Prosperity and Depression.pdf

Ana/ysi.r of Theorie.rPart IMr. KEYNES' system is conceived in terms ofMacro.rcopicversusmicroscopicmacro-economic concepts, inasmuch as its fundamentaldata consist of complex magnitudes whichrelate to society as a whole, such as national income,analYsis. ' savings, investment, volume of production ofproducers' or consumers' goods, effective aggregatedemand, price levels, etc. Its macroscopic nature Mr. KEYNES'theory has in common with most business-cycle theories. If atheory which aims at representing the economic process as a wholeis to be manageable, it cannot avoid using broad averages andaggregates of a collective nature. It is very well· to p~each amicroscopic approach and to urge the investigator to go back tothe individual units (households and firms). It is true, of cours'e,that direct and indirect observations of individual behaviour andhappenings are the only source ofinformation about the magnitudeand behaviour of collective phenomena. But the final l statementsat which the theory aims (as distinguished from the methods bywhich they are reached) must practically always run in terms ofaggregates and averages. 2The .broader these aggregates, the smaller their number, themore easily manageable (theoretically and statistically) the resultingsystem. Unfortunately, however, it is usually not possible to findbetween very broad aggregates significant relationships which canbe relied upon to be borne out by the facts. If so, the aggregates1 " Final" ina relative sense.I Professor Frisch (U Propagation and Impulse Problems tt, in EcoftomicEssays ift Honour 01 gu$tav Cassel, London, 1933, page 172)uses the term" macro-analys,is " in the sense of " general" (embracingthe economic process asa whole) and" micro-analysis" in the sense ot" partial equilibrium analysis ". He points out that a gefterat interdependencetheory can be given in all de.tail (in our terminology: in microscopicterms) only U if we confine ourselves to a purely fO'Ymal theory.Indeed, it is always possible by a suitable system of subscripts andsuperscripts, etc., to introduce practically all factors which we mayimagine (all individual commodities, all individual entrepreneurs, allindividual consumers, etc.), and to write out various kinds of relationshipbetween these magnitudes, taking care that the number of equations isequal to the number of variables. Such a theory, however, would haveonly a ra.ther limited interest. In such a theory it would hardly bepossible. to study such fundamental problems as the exact time, shapeof the solutions, etc." (page 172).