategy, however, put the camel’s nose under the tent. It allowed financial principles to be subsumed under the banner of economics. In this alternative economic theory, the principle of laissez-faire was to be sold as a public good. The invisible hand of the market was deemed to constitute obligatory public policy. The law of supply and demand was to be taught as a core economic principle. Local competitive advantage and global comparative advantage were to be offered as prudent economic policy.
None of these microeconomic principles, however, apply to good economic policy. They are all financial principles best managed by business firms for their own benefit. An economy may rest upon a bed of strategic financial principles, but it is, itself, not subject to or governed by those same principles. Teaching these and other principles of finance has compromised the discipline of economics and has required the profession to become something it is not.
When policy makers take their collective eye off the stated goal of full employment, the less organized become the victim and, ultimately, we all lose. Fighting inflation by way of increased unemployment, for example, results in our cities become blighted with people experiencing homelessness. The historical inequities of racism are not addressed properly when full employment becomes a nice-to-have. Allowing great wealth to set social policy depletes financial resources needed to mitigate social inequities and, perhaps in the process, compromises democratic institutions.
Passing the Torch
Giving the classical doctrine of laissez-faire stature gave false equivalency to radically different approaches to public policy. It caused confusion and allowed the loudest voice to set the agenda. Imagining that economies can be managed both with governmental involvement and with a hands-free approach set the stage of bitter acrimony and worse.
Budding economists are caught in the lurch. Prospective economists are taught that an economy is both a market that required freedom from governmental constraints in order to work its magic and that an economy is not a market and required occasional intervention on the part of government. Students are taught conflicting theories with no resolution.
In his General Theory, Keynes cites what came to be known as microeconomics as a special case. He says that when effective demand is generated from business investments and from consumer activity, the economy is in equilibrium and is positioned for growth. He goes on the say, however, that tacit assumptions of classical economics “are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world’. In other words, there are times within the business cycle where an effective demand cannot be maintained and that financial principles alone are inadequate for maintaining full employment.
Microeconomics sets the corporate agenda. Allowing the financial community to set social policy has compromised our nation’s ability to meet societal goals and objectives. It has prevented the profession from engaging in a meaningful dialog with critical stakeholders and processes necessary to maintain full employment. Incorporating the principles of microeconomics into the discipline of economics has stultified the profession into a non-working whole.
Conflating finance with economics muddies the water. The financial community must give the profession of economics back to the economists. The discipline of economics is a social science and must be taught within the liberal arts curriculum. The profession of economics must attract public minded individuals who intend to advance the public good and not one’s own personal gain.
A Chinese proverb holds that the beginning of wisdom is to call things by their right name. Giving voice to financial principles under the banner of microeconomics does a disservice to the profession. We must reclaim the profession of economics from the corporate interests.
