Macroeconomic theory is a large and complex field that encompasses different schools of thought. Here are some of the main schools of macroeconomic theory:
Table of Contents
The classical school
The classical school of economics generally referred to itself as the study of “political economy”. He did not distinguish between microeconomics and macroeconomics as we do today, but his theories were based on the work of Adam Smith, David Ricardo, Jean-Baptiste Say, Robert Malthus, John Stuart Mill and d ‘others.
Some of the concepts promulgated by the classical school are incorporated into our macroeconomic perspective, if only for comparison with later macroeconomic thinking.
Read Also: Contribution Margin Calculation Explained
One of the tenets of this thinking was wage and price flexibility, which is generally rejected today on the basis of empirical evidence and theoretical challenges.
The Keynesian school
This is the approach initiated by John Maynard Keynes and developed by many economists, including Sir John Hicks, Lawrence Klein, Franco Modigliani, Paul Samuelson, Robert Solow and James Tobin. Professor Alan Blinder of Princeton University has observed that there are six basic tenets of Keynesian economics.
“A Keynesian believes that aggregate demand is influenced by a multitude of economic decisions, both public and private, and sometimes behaves erratically.”
Read Also: Understanding Balance of Payments Calculation
“According to Keynesian theory, changes in aggregate demand, whether anticipated or not, have their greatest short-term effect on real output and employment, not on prices.”
“Keynesians believe that prices, and especially wages, respond slowly to changes in supply and demand, leading to periodic shortages and surpluses, especially of labor.”
“Keynesians don’t think the typical level of unemployment is ideal, partly because unemployment is subject to the whim of aggregate demand, and partly because they think prices adjust only gradually.”
Read Also: How can I start mining cryptocurrencies?
“Many, but not all, Keynesians advocate militant stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems.”
“Finally, and even less unanimously, some Keynesians are more concerned with fighting unemployment than beating inflation.”
Monetarism
The monetarist school was initially based on the quantity theory of money, which uses the exchange equation (denoted MV = PQ, where M is the money supply, V is the velocity of money, P is the price level and Q is real output, and PQ is also equal to nominal GDP).
Read Also: Solvency Ratio Calculation Explained
From this exchange equation, a monetary theory was constructed based on assumptions of velocity stability (which empirically is no longer the case if it ever was) and the quantity (Q) is also invariant (fixed).
For velocity (V), it was assumed to be fixed (or relatively) because it depends on population, trade volume, people’s habits (to hold money) and type of system financial position – all factors assumed to be unrelated to the value of money.
Similarly, the quantity (Q or real GDP) has also been assumed to depend on factors that are unrelated to the value of the currency, including factors such as the abundance of natural resources in the country, production methods , labor skills and the country’s infrastructure.
Read Also: Value at Risk (VaR) Calculation Explained
Therefore, it showed that the currency and the price level were directly related. From this beginning, the monetarist school evolved towards the idea that the supply of money was the cause of inflation and/or economic activity.
It has evolved from its heyday in the 1960s and 1970s by advocating rules-based growth of the money supply or interest rates, which has become part of today’s new classic and “new monetary consensus” approaches.
Some people who were instrumental in the monetarist movement in the 1960s were the University of Chicago professor. Milton Friedman, Professor Karl Brunner of the University of Rochester and Professor Carnegie Mellon.
Allan Meltzer. One of the enduring views of this perspective is that over the long run, changes in the quantity of money lead to proportional changes in the long-run price level.
New classical school/new monetary consensus
The neo-classical (or neo-classical) school, also sharing similar ideas with the real business cycle or rational expectations approach and the neo-Keynesian school, tries to integrate the fundamentals of microeconomics into its theory macroeconomic.
This school of thought grew out of the work of Robert Lucas and was developed by Thomas Sargent, Neil Wallace and others and evolved into what some economists call the new monetary consensus.
Neoclassical economists believe that individuals choose the best choices available given prices and wages to move quantities supplied equal to quantities demanded (equilibrium) without the need for discretionary fiscal policies and that monetary policy can control the inflation.
As such, early work on this theory only argued for policy adjustments by monetary authorities, but after the 2008 global financial crisis, some proponents accepted the need for fiscal policy to complement monetary policy, but these policies largely focus on longer-term aggregate supply. – secondary factors.
Despite recognizing the need for some fiscal policy at times, this economic outlook largely assigns the stabilizing role to monetary policy by using some type of rule to set interest rates.
If aggregate demand is too high and creates high inflation expectations, the central bank must raise interest rates and vice versa. The main channel through which this theory works is the control of expectations.
austrian school
The Austrian school of macroeconomics focuses largely on the theory of capital and the business cycle and tends to adopt a free market solution to an equilibrium between aggregate supply and demand.
In the absence of fiscal and monetary policy attempts to stabilize the business cycle, the Austrian school argues that the economy will eventually find its equilibrium without any misallocation of resources.
This perspective also agrees with monetarist Milton Friedman’s view that “inflation is always and everywhere a monetary phenomenon”.
The economists behind this school include Carl Menger, Eugen Böhm-Bawerk and Ludwig von Mises.
School of Modern Monetary Theory (MMT)
MMT is based on the idea that a sovereign nation that issues its own currency cannot be forced to default on the debt it has issued, which is denominated in its own currency since the country can always create more money to pay his debt.
This perspective developed in the 1990s has been described as “descriptive” and “distinct from the policies advocated by MMT proponents”.
Descriptively, Professor Stephanie Kelton observed that “To describe the Modern Monetary Theory (MMT) project in a single sentence, I would say that it is about replacing an artificial [federal deficit constraint] with a of inflation.
So there are limits [to government deficit spending]. But the limit is not a predetermined numerical level or a percentage of the budget. There is no strict financial constraint. A currency-issuing government can afford to buy anything sold and sold in its own currency.
The limit [to] expenditure, [however, is] not the expenditure itself, nor the deficit, [but] the limit is inflation. This is at the heart of MMT. L. Randall Wray, Warren Mosler, Bill Mitchell, Stephanie Kelton, and Scott Fullwiler are among the developers of this perspective.
Conclusion : schools of macroeconomic theory
It should be noted that these schools of thought are often the subject of debate and evolution over time. Economists hold differing opinions on many aspects of macroeconomic theory, leading to ongoing debate and theoretical developments.