5 Great Early Macroeconomists
Like any academic discipline, macroeconomics relies on the incremental progress of researchers, each building upon and improving previous work — like bricks holding up a wall or, more salubriously, adding new ingredients to old cocktail drinks. Here are five famous economists who had a huge impact on macroeconomics.
Adam Smith (1723–1790)
Here he is . . . the big daddy, not just of macroeconomics but economics as a whole. Adam Smith was the first person to think seriously about modern economic problems. His ability to observe the world around him and to describe the motives and mechanisms that underlie what he saw remains impressive to this day. It lies at the heart of all good social science.
Smith wrote his most influential work in 1776: An Inquiry into the Nature and Causes of the Wealth of Nations. He argued that people acting in their own self-interest may serve the common good better than if they try to “do good” intentionally.
John Maynard Keynes (1883–1946)
If Adam Smith is the father of economics, John Maynard Keynes is the father of modern-day macroeconomics.
In 1936, he wrote The General Theory of Employment, Interest and Money. He was writing during the Great Depression, a prolonged period from 1929 until the late 1930s that saw large and persistent falls in output and high unemployment. The classical economists of the day had a hard time explaining the causes of the Great Depression.
The Keynesian analysis fits readily in the aggregate supply and aggregate demand framework. In Keynes’ view, wage (and price) stickiness made the aggregate supply curve fairly flat in the short run. Hence, movements in aggregate demand had a big impact on real GDP and not just on the price level. Indeed, Keynes thought that it often took a very long time for output to return to its long-run potential. Thus, a clear case existed for governments to intervene with expansionary policies in order to get economies out of recession.
In recommending short-run government intervention, Keynes also argued that expansionary fiscal policy would likely be the best tool in times like the Great Depression.
Milton Friedman (1912–2006)
There was opposition to Keynes’ ideas very early on. Much of this opposition was led by Milton Friedman, who was foremost among a small group of influential economists known as the monetarists.
The monetarists were very concerned that economists understood very little about how the economy works. They argued that Keynesian calls for intervention amounted to trying to fine tune the economy in the absence of understanding it and that this was likely to lead to more instability — not less. They believed that just following simple rules was a better policy. In addition, they doubted that fiscal policy would have much impact on aggregate demand, so they focused on a simple rule for monetary policy.
The “Friedman Rule” as it came to be called was the central policy recommendation of the monetarists. It called for setting the rate of growth in the money supply at some (low) rate that would be constant forever — regardless of the state of the economy.
Friedman made many lasting contributions. He was awarded the Nobel Memorial Prize in Economic Sciences in 1976.
Paul Samuelson (1915–2009)
Paul Samuelson was one of the great economists of the twentieth century. He was among the first to stress the importance of modeling economic phenomena mathematically. His work completely changed the way that both microeconomists and macroeconomists look at the world.
Samuelson introduced two key principles:
- Constrained optimization
Samuelson also introduced formal dynamics into macroeconomic modeling. Most previous work focused on what is usually referred to as comparative statics — comparing the equilibrium under one set of policies with what the equilibrium would be under a different set of policies. Samuelson showed that it was important to understand the dynamic process of how the economy would actually move from one equilibrium to another. In some cases, that process would not converge and the economy would never reach the new equilibrium. That meant one had to consider whether the static equilibrium model being used really made sense.
He was awarded the Nobel Memorial Prize in Economic Sciences in 1970.
James Tobin (1918–2002)
James Tobin was among the early American disciples of Keynes and one of the foremost developers of the Keynesian model. Like Milton Friedman, Tobin wrote widely for the general public as well as for academic publications.
Tobin is best known for his work linking financial markets to macroeconomic outcomes. He was the first to introduce a monetary sector into the neoclassical growth model. More generally, he was among the first to see money as just one of many assets that investors could use to store their wealth. This led to an understanding that financial disturbances other than monetary ones could have important consequences for real GDP and employment.
Consideration of different assets and investors’ optimal portfolios led Tobin to develop the mutual fund separation theorem that states that, under some not too restrictive conditions, all investors will earn the highest return per unit of risk by splitting their wealth between just two assets: a safe, risk-free asset and a broad index mutual fund reflecting all risky assets as a group. The only difference would be that more risk-averse investors would put more of their wealth in the risk-free asset. This result is central to the Capital Asset Pricing Model that lies at the foundation of modern theories of asset pricing.
Tobin worked on issues of income distribution and empirical methodology. His estimation technique, known as Tobit estimation, is a standard statistical way to handle variables whose values are truncated so that they cannot fall below a specific lower bound. He was awarded the Nobel Memorial Prize in Economic Sciences in 1981.