Macroeconomics in The Economy

The textbook The Economy¹ produced by the Curriculum for Open-access Resources in Economics (CORE) project is an introduction to the economy that according to its authors includes institutions and aims to be evidence-based. Presumably, it is an attempt to interpret the world for students. We are told by its authors that the title has been chosen to distinguish it from texts on “Economics,” the suggestion being that the latter could end up as a discourse on the discipline of economics without much to say about the economy itself. This makes it a welcome initiative. I here comment on the sections that would count as macroeconomics, even though the authors may not have envisaged such a tight distinction. Anyhow, I base this review on the chapters titled “Economic Fluctuations and Unemployment,” “Unemployment and Fiscal Policy” and “Inflation, Unemployment and Monetary Policy.”

The section on fluctuations starts by stating that fluctuations are endemic to capitalism. This is an important point to make at the very beginning, and is markedly different from what may be seen in some standard macro textbooks of the day. It should make students think of capitalism as a “system” that is adopted rather than the inevitable form for an economy. The section starts with a distinction being made between consumption and investment. Consumption smoothening by households as a deliberate choice is introduced to account for the relative stability of consumption. Investment is introduced as volatile and thus accounting for the fluctuations under consideration. I would have preferred a deeper discussion of “animal spirits,” as meant by John Maynard Keynes, to convey the idea that investment is best left exogenous. Some reference to “irreducible uncertainty” would have been appropriate too. But an innovative passage describes how investment can be moved disproportionately by the promise of new and yet untested technologies, leading almost inevitably to a crash. The “tech boom” of the 1990s in the United States (US) is shown to be a case in point. The chapter concludes with a description of investment decisions as a coordination game where anticipation of demand determines investment and thus aggregate demand. It is shown how pessimistic expectations can result in low-level output. The possibility of multiple equilibriums is shown and game theory used to show how this equilibrium would be a Nash equilibrium. In the course of the discussion, national income accounting is introduced and the student is alerted to the shortcomings of gross domestic product (GDP) as a measure of welfare.