Macroeconomics & Microeconomics

10/17/08 Revised

As the first-year grad student, I had to take at least two main courses of macroeconomics and microeconomics.

When I was the first-year undergraduate student, one teacher said in his class,

"Microeconomics puts a great trust in a free-market mechanism, while macroeconomics doesn't."

In my guess, his statement came from two English economists, Adam Smith and John Maynard Keynes.

Adam Smith believed that a market mechanism was functioning well by stating "an invisible hand" in his famous book, "An Inquiry into the Nature and Causes of the Wealth of Nations". On the other hand, Keynes was skeptical about such a free market mechanism in his noble book, "The General Theory of Employment, Interest, and Money".

Smith guessed that he or she would be rational in a free market economy and thus the economy as a whole would work well. Keynes said that he or she would not always be so rational that the economy could work well enough to avoid recession. Keynes thought that the failure of market such as recession would be inevitable.

Some economists think of Smith as a father of microeconomics, or classical economics, and Keynes as a father of macroeconomics.

However, I disagree with that idea. It isn't to the point! There's no wall between micro and macroeconomics anymore. They have much in common in that they explain the optimization behavior of economic agents; That is, they have shared the idea of individual rationality and incentive.

In their models, a market is often assumed well functioning and well organized too. Under such an unreal assumption, we can examine the working of our economy and the effect of public policy.

Microeconomics analyzes each individual behavior in our economy, while macroeconomics the working of our economy as a whole. Both of them try to solve the economic problems via the static and dynamic optimization theory, which is much more mathematical area than we have generally thought of as economics.