Economics: Microeconomics Vs Macroeconomics

MICROECONOMICS VS MACROECONOMICS

In the 1930s Great Depression, classical economics (today called 'microeconomics') failed because of a basic truth about the economic system: the whole is greater than the sum of the parts. In 1936, John Maynard Keynes wrote 'The General Theory Of Employment, Interest And Money' and invented a new way of looking at the economy (called 'macroeconomics') based on this basic truth. Macroeconomics was correct because it filled an important gap in economics: the gap between the whole and the sum of the parts. This point is important. That is, the purpose of macroeconomics is ONLY to fill this gap - ie, to explain those aspects of the (aggregate) economy that microeconomics cannot explain. The purpose of macroeconomics is NOT to explain ALL aspects of the (aggregate) economy - ie, macroeconomics is not a magic wand / silver bullet. The economy is fundamentally a bottom-up (not top-down) system - so microeconomics DOES explain most of the aspects of the economy.

This is a fundamental point in economics. It is the most fundamental point about the relationship between microeconomics and macroeconomics. But unfortunately no textbook says this clearly. Micro textbooks don't say this because they think that micro is anyway the 'real economics' - and assume that everybody also thinks like this. Macro textbooks don't say this because they do not want to highlight macro's deficiency. So there is a gap of silence between the two - which creates a gap in students' understanding. But understanding this point is essential to understanding economics.

Basic economics courses (BSc's first two years and MSc's first year) are structured like this:

1. Microeconomics - 50%

2. Macroeconomics - 50%

So everybody thinks:

Economics = 50% Microeconomics + 50% Macroeconomics

(See Figure 1)

Advanced economics courses (MSc's second year) consist of subjects like Trade Economics, Labour Economics, Industrial Economics, etc. But all these subjects are nothing but applied microeconomics. And the 'Microeconomics' subjects in the basic economics courses are actually microeconomic theory. So Figure 1 is wrong. And the correct equation of economics is:

Economics = 25% Microeconomic Theory + 25% Macroeconomics + 50% Applied Microeconomics

(See Figure 2)

So we must carry out two changes in our economics courses:

1. Rename the basic 'Microeconomics' subjects as 'Microeconomic Theory'

2. Explicitly identify the other subjects as 'Applied Microeconomics'

Then students will correctly understand the real structure of economics.