|In macroeconomics one is concerned with the aggregate outcome of individual actions. Keynes’s “consumption function,” for example, which relates aggregate consumption to national income, is not built up from individual consumer behaviour; it is simply an empirical generalization. The focus is on income and expenditure flows rather than on markets. Purchasing power flows through the system from business investment to consumption, but it leaks out at two places in the form of personal and business savings. Counterbalancing the savings are investment expenditures in the form of new capital goods, houses, and so forth, which constitute a source of new injections of purchasing power in every period. Since savings and investments are carried out by different people for different motives, there is no reason why “leakages” and “injections” should be equal in every period. If they are not equal, national income, the sum of all income payments to the factors of production, will rise or fall in the next period. When planned savings equal planned investment, income will be at an equilibrium level, that is, a level at which it can sustain itself; when the plans of savers do not match those of investors, the level of income will go on changing until the two do match. One can complicate this simple model by making investment a function of the interest rate; by introducing the government budget, the money market, labour markets, imports and exports, foreign investment; and so forth. But all this is far removed from the problem of resource allocation and from the maximizing behaviour of individual economic agents.|
|The result is a kind of intellectual schizophrenia in which the techniques of microeconomics do not carry over fully into macroeconomics and vice versa. This is widely held to be an unsatisfactory state of affairs; economists have in recent years sought to build a bridge between the individual consumer and the overall consumption function and between the individual investor and the behaviour of aggregate investment. Nevertheless, the bridge remains incomplete, and the student of economics must be prepared to work with two boxes of tools.|
|To cite this page:
“The Social Sciences: Economics: METHODOLOGICAL CONSIDERATIONS IN CONTEMPORARY ECONOMICS: Macroeconomics.” Britannica Online.
[Accessed 09 May 1998].