In response to a list of five conventional macroeconomics textbooks, I compiled my own list of books to read on macroeconomics. They won’t necessarily cover what’s on the exam in a typical course, but they will help you become learned on the topic.
An excerpt from my short essay:
The late Charles Kindleberger was an economic historian, and I believe a historian’s perspective is crucial for looking at macroeconomics. After all, there are no repeatable experiments in macroeconomics, only historical episodes. Kindleberger looks at the most dramatic episodes in history, using the framework of financial instability developed by Hyman Minsky. Kindleberger is a better expositor than Minsky. Also, Kindleberger emphasizes the phenomenon of “displacement,” in which a sudden change in world conditions, brought about by a major new discovery or the outcome of a war, triggers a dangerous mania. My own thinking about macroeconomics is a combination of Kindleberger-Minsky and Fischer Black (below).
I would take a more radical approach. If I was teaching a macro econ course (in addition to editing my law blog, Bob Loblaw’s Law Blog), I would assign one article and end it at that. Why?
1) textbooks are boring,
2) macro econ is mostly voodoo, and
3) your average college student is going to forget most of what he/she learned anyways.
Might as well impart something enlightening, scientifically verifiable, and readily retainable.
Here would be my article candidate:
A Brief History of Economic Time
“Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture — but none of that stuff had much effect on the quality of people’s lives.”
https://www.wsj.com/articles/SB118134633403829656
Looks like you would have to pay for the article.
I’m unable to generate an ungated link (even though I’m normally able to do so with more recent WSJ articles with my subscription).
Not sure how long this will stay up, but here you go…
Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture — but none of that stuff had much effect on the quality of people’s lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.
Then — just a couple of hundred years ago, maybe 10 generations — people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.
Then it got even better. By the 20th century, per capita real incomes, that is, incomes adjusted for inflation, were growing at 1.5% per year, on average, and for the past half century they’ve been growing at about 2.3%. If you’re earning a modest middle-class income of $50,000 a year, and if you expect your children, 25 years from now, to occupy that same modest rung on the economic ladder, then with a 2.3% growth rate, they’ll be earning the inflation-adjusted equivalent of $89,000 a year. Their children, another 25 years down the line, will earn $158,000 a year.
Against a backdrop like that, the temporary ups and downs of the business cycle seem fantastically minor. In the 1930s, we had a Great Depression, when income levels fell back to where they had been 20 years earlier. For a few years, people had to live the way their parents had always lived, and they found it almost intolerable. The underlying expectation — that the present is supposed to be better than the past — is a new phenomenon in history. No 18th-century politician would have asked “Are you better off than you were four years ago?” because it never would have occurred to anyone that they ought to be better off than they were four years ago.
Rising income is only part of the story. One hundred years ago the average American workweek was over 60 hours; today it’s under 35. One hundred years ago 6% of manufacturing workers took vacations; today it’s over 90%. One hundred years ago the average housekeeper spent 12 hours a day on laundry, cooking, cleaning and sewing; today it’s about three hours.
As far as the quality of the goods we buy, try picking up an electronics catalogue from, oh, say, 2001 and ask yourself whether there’s anything there you’d want to buy. That was the year my friend Ben spent $600 for a 1.3-megapixel digital camera that weighed a pound and a half. What about services, such as health care? Would you rather purchase today’s health care at today’s prices or the health care of, say, 1970 at 1970 prices? I don’t know any informed person who would choose 1970, which means that despite all the hype about costs, health care now is a better bargain than it’s ever been before.
The moral is that increases in measured income — even the phenomenal increases of the past two centuries — grossly understate the real improvements in our economic condition. The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but I suspect that Tudor King Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of antibiotics and access to the Internet.
The source of this wealth — the engine of prosperity — is technological progress. And the engine of technological progress is ideas — not just the ideas from engineering laboratories, but also ideas like new methods of crop rotation, or just-in-time inventory management. You can fly from New York to Tokyo partly because someone figured out how to build an airplane and partly because someone figured out how to insure it. I’m writing this on a personal computer instead of an electric typewriter partly because someone said, “Hey! I wonder if we can make computer chips out of silicon!” and partly because someone said “Hey! I wonder if we can finance startups with junk bonds!”
Which contribution is more important? By one rough measure — the profits earned by the innovator — they’re about equal. In the late 1980s, Microsoft earned economic profits of about $600 million a year, while Michael Milken, the inventor of the junk bond, earned an annual income that was just about the same.
“Sustainability” has a clear and measurable alt-name in business economics.
Profit.
One can make a strong argument that the idea for Double Entry Bookkeeping is what allowed more profit oriented organizations to really start making more profit – since they knew more about what their real accounts were.
“Writing” was originally developed to track tax collection & trade payments.
Market transactions are win-win, and a lot of tech progress was oriented towards increasing market transactions.
Arnold, I recommend reading the new book “Macroeconomics as Systems Theory” de Richard E. Wagner (GMU econ professor who has published several interesting books on Public Finance and a close associate of Jim Buchanan for decades). Given your acquaintance with Math and Statistics, you may also be interested in the Ph.D. thesis of Abigail Deveraux “Synecological Systems Theory: An Alternative Foundation for Economic Inquiry” (GMU Econ 2020) written under Richard Wagner’s supervision.
Interesting choices and very charitable.
So random questions from a neophyte’s perspective that might perhaps amuse. Blame my better half for turning on the TV.
Searching the archives it appears that you acknowledge that Specialization and Trade is not significantly inconsistent with Austrian economics but is independent of that school. Are there any Austrian books that you would consider worthy of mention?
Could the same be said of the neo-Keynesian attempt to link micro- and macro? Maybe I didn’t search the blog with the right words, but it seems as if neither chapter 9 of the book nor any of your essays address this topic. Do you think of patterns of specialization and trade as related?
You have suggested that economists benefit from exposure to the inner workings of actual firms. You, like Gordon Tullock, spent years in the federal bureaucracy. Do you have any Tullock stories? You’ve written about public choice on many occasions. Do you see much transferable from the private to the public sector? Would one of the differences within bureaucracy be that greater specialization actually eliminates opportunity for trade/substitutes/alternative approaches in the public context and the returns from such specialization are rarely in the public interest? Your famous observations on “subsidize demand, restrict supply “ seems to me to deserve higher status. Would you consider this observation to be more macro- than micro? Are you aware of it making its way into any textbooks? I for one would like to see it more widely recognized.
I would add one short piece to Arnold’s list, which is the first section of the first chapter of Olivier Blanchard’s and Stanley Fischer’s “Lectures on Macroeconomics” (1989), “Introduction: Macroeconomic Facts.” Perhaps they have a later edition and, if so, it’d be worth reviewing. The noted section of their first chapter, akin to Ed Leamer’s “Macroeconomic Patterns and Stories,” lays out very long-run, high level facts about the macroeconomy, e.g. patterns of GDP growth, employment, inflation, etc. over many decades. In the end, the requirements for any sound macroeconomic theory is to explain these curious facts, which Blanchard and Fischer attempt to do in their book. BTW, their entire book is challenging and insightful and probably still timely even if 30 years old.
I don’t believe any of the books are discussing Hyper Asset Inflation – where the gov’t prints money and the prices of assets go up at a far more rapid rate than the prices of necessities and commodities.
We now have over 30 years of Japan having a huge national debt, some 220% of their large annual GDP, yet they are not suffering high inflation. How long does it have to go on to falsify the theory which says high national debt leads to high inflation?
30 years ago, I was sure it would.
20 years ago, I still thought it would.
10 years ago I started having serious doubts.
Now I don’t believe the debt will be the trigger, nor the key fuel for any big problems. Not in Japan. And not in the USA, which recently went over 100% annual GNP as national debt.
The primary purpose of “macroeconomics” is to help gov’t decision makers make better economic decisions. Macro metrics for gov’t are also often useful for businesses to help them make better plans.
Whenever macro is used by decision makers to justify a questionable decision, the value of macro becomes questionable — yet it is this quality of usability which makes macro so attractive to decision makers.
And activist Keynes over market-freeing Hayek allows far more gov’t power to be justified by macro theory.
Solyndra comes to mind as an example of gov’t boondoggles instead of successful winning investment selection.
As the man who jumped out of a window on the 10th floor and passed the 5th, “No problem so far!”
Ya I used to think Japan’s national debt was about a 10-30 story building they jumped out of. About 20 years ago.
Are you saying it’s a 60 story building, one story a year, and they’re only halfway down (5 of 10)?
Japan will have trouble before the USA if the US remains at a lower than Japanese level of debt/annual GDP.
Zerohedge cites Pete Schiff in support of your position:
https://www.zerohedge.com/markets/peter-schiff-weve-passed-point-no-return (March 17, 2020; big COVID market correction down)
” the laws of economics apply here just like they did in the Weimar Republic Germany, or Zimbabwe, or in Venezuela.
If we pursue the same monetary and fiscal policy they did, we’re going to receive the same monetary outcome they did.”
Schiff even uses the building jumping, which I’ve also heard before. He at least offers asset-buying advice to buy gold:
When the rally [in gold] really starts, it’s going to go ballistic. You are going to see a rush of money into gold, and we are going to see $100, $200, a $500 up day. It’s coming. Because what are you going to do? There is only so much food you can stock up on. There’s only so much toilet paper you can store in your house. So, if you’re not buying food, you’re not buying toilet paper, what are you going to buy? You’ve got to buy gold. Becuase if you want to buy food and toilet paper in the future, you’d better have gold. Because the problem is people are going to get wiped out when the dollar collapses.”
[Ron Paul was a ‘goldbug’ even when I supported his run for President as a Libertarian against Bush in 1988.] Schiff is also claiming that Hyper Asset Inflation will be mostly gold.
His timing is certainly wrong – the March correction was NOT hitting the pavement. But he’s right that there’s only so much food & clothes a reasonable person buys (maybe like I. Marcos about 3 thousand pairs of shoes?).
A couple weeks ago their readers answered the Q: where is the inflation?
https://www.zerohedge.com/news/2020-08-21/where-hyperinflation-zero-hedge-readers-response
I like their Summary:
To condense these great insights still further:
-Because of its psychological nature, hyperinflation is a constant threat.
-Current money expansion favours those closest to the source – banks, government and large institutions (Cantillon Effect). This continues to increase income inequality.
-Today’s monetary expansion is primarily caused by the need to service unsustainable debt. As new money increases debt this addictive cycle will not cease by its own accord.
-Fiat currencies have been constantly debased over decades (inflation).
-The reserve currency status of the US dollar gives the US greater freedom to print.
-If there was a credible alternative fiat currencies would likely hyper-inflate tomorrow.
No big mention of Bitcoin/ cybercurrency as a future alternative – but they’re not yet truly secure.
No mention of (nice) house asset inflation, tho financial assets are inflating. Like Apple stock:
https://nypost.com/2020/08/19/apple-becomes-first-us-company-to-reach-2-trillion-valuation/
Only 2 years ago Apple became the first $1 trillion market cap company.
Why can’t it keep doubling every 2 years — and absorbing all the USD that the gov’t prints/ borrows for mostly entitlements?
I don’t like this, and feel sure the situation will change sometime. But when the rich start selling Apple stock, what will they do with all their cash?
Maybe space rockets to Mars? or to the Moon? (a Harsh Mistress).
1 – Since the 1920s, Macroeconomics has been linked to national accounting (I assume that is the metric you talk about –yes, you should add other “aggregates”, including the sectorial accounts used in the construction of flows-of-funds statistics). This Macro based on aggregates has been the dominant framework to analyze a country’s economy since the GD under the assumption that this economy is closed but it may be open to transactions and transfers with other countries (post-WWII the Macro for Open Economies was “a big step” in the history of modern Macro). Also, post-WWII and thanks to J. Tinbergen and others this Macro was intended to be a tool for policy-making.
Unfortunately, most macroeconomists still have a poor knowledge of national accounts and other aggregates. They rely on them but they don’t care about their reliability. They have learned the “theoretical models” about the two sides of income (Y) –as the payment for output (PxQ) and as the payment of expenditures (C, I, G), with the necessary corrections for open economies (X, M, K) and if you are interested in inflation you may add the identity (Mo=kY). To apply the models you need to know well whether the available statistics are “good” proxies for the variables, but it’s faster to assume that they are.
2 – The 2008 crisis made clear that the dominant Macro framework lacked any explanation of how the stock K used for output Q was “owned” by consumers (the underlying assumption was that it didn’t matter). Forget about how K is measured (since the 1950s, hundreds of economists have been producing estimates of K for the second half of Macro –the Solow Macro of growth also based on a production function at an economy that produces just one “aggregate” good). In the 1960s, we learned how difficult was to introduce both “Money” and “Finance” into the dominant Macro framework. Friedman solved for “Money” by adding Mo=kY=k(PQ) and assuming k to be constant and therefore for a given Q, any increase in Mo implied a similar percentage increase in P. But nobody solved for “Finance” (forget about Minsky because his contribution was limited to explain Ponzi games –yes, I relied on Minsky to do my Macro analysis of the Latin American debt in the early 1980s). In addition to “Money” and “Finance”, there were serious problems to introduce “Government” even under the simplest assumption that its “current” expenditure was largely financed by “current” taxation (G was equal to T plus a residual in the form of “the inflationary tax” or “future taxation” but this residual was analyzed separately).
3 – The large windfall gains from the ownership of tangible assets in the past 40 years are due to the extraordinary growth of real incomes at the world level. This growth has implied a large accumulation of savings by some people that have been using them to finance the accumulation of K (please remember that there are errors in measuring properly this stock) as well as the consumption of other people (including people that have been working for salaries in old jobs and people that have been inventing but have yet to produce anything). The prices of many types of tangible assets have increased sharply since 1980 because the production of these assets has been lagging (each of us can check this by looking at what has happened in some old neighborhood with the prices of housing under strict controls of construction). One additional evidence of this explanation is the extraordinary growth of the personal incomes of those involved in financial intermediation (and in the intermediation of existing and new tangible assets). We must analyze financial intermediation as any other intermediation and we should not be surprised about the extraordinary increase in the number of people that have been earning their lives thanks to financial intermediation. Yes, we are now seeing a decline but mainly because many tasks of the intermediaries can be automatized.
4 – And then we have big questions about government expenditures and their financing. It’s a mistake to ignore the many issues related to expenditures, starting with the large change in its composition (I’d say that most of the absolute increase in the total expenditure of each national government since 1980 has been in “redistributive” programs, and in some countries the expenditure in “productive” services have declined to accommodate increases in those programs). Redistribution has benefited a lot of people, including the many government officials involved in the intermediation of funds from taxpayers to the final beneficiaries (in the national accounts, G measures expenditure for producing goods and services). Regarding the financing of the total expenditure, the most important change since 1980 has been the increasing reliance on borrowing (or future taxation) and the sharp decline in “inflationary taxation”. Since 2008, in most countries (including the U.S. and the E.U.) central banks have been just simple financial intermediaries, mainly to borrow from banks and markets to lend to their governments. They are lenders of first, second, and occasionally last resort to their governments (in some countries, governments can collect the inflation tax directly because they issue the money, but then their central banks can borrow and buy government bonds).