TITLE : MACROECONOMICS: THEORY AND POLICY.

PREFACE

Macroeconomics; Theory and Policy replaces Macroeconomic Theory (Macmillan, 1961), but it is not a revised edition of the earlier work. In a few chapters particularly those dealing with the "classical model"I have relied heavily on the previous book and have reproduced a number of pages with only minor revision. Almost all of the remainder, however, has been written from scratch. Much of it deals with topics unknown at the time of the previous writing or then not considered suitable for an intermediate text. (This accounts for the fact that, although several topics have been omitted, this text is considerably longer than the previous book.)

Macroeconomic Theory was considered by many to be the first full- scale textbook in this subject. As such, it was successful far beyond any expectation. It has been widely used both in the United States and abroad (in the original edition, in two "student editions" in English sold abroad, and in a number of translations). One of my greatest pleasures in recent years has been to meet or to hear from people in many countries who "already know you from your book." I hope that Macroeconomics: Theory and Policy may sustain our contact and perhaps make new friends.

Following publication of Macroeconomic Theory, I was on leave from my academic appointment for eight years and, during most of that time, unable to follow the current literature in macroeconomics. Since returning to the University of Michigan in September 1969, I have been trying to assimilate, understand, organize, and evaluate as much as I can of the large body of theoretical and empirical literature in macroeconomics that has accumulated in the now almost twenty years since the bulk of writing on the previous book was finished. In the meantime, some new and quite different practical macroeconomic problems have engaged economists'-and the public's-attention, problems that cry out for solution, amelioration, or, at least, understanding. (Inflation is, of course, the most notable, and the most difficult.)

Much of the new literature, including what has been written about the new problems, I find to be important and enlightening and to require substantial revisions in economists' previous understanding of our economy and in their views about appropriate economic policies. On the other hand, I find other portions of it puzzling, irrelevant, or misleading. It has thus seemed to me appropriate to attempt a full reassessment and restatement of what I think economists know-and what they still do not know-in macroeconomics. Many users of Macroeconomic Threory have encouraged me in this endeavor. Although a number of other new text- books attempt a new, comprehensive appraisal, none of them fully meets my own view of what is right and important.

In this book, therefore, I try to do considerably more than digest and explain current ideas in macroeconomics. I also indicate and explain my agreement or disagreement with many particular ideas and points of view Probably I misunderstand my colleagues on some points and am unfairly critical or unduly impressed on others. In any case, I have tried, above all to put across a basic point of view that I find missing in much recent work t at I am convinced is correct, and that I feel strongly is important. This point of view relates both to the nature of our economy and to the scope and approach of macroeconomics as a discipline. First, it seems to me fundamental to recognize that-at least in their macro aspects-modern, western-style industrial economies are inherently hlghly unstable and prone to continuous, considerable, and often painful uctuation. In my view, much of this disturbance is probably associated with what we call economic growth-one of the most pervasive charac- teristics of these economies. In much recent work, I find instead the assumption, sometimes explicit but more often tacit, that the modern macroeconomy is inherently stable, subject to only moderate inherent disturbance, and equipped with powerful automatic stabilizers. Most of the time It Is in, or near, some kind of macroequilibrium state. In most treatments growth is explicitly assumed absent, so it cannot possibly be a factor of disturbance. Even when the need to analyze and explain growth is recognized, it is seldom suggested as a source of major fluctuations

Thus what appears to be disturbance and instability is held, either explicitly or implicitly, to reflect the effects of government intervention past or present. Eliminate such intervention, it is suggested or implied and the economy would be free from major macroeconomic disturbance. A symptom of this point of view is the fact that for a full generation we have lacked any new-or even a wide acceptance of any older-theory of the business cycle, or, indeed, very much discussion of the cycle in economics et the phenomenon has surely persisted. Now we have finally had proposed a new business cycle theory, that of the "political business cycle." This theory, of course, contains more than a germ of truth-but dreadfully exaggerated.

Almost never does one still read in respectable theoretical literature about Schumpeter's creative-destructive technological innovation and its estabilizing consequences; about Keynes' animal spirits, contests to choose the queen judge by other contestants to be the most beautiful or expeditions to the South Pole; even in the new world of floating exchange rates, about destabilizing speculation. Inventory cycles and cobwebs have gone out of fashion-in textbooks but perhaps not in the

There are two principal groups of dissenters from what has become almost the orthodoxy of inherent stability: the Clower-Leijonhufvud axis and the Robinson-Kaldor school. I will be seen to have considerable sympathy particularly with the first of these, although I use a somewhat different vocabulary and may put a somewhat greater emphasis on factors associated with economic growth as elements of disturbance.

A second major aspect of the point of view that pervades this book relates to the nature of economic knowledge (or to the nature of economic theory-I refuse to distinguish the two). To my mind, the business of economics is the accumulation of tested empirical generalizations about relationships that prevail in the current "real-world" economy. These generalizations are the more interesting and the more useful the greater their specificity. If all we knew about the major relationships were the probable signs of partial derivatives (based on a priori knowledge or casual observation), this would still be better than no knowledge at all. But numerical estimates of fundamental macroeconomic relationships, statistically derived from reliable measurements, and estimates of their tempora stability provide far more important and useful informatlon. Long chams of mathematical reasoning based solely on a priori postulates are fun. ut they may badly serve the needs of our society.

The last sentence suggests the third element of the point of view I wish to mention here. It is that knowledge is to be applied-brought to bear in the solution of problems that affect people. A textbook in fundamentals is not the place to do very much of this, but some illustrations are necessary to remind the reader what the whole thing is about.

Thus the reader will find here-along with hypotheses derived from a priori postulates and the development of their implications-considerable discussion of what statistical testing appears to tell us about the specific shapes and degree of stability of major macroeconomic relationships (for the United States economy), along with occasional discussion of a a sources and problems, and of what this knowledge may imply for policy. Ideally the results of macroeconomic study should find their ultimate expression in full-scale macroeconometric models, but the place for such expression is not an intermediate textbook.

To put the matter in another way, it seems to me that it is a proper function of a textbook to warn its readers against widely accepted propositions that appear to be empirically incorrect or insufficiently established-especially those applied in discussion of public policy problems. For example, it seems to me important to point out that, despite the fact that both the classical economists and Keynes (in effect) hypothesized an aggregate production function subject to diminishing returns, most empirical evidence fails to confirm this view. Thus we must not assume (as many economists still seem to do) that employment can normally increase only if real wages decline (or decline relative to trend)

One of the most difficult problems in writing a textbook is to determine which specific topics should be included and the sequence of their discussion. Although a good deal of thought has gone into the selection and order of the topics for this book, instructors inevitably will disagree with my choices. After all, interests and emphases differ, and the selection and sequence of topics will also be affected by the other readings or supplementary materials the instructor may wish to introduce. The book is organized to permit considerable flexibility in selection of topics, and some changes in their order are possible without major discontinuity.

Among topics that can easily be postponed (but I hope not omitted) are those coesidered in either or both halves of Chapter 7 (fiscal policy and Keynesian dynamics), in either or both halves of Chapter 8 (investment and multiplier-accelerator growth models), and in the final sections of Chapter 9 (supply and demand for bonds and the interest rate) and of Chapter 11 (IS-LM dynamics). If one prefers not to wait as long as I have waited to introduce the subject of inflation, the first two sections of Chap- ter 13 can easily be moved ahead. And if it is desired to introduce money creation by banks and an endogenous money supply considerably earlier than this book does, the first section of Chapter 21 can be assigned at almost any point. Indeed, all of Chapters 20 and 21, dealing with money and finance, can easily be assigned either prior to Chapter 13 or to Chapter 16. Chapters 14, 17, 19, 20, and 21 contain some of the most advanced or specialized materials and can be entirely or partially omitted. The several chapter appendixes are clearly optional.

On the other hand, there are several sections that may seem unnecessary, or even extraneous where they first appear, but are there to set the stage for later discussion. They can, of course, be postponed, but they probably should not be omitted. Examples are several of the topics in Chapter 1, the discussion of wealth accounting in Chapter 2 (now that wealth is widely used as a variable, we need to understand how various concepts of it are related and how they can be measured), discussion of the production-input relationship in Chapters 3 and 4, the treatment of the bond market in Chapter 5, and the brief discussion of expectations in Chapter 7.

Despite its length, the book has two large and glaring omissions, as the reader is warned in Chapter 1-omissions regretted but deliberate. The first is international repercussions; the second, formal growth models more incalbuodrath than simple Harrod-Domar sequences. Less regretted omission and price determination functions.

I am very conscious of several sections that, despite much rewriting, still do not come off as well as I had wanted, of several points at which I may have let my feelings show a little too much, and of an incompletely disciplined tendency to write sentences that are too long. I could easily spend another year rewriting, pruning, rounding out, depersonalizing, and otherwise improving the manuscript. However I have already spent much too long on this book, and my editor is (or should be) losing his patience. So the manuscript now goes to the publisher and soon to my colleagues. All that is left is to list some of my obligations.

First and foremost, my gratitude goes to the University of Michigan for wanting to bring me back into its stimulating academic environment after each of my several long absences and for providing the relative leisure from routine duties that has permitted me to write this book as well as to engage in other scholarly and public service activities. To recent depart- ment chairmen-the late Warren Smith, Harvey Brazer, Peter Steiner, and Harold Shapiro-I owe special thanks.

Under these favorable auspices, writing has proceeded in Ann Arbor from early 1972 through summer of 1976 with a steadily increasing tempo of application. But it took a sabbatical leave spent in Italy in the fall term of 1976 to get the book to this stopping place. In Italy the wonderful hospitality of the Rockefeller Foundation's study center at Bellagio and of the Banco di Roma's offices in Rome have provided the setting for the intensive work that produced most of Chapters 1 and 15 through 21, along with extensive rewriting of the remaining chapters.

Several assistants have been employed from time to time in this effort. I thank them all, but I must express special gratitude to Ronald Anderson, John Gardner, and Bo Kang. A number of secretaries have toiled willingly with me, among whom I particularly wish to recognize Jacqueline Parsons and Rodney Eatman.

Readers recruited by Macmillan have made a large number of extremely helpful suggestions that have greatly improved the final product, and I deeply appreciate their help. They are Professors Richard M. Friedman of California State University, Northridge; Richard J. Froyen of the University of North Carolina; and Rodney L. Jacobs of the University of California, Los Angeles. My colleague Professor Robert S. Holbrook kindly read Chapters 20 and 21, making a number of helpful suggestions. All of these readers also found mistakes that have been corrected; I alone am responsible for those that remain. Editor Anthony English of Mac- millan has been at all points supportive, patient, and helpful. His gentle blend of prodding, shame, encouragement, and understanding has been ideally suited to keeping me at work.

I am grateful to the editors and publishers of the Review of Economic Statistics, The Weekly Toyo Kezai and The Oriental Economist for permission to use excerpts from my articles that first appeared in these Journals. I also appreciate the willingness of the Atlantic Institute for International Affairs to Dermit me to adaDt for use here some portions of my "Stemming World Inflaction", which the Institute published in 1971 as an Atlantic Paper, and of the Federal Reserve Bank of Boston to adapt portions of my discussion in Consumer Spending and Monetary Policy: The Linkages, 1971.

This preface is written in Taormina, Sicily, where my window looks out on the ever-changing and always breathtaking beauty of Mount Etna. The scene reminds me to mention that much of the text of Macroeconomic. Theory was also written in Italy in 1956-1957, as has been some of the best of my other work. Personally, I owe much to this beautiful and tormented land where I have now spent four considerable periods of work and residence. But my greatest debt is to my wife Bonnie, whose patience with me and my work surpasses belief and to whom I have dedicated this book.

G. A.