Macroeconomics—the study of the aggregate economy—is a comparatively young discipline. In its modern guise it dates back to 1936 and the publication of John Maynard Keynes’s The General Theory of Employment, Interest and Money. That book, published in response to the greatest economic cataclysm of the twentieth century, the Great Depression, revolutionised thinking about macroeconomics. It demonstrated that a different set of tools from those usually employed by economists was needed to understand events like the Great Depression. Since then, both the world and macroeconomics have steadily evolved. We now face macroeconomic problems that were simply not relevant at the time of Keynes. We have, for example, passed through the Great Inflation of the 1970s and 1980s—a sustained period of double-digit inflation that required further refinement of the economists’ toolkit. More recently, the global financial crisis has refocused attention on the ideas first promulgated by Keynes, with renewed debate about the wisdom of using policies designed to manage the macroeconomy.

This text provides an introduction to modern macroeconomics. We do not attempt to offer an encyclopaedic treatment of the discipline. Instead, our approach is to emphasise the key ideas that have shaped modern thinking about macroeconomics and to present those ideas in the most intuitive way possible. We encourage readers to learn to ‘think as an economist’ by providing examples from recent Australian and world economic history to show how macroeconomics can aid the understanding of important real-world events. At the same time, we believe that students are best served by receiving a good grounding in key macroeconomic principles, the cornerstones of our discipline, which will assist analysis of whatever new macroeconomic phenomenon awaits us in the future.

A key feature of this book is its treatment of time. We begin with the very short run, a world in which output and employment, but not prices, adjust to aggregate spending changes. We then lengthen the time period to consider situations in which prices, output and employment all adjust in response to changes in aggregate spending plans, and further lengthen the time frame of analysis to consider a world in which prices alone adjust. Finally, we tackle the very long run, the period in which the economy’s potential level of aggregate output is itself capable of change. Many texts in macroeconomics take a different approach to ours, beginning their analysis using the very long run and then moving downwards to the short-run world of fixed prices. We believe, however, that the order we have adopted flows more naturally, making it possible to appreciate the commonality that characterises macroeconomists’ approaches to understanding the aggregate economy, while still seeing how different modelling methodologies are required for different time frames of analysis.

We have taken the opportunity provided by the preparation of this new edition to update and improve the exposition in almost every part of the book. Where appropriate, new examples have been introduced; there is an extensive discussion of the issues raised for macroeconomics by the global financial crisis.

We have provided a range of pedagogical resources to assist students and instructors in their use of this text. Details of these can be found in the ‘How to use this book’ section. Our guiding principle in designing these features is our belief that the best way to acquire a deep knowledge of macroeconomics is to have exposure to the way that the discipline can shed light on what happens in the real world and then to practise (and practise and practise) the use of macroeconomic concepts. Although perfection in our knowledge of how a modern macroeconomy works is impossible, there is still much to be said for the old adage that ‘practice makes perfect’.

As generations of macroeconomics students will attest, ours is a complex and challenging discipline. It requires proficiency in an extraordinarily wide range of skills. As Keynes himself once wrote:

. . . the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be a mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician. Source: J.M. Keynes (1924), ‘Alfred Marshall, 1842–1924’, The Economic Journal, vol. xxxiv, no. 135, pp. 311–72.

Few of us can live up to these high standards! Yet the subject matter of macroeconomics is of such importance, dealing as it does with fundamental questions of what determines people’s living standards and what governments can do to raise those standards, that we are obliged to try. In this book you will begin your study of ‘the present in light of the past for the purposes of the future’. We wish you every success.

NILSS OLEKALNS
University of Melbourne