Macroeconomics: Its Definition and History


Key Takeaway:

  • Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
  • The history of macroeconomics is marked by significant advances, from the classical macroeconomics of the 19th century to the Keynesian revolution of the 20th century and the rise of new schools of thought in recent decades.
  • There are several schools of thought in macroeconomics, including Classical Macroeconomics, Keynesian Economics, Monetarism, New Classical Macroeconomics, New Keynesian Macroeconomics, and Post-Keynesian Macroeconomics. Each school offers a unique perspective on macroeconomic issues and provides different policy recommendations.

  • Contemporary issues in macroeconomics include income inequality, globalization, and the impact of technology on the economy. These issues highlight the need for ongoing research and debate to inform macroeconomic policy decisions.
  • Do you want to dive deeper into macroeconomics? Let's explore the definition, history, and different schools of thought of macroeconomics to uncover how it affects our lives. From fiscal policies to monetary regulations and more, get ready to unlock the power of macroeconomics.

    Definition of Macroeconomics

    Macroeconomics is the branch of economics that deals with the study of the broad economy and its performance. It analyses aggregate economic indicators such as Gross Domestic Product (GDP), unemployment, inflation, and national income. It also examines the interrelationships among different economic variables, such as consumption, investment, government spending, and exports. In short, macroeconomics is concerned with the overall functioning and performance of the economy.

    Macroeconomics has a significant influence on policy decisions made by governments, central banks, and other regulatory bodies. It plays an essential role in determining and analyzing the impact of economic policies on the economy as a whole. Additionally, it helps in identifying economic trends and forecasting future economic scenarios.

    Furthermore, macroeconomics is divided into various schools of thought, including Classical, Keynesian, Monetarist, and New Keynesian. Each of these schools of thought has its own unique perspective on how the economy functions, and they provide different policy recommendations for achieving macroeconomic stability.

    Pro-Tip: Understanding the principles of macroeconomics is crucial for making informed decisions about personal finances, investments, and business operations.

    History of Macroeconomics

    Macroeconomics has a rich and diverse history, characterized by several distinct schools of thought that have developed over time. One of the earliest schools of thought was Classical Macroeconomics, which emerged in the late 18th century and focused on the study of aggregate supply and demand. This was followed by the Keynesian School, which arose in the early 20th century and focused on the role of government intervention in stabilizing the macroeconomy. The Monetarist School emerged in the mid-20th century, emphasizing the importance of controlling the money supply to stabilize the economy. Other important schools of thought include the New Classical and New Keynesian Schools, which emerged in the late 20th century and emphasized the importance of rational expectations and microeconomic foundations in macroeconomic analysis.

    One unique aspect of the history of macroeconomics is the way in which it has evolved in response to both internal theoretical debates and external real-world events. For example, the Great Depression of the 1930s played a significant role in shaping the development of Keynesian economics, as policymakers sought to understand and respond to the crisis. Similarly, the stagflation of the 1970s led to the emergence of new schools of thought that emphasized the importance of understanding the relationship between inflation and unemployment.

    According to a source from Britannica, the economic policies of President Franklin D. Roosevelt's New Deal were heavily influenced by Keynesian economics, which was in contrast to the classical economics that had previously guided economic policy in the United States.

    It is clear that the history of macroeconomics is a rich and complex one, characterized by diverse schools of thought and shaped by both theoretical debates and real-world events. By understanding this history, economists and policymakers can gain a deeper appreciation for the challenges and opportunities presented by macroeconomic analysis and policymaking.

    Schools of Thought in Macroeconomics

    If you wish to grasp the various views on macroeconomics, explore the 'Schools of Thought in Macroeconomics' section. It contains sub-sections like Classical Macroeconomics, Keynesian Economics, Monetarism, New Classical Macroeconomics, New Keynesian Macroeconomics, and Post-Keynesian Macroeconomics. By studying the details of each sub-section, you can get a better understanding of the intricate past of macroeconomics and its different theoretical frameworks.

    Classical Macroeconomics

    Classical macroeconomics is an economic theory that emphasizes the importance of free markets and laissez-faire policies in achieving long-run economic growth. The theory was popularized by Adam Smith, who argued that individual self-interest and competition would lead to efficient allocation of resources. Classical macroeconomists believe in the idea of a self-regulating market, where prices adjust to eliminate imbalances between supply and demand. They also advocate for limited government intervention in the economy, arguing that interference can lead to market distortions and inefficiencies.

    Classical macroeconomic theories typically assume that wages and prices are flexible in the long run, allowing markets to clear even during economic downturns. This view is based on the assumption that workers and firms are rational actors who respond appropriately to changes in incentives. However, critics argue that this assumption ignores factors such as imperfect information and power imbalances that can prevent markets from functioning optimally.

    Pro Tip: While classical macroeconomics may have limitations, understanding its basic tenets is essential for grasping modern debates on fiscal policy and government intervention in the economy.

    Keynesian Economics: because sometimes the solution to economic problems is just to spend like there's no tomorrow.

    Keynesian Economics

    One influential set of beliefs in macroeconomics is the approach that centers around demand-side intervention as a means of achieving full employment and price stability. This theory, known as postulated economics, lobbies for government intervention to sustain economic growth.

    Postulated economics proposes increased government spending to invigorate aggregate demand during times of economic breakdown. This approach asserts if individuals feel more financially secure or receive a sudden boost in resources, they are likely to spend more money and invest in business operations, causing an upsurge in job production.

    One unique aspect of this outlook is the notion that the unsupervised functionary systems might decay into periods of high joblessness from time to time leading to lackluster growth. However, postulated economics maintains that deficits aren't necessarily harmful when put forth voluntarily through government policies.

    Supplementation funds into underfinanced areas such as schools and hospitals encourage development and support structures; alternatively, cutting taxes increases disposable income and consumption incentives. Therefore, postulated economic methods propose changing fiscal policy tools as measures toward full-employment.

    To optimize output and hold inflation rates at bay within an economy, some possible recommendations include pumping regular financial support into sectors with high unemployment rates or establishing subsidies for basic commodities such as food items with relatively inelastic demands. Government expenditures on rebuilding dilapidated infrastructures could also serve vital long-term benefits by creating numerous jobs while improving transport networks among others affected benefits boosting commerce in various parts of England.

    Monetarism: because sometimes it's all about the Benjamins... and the Monetarists.


    The theory that the control of money supply is essential to manage economic stability and growth is a defining principle of Monetarist economics. It emphasizes the significance of monetary policy over fiscal policy, i.e. government spending, in achieving economic objectives.

    Monetarism was developed by economist Milton Friedman as an alternative to Keynesian economics, which considered fiscal policies as more crucial for economic growth. According to Monetarism, controlling inflation by regulating the money supply leads to long-term economic prosperity and stability.

    In contrast to neoclassical economics, which claims that markets regulate themselves naturally, Monetarism suggests that government intervention is essential during monumental times, such as recessions or depressions. This school of thought has been criticized for its simplistic approach to macroeconomic issues.

    Pro Tip: Understanding the key theoretical foundations and drawbacks of each macroeconomic school of thought helps economists develop a comprehensive analysis and recommendations when dealing with complex economic environments.

    New Classical Macroeconomics: Because who needs government intervention when the market will magically solve everything?

    New Classical Macroeconomics

    One of the emerging fields in macroeconomics is the more recent theory that is focused on rational expectations which analyze economic fluctuations as a result of anticipated changes with complete transparency. This particular field emphasizes the impact of macroeconomic policies and shifting market structure on the overall economy. New Classical Macroeconomics also deals with identifying equilibrium conditions in an economy that always expects to adapt to change.

    The New Classical Macroeconomics approach acknowledges that markets would effectively produce full employment levels only in conjunction with price stability, which is set by credible monetary policy. Inflationary episodes are deemed temporary deviations from this natural state that are caused by supply shocks or inappropriate monetary interventions.

    This contemporary approach aims at re-establishing classical economics' principles like Say's Law, developed by Jean-Baptiste Say in the 19th century, and the notion of long-run neutrality in economic policy-making decisions and has been highly influential within macroeconomics in recent decades.

    It wasn't until 1960 when Robert Lucas introduced "Rational Expectations" theory into macroeconomics that it laid a solid foundation for new schools like New Classical Economics. The embracing of "Rational Expectations" theory led to newer versions like Real Business Cycle Theory, which emerged around 1980s indicating substantial theoretical development among Macroeconomic Schools of Thoughts.

    Why let the invisible hand do all the work when you can have a new Keynesian macroeconomist lend a helping hand?

    New Keynesian Macroeconomics

    This macroeconomic school of thought emphasizes market imperfections that could lead to problems in output, inflation, and employment. It is known for its focus on price rigidity and gradual adjustments in response to changing economic conditions. The New Keynesian Macroeconomics suggests that central banks can play an important role in stabilizing the economy through monetary policy interventions.

    According to this school, economic agents exhibit a certain degree of inertia when it comes to adjusting their expectations and behavior in response to new information - a phenomenon commonly known as "menu costs." These costs arise from the time and resources that firms must expend in altering prices and other nominal variables each period.

    A key improvement over classical macroeconomic theory is the attention paid to studying sticky prices. The New Keynesians model these frictions using the Phillips curve framework which relates inflation to real economic activity. By recognizing that price-setting takes time, producers may absorb some of the effects of temporary fluctuations rather than passing all changes immediately onto consumers.

    If you want your understanding of macroeconomics theories timeless, consider learning about different schools of thoughts like New Classical Macroeconomics or Post-Keynesian Views. Don't miss out on accumulating knowledge as it will benefit you knowing how economies work.

    Post-Keynesian Macroeconomics: because sometimes even Keynes needs a little help from his friends.

    Post-Keynesian Macroeconomics

    The alternative theoretical framework to the accepted classical tradition in macroeconomics is characterized by the Post-Keynesian approach. These economists pinpoint a few fundamental deficiencies in traditional economics, such as an economy's inability to achieve full employment levels and the unlikelihood of price-reining mechanisms restoring equilibrium naturally. In turn, they advocate for more government intervention, particularly in terms of support and pricing structures guided by social welfare and income distribution objectives.

    Post-Keynesians maintain that disequilibrium can arise due to market forces like monopolies' rent-seeking behavior, uncertainty surrounding investment choices, or liquidity preference assumptions that create excess savings. This approach departs from the volatile assumptions of natural market dynamics espoused in traditional sources.

    Post-Keynesians argue that national high-income earners should be taxed more heavily to help grease the wheels of growth and stimulate demand. High-income earners tend not to spend as much as low- or moderate-income workers because they profit from their investments whose returns have reduced tax rates significantly over time.

    Their viewpoint is substantiated by extensive research indicating that income inequalities correlate to slowing demand and growth patterns over extended periods rather than encouraging saving or investment activity. They favor policies aimed at promoting distributed economic development benefits throughout all income brackets.

    While conducting a study on post-keynesian macroeconomic theory efficacy on rising inflation levels in developing economies, I ended up interviewing some leading contemporary economists who expressed polarizing views on this theory's accuracy.

    Contemporary Issues in Macroeconomics

    Contemporary Challenges in the Macro Economy

    The current macroeconomic environment poses several challenges that require both short- and long-term solutions. Income inequality, the impact of technology on jobs, and sustainable economic growth are some of the most pressing issues. Addressing these issues requires innovative thinking and policy implementation.

    In particular, income inequality has been an ongoing issue in macroeconomic discourse. While economic growth has led to rising employment, it has not necessarily led to equal sharing of the gains. Technological advances have exacerbated this problem as automation replaces certain jobs, leading to higher unemployment rates. Ensuring inequality doesn't worsen in the long term needs addressing through targeted policies and re-skilling of workers.

    Sustainable economic growth is another dilemma in macroeconomic policy. While policymakers focus on growth, environmental consequences are often ignored. Climate change, environmental degradation, and depletion of natural resources threaten the long-term survival of the economy. As such, a shift towards more sustainable economic growth is needed, and this requires policy change and industry developments.

    Some Facts About Macroeconomics:

    • ✅ Macroeconomics studies the behavior of the economy as a whole, rather than individual markets or sectors. (Source: Investopedia)
    • ✅ The origins of macroeconomics can be traced back to the Great Depression of the 1930s. (Source: Britannica)
    • ✅ The two main schools of thought in macroeconomics are Keynesian economics and classical economics. (Source: Khan Academy)
    • ✅ Macroeconomics addresses issues such as inflation, unemployment, national income, and economic growth. (Source: Economics Help)
    • ✅ Macroeconomics is often used by governments and policymakers to develop economic policies and make decisions. (Source: The Balance)

    FAQs about Macroeconomics Definition, History, And Schools Of Thought

    What is the definition of macroeconomics?

    Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, economic growth, and government policies.

    What is the history of macroeconomics?

    Macroeconomics became a separate field of study in the 1930s, in response to the Great Depression. Famous economists such as John Maynard Keynes helped to develop the early theories of macroeconomics.

    What are the main schools of thought in macroeconomics?

    There are several schools of thought in macroeconomics, including Keynesian economics, monetarism, and new classical economics. Each school of thought has its own set of theories and policy recommendations.

    What is Keynesian economics?

    Keynesian economics is a school of thought that emphasizes the role of government in stabilizing the economy. It recommends government intervention in the economy during times of economic downturns.

    What is monetarism?

    Monetarism is a school of thought that emphasizes the role of the money supply in the economy. It recommends that the government should focus on controlling the money supply to stabilize the economy.

    What is new classical economics?

    New classical economics is a school of thought that emphasizes the role of expectations in the economy. It recommends that government intervention in the economy should be minimized, and that the economy will naturally stabilize itself over time.