As I’ve written before, every time I teach microeconomics I remind students that the fundamental difference between macroeconomics and microeconomics has nothing to do with subject matter. That is, macroeconomics doesn’t tackle the “big” questions while leaving the “small” questions to microeconomics. The real difference lies in what practitioners in each discipline use as their basic units of analysis.
The Keynesian macroeconomist, for example, thinks the basic units of analysis are national-level aggregates and averages, such as gross domestic product, aggregate demand and supply, the rate of unemployment, and the rate of inflation. Keynesian macroeconomic theories involve the interactions of those aggregates and averages.
For a microeconomist, the units of analysis are individual choices and incentives. So a satisfactory explanation for the macroeconomist about rising unemployment—e.g., that aggregate demand is insufficiently low—would not satisfy a microeconomist. The microeconomist would want to know what kinds of incentives confront people in the labor market that might induce them to withhold their labor. For example, do higher unemployment benefits lower the cost of leisure so that not working looks more attractive than working?
It bears quoting the noted Austrian macroeconomist, Roger Garrison: “There are macroeconomic problems, but only microeconomic solutions.”
CONTINUED at FEE. Written by Sandy Ikeda.