Friday, July 29, 2016

Toward a New Chapter in Macroeconomics – Literally by Robert Scott Gassler

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Intermediate macroeconomics textbooks (Blanchard, 2003, for example) have started to expand their treatment of growth and integrate it a bit more into the model, if only by putting the chapter in the middle and not at the end. Jones and Burda and Wyploz even write their books backwards from what it would have been in the 1960s: economic growth, then Aggregate-Supply-Aggregate-Demand, then the Keynesian model, then monetary theory, then the ISLM model, and so forth. The economy is, however, embedded in the ecological system, so our models of the economy need to be embedded in models of the ecological system as well. Before the chapter on economic growth, there needs to be one on the environment in which economic activity takes place. The limits to growth, both from depleting resources and from carbon emissions, should be addressed early. To the circular flow, for example, there need to be added a source and a sink; the flow comes from somewhere and goes to somewhere. I attempt to outline such a chapter. I define a variable YG, which depends not only on the usual factors of production but especially on the quantity of depletable resources used and is related to the quantity of emissions in the environment from the past. There is a level YG* beyond which the environment of the planet is irreversibly damaged. Note that Mother Nature does not care about prices or reductions in per capita GDP. I also indicate how this chapter affects the rest of a typical macroeconomics textbook. Jonathan Harris’s classification of consumption and other variables into non-durable, human-capital intensive, energy-intensive, etc., would appear in this chapter and in the ones on measurement and the components of aggregate demand. But for the moment it should be enough to put them in this new chapter. That way it can be slipped into the typical macroeconomics course without requiring very much revision of the instructor’s lecture notes. This chapter should be compatible with whatever approach is used in the textbook: New Classical, New Keynesian, Post-Keynesian, or radical, though perhaps with a few revisions here and there. For example, a New Classical model would have a vertical Aggregate Supply curve, a New Keynesian model would use a partly horizontal one, and a radical textbook would omit the part on Aggregate Supply and Aggregate Demand. Ideally we would rewrite macroeconomics textbooks completely. In the meantime, we can at least supplement them in a useful way