No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seventeen: A Short History of Macroeconomics 438 a disproportionality in the economy. In this view, the government’s original policies caused the problem, and subsequent policies to prevent housing prices from falling delayed the necessary correction. Further, the low interest rate policy of the Fed since the crisis has enabled other potential bubbles, creating yet more problems. Still others pointed to the changing incentives to work, making it unprofitable to produce. Chicago economist Casey Mulligan is at the forefront here, and his focus on changing incentives to work places him firmly in the classical world of Say’s Law: to have the power to purchase, one must first produce. The more things change in macroeconomics, the more they stay the same. IT’S A WRAP! As you’ve learned in this chapter, the first person to argue often looks good, but considering the other perspective can at least sharpen the argument. The classical school is undoubtedly right that the source of a person’s ability to demand is prior production (supply). In an economy that operates in time, prior production is a logically necessary but not sufficient condition to keep the circular flow going. Further, Malthus’ (and later Keynes’) view that demand might not be effective due to an unwillingness to spend was also well understood by the classical economists. But they paid insufficient attention to why demand might fail and why disproportionalities might persist for a long time. Keynes’ caricature of classical economic views may be an unfortunate strawman, yet economics as a science can use his critique to better drive us to understand why disproportionalities might persist and what can be done to prevent them. In the next chapter we will review the basic macroeconomic analytical technique and its shortcomings. We will also review the variables that many macroeconomists focus on, and that you will often hear about in business news—Gross Domestic Product (GDP), Consumer Price Index (CPI), and unemployment. With the historical review of this chapter, you are now ready for chapter 18!