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Macroeconomic

Problems,

Microeconomic

Solutions

Peter J. Boettke

Econ 881/Spring 2005

February 28

Main Points to Stress



Macroeconomic problems are coordination problems



Production plans must mesh with consumption demands

 Capital and Labor



Incentives must be aligned and capabilities must be

exploited

 Incentive problems are knowledge problems and knowledge

problems are incentive problems



Changing circumstances result in disturbances, but

the crucial question is one of adjustment



Feedback and learning through time

What is the solution to these problems?

Classical 

Market discipline

Keynesian 

Government correctives

 Fiscal policy

 Mix of fiscal and monetary policy

After Keynes 

Market equilibrium

Fiscal Policy Versus Monetary Policy as a Corrective Keynesian World View Monetarist World View

LM

IS

IS

LM

Y Y

r r Liquidity trap makes monetary policy ineffective Crowding out makes fiscal policy ineffective

What is Wrong With this

Picture?

Unconnected to the Choices of Individuals 

Labor Market

 Money Illusion



Capital Market

 Fiscal Illusion

 Autonomous Investment



Capital Goods Market

 Time and the Process of Production



Complementarity and Substitutability in the chain of

production

Labor Market Response

Workers do not persistently suffer from money illusion N

W/P

W/P 0

W/P 1

N 0 N 1

Lucas Critique of Keynesian

System

Adaptive Expectations → Rational Expectations 

Bayesian Learning



Expectations on underlying distribution

 Methodological Rule --- economist cannot assume a level

of knowledge greater than the participants in the economy

Equilibrium Theory of the Business Cycle 

Monetary Neutrality and Market clearing

 Noise and disturbances to the system (signal extraction)

 Invariance proposition

Upshot of Lucas Critique

Short Run and Long Run Phillips Curve are the same

Microfoundations of Macroeconomics provides coherence to the discipline

General Competitive Equilibrium 

Optimizing behavior



Continuous Market Clearing

The Classic Austrian Theory of the Cycle r Q

D

So S 1 r Q S/C Higher Order Goods Lower Order Goods

Main Tenets of the ABTC



Non-neutrality of Money

 Injection effects through Relative price adjustments



Capital Structure



Heterogeneous and multi-specific goods

 Capital maintenance and entrepreneurial decision making



Intertemporal Coordination and Monetary

mechanism



Interest rates as signals between present and future



Complimentarity of Capital and Labor

 Employment of scarce resources