The Macroeconomics of Anticipated Events
by
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"Economics is what economists do."
What’s It All About?
To begin, we need a viewpoint as well as a starting point. An informal definition of economics conveniently gives us both.
Economics is the study of how people go about their daily business of earning a living.
Consider the routine of a family of bakers. They rise early, eat breakfast, travel to their bakery, make bread in the back room, sell it in the front room for cash, use this cash to buy food and other goods in a nearby market, and finally return home to eat dinner and relax. These bakers perform different economic functions during the day. They produce bread, sell it, use the money received to buy various other goods, and finally consume their purchases.
Each day the bakers must repeatedly choose how to spend their limited time and money. Shall they get up early or late? Shall they drive to the bakery or take a bus? Shall they produce wheat or rye bread? Shall they buy fish or fowl in the market? Shall they spend their income or save it? Shall they take lessons in tennis or cooking during their spare time? Note that all of these choices involve the present but the two italicized choices involve the future as well. The choice of fish or fowl for dinner does not essentially involve the future. Bakers are deciding which of two goods they should consume today. On the other hand, the choice between saving their income or spending it on consumer goods does involve the future. Saving some money and investing it ties up the funds until some future time. Only then can the bakers cash in their savings and buy goods. The choice between taking lessons in tennis or cooking also involves the future. Cooking lessons are an investment in time and money which pays off after the bakers learn how to make excellent pastries. In the future the bakers will be able to sell these pastries at a high price and thereby earn extra income with which to buy more consumer goods.
Why Bother With Economics?
The distinction between present and future conveniently splits economics into two branches: microeconomics and macroeconomics.
Microeconomics studies what determines the production and consumption of particular goods and services such as bread. In microeconomics, individuals typically choose among present possibilities.
For example, bakers must decide daily how much bread to produce and everyone, including bakers, must decide how much bread to eat. On the other hand,
macroeconomics
For example, everyone must decide how much of their income to spend on consumer goods today and how much of their income to save, possibly to spend on consumer goods tomorrow. Other things being equal, in order to consume more tomorrow people must consume less today. That is, people must consume less of their present income so they can save and invest more of it and thereby achieve a higher income to spend on consumer goods in the future. This personal choice between consuming or saving current income is probably the most important economic decision people can make--because they must make it repeatedly, and in the long run it will have a great cumulative impact on their wealth and welfare.
Nations, as aggregates of individuals, also face the critical choice between consuming or saving their income, and their decisions lead to important long-term consequences. You will be far better off in the long run if your fellow citizens choose to save more of their income. (Savings tend to be invested in new machines which generally improve job performances and salaries, including yours.) To assess how a nation is doing economists often compare its totals for
(2) income for the producers of these items which, after paying
(3) taxes to various levels of government, leaves a residual income for either
(3) spending on consumer goods and services, or
Macroeconomics began as an attempt to understand what determines these key aggregates, and why they fluctuate--sometimes dramatically. This book is about macroeconomics because it systematically examines the causes and consequences, both in the short-term and the long-term, of how a nation chooses to split its income between spending and saving.
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About the Book
Why are some nations far richer than others? Why do riches and employment grow unsteadily? What can we do about it? Macroeconomists ask these important questions, and this introductory textbook is the first to simply and comprehensively explain the latest way to answer them. The answers come from the relatively new, but impeccably pedigreed, theory that people rationally anticipate their probable future wealth when deciding how much of their current income to save or spend. This theory is exciting and even revolutionary because it identifies tax policies, such as those long used by booming Hong Kong, that can significantly boost saving and wealth. Furthermore, the theory fits recent facts far better than the traditional textbook theory of saving which stars current income rather than probable future wealth. Ironically, these presently-competing theories stem from initially-different views about probability held by two friends at Cambridge University who greatly admired each other’s ideas about saving, the famous economist John Maynard Keynes and the young philosopher Frank Plumpton Ramsey.
About the Author
Ben P. Klotz received his Ph.D. in economics from the University of Minnesota in 1969. He has worked as an economist at the U. S. Bureau of Labor Statistics and the Urban Institute in Washington DC, at the RAND Corporation in Santa Monica, and at the Organization for Economic Cooperation and Development in Paris. He has instructed for several semesters at the American University in Paris. Since 1975, he has taught both undergraduate and graduate macroeconomics at Temple University in Philadelphia. During his long career as an economist, Dr. Klotz has served on several editorial boards and presented many papers at professional conferences. He has written articles for leading economic journals such as the American Economic Review, the Journal of the American Statistical Association and the Review of Economics and Statistics. His publication "Supply-Side Economics for Ukranian Growth" (Ukrainian Economic Review, No. 4-5, 1997-98, pp. 5-19) applies the new macroeconomic theory explained in this book. He believes the book will be most useful to readers because it rests on a modern base rather than the traditional one (a beguiling macroeconomic analogue to Ptolemaic astronomy) that he once taught and that other primers still feature.