Macroeconomics emerged as a separate branch of economics in the 1930s during the great depression businesses collapsed and unemployment rate rose making millions of people to be out of work. The classical economists and john maynard Keynes were central in trying to proffer a workable action programs that would solve the problem. Before kaynes, most economists belong to the classical school of thought. The classicals, as they were usually called, were concerned largely with microeconomics and the functioning of individual markets within the economy. They believed that the market mechanism operating in competitive markets would, in the long run, automatically ensure full employment and economic growth. But the great depression of 1930s shook this believe.
It was the great depression that induced the work of kaynes. Keynes presented an alternative theory of the determinant of employment and output. He argued that a major cause of the problem lay in the existence of deficient aggregate demand. In explaining the depression, kaynes started by examining the determinants of two main indicators of the problems namely.
- National output
- Level of total employment
He reasoned that this crucial variables were determined by the level of total spending, i.e., aggregate demand. Hence in his famous book “The general theory of employment, interest and money,” published in 1936, kaynes set out what he clearly thought was a better and more general theoryto explain the determinant of output and employment in the economy than that offered by the classical theory.
Modern macroeconomics was developed from kaynes general theory. However the term macroeconomics was first used by Ragnar Frisch in 1933.
MACROECONOMIC THEORY AND POLICY
A theory is a general explanation of phenomenon. It shows in a simplified way what lies behind a phenomenon. By this, we mean what makes it work and what has caused it and/or what is likely to result from a certain phenomenon. Specifically macroeconomic theory is concerned with the general principle of macroeconomics. It is that part of macroeconomics that offers general explanations and general knowledge of the various aspects of the life of society.
The task of macroeconomics theory or analysis is to systematically arrange, interpret and generalize upon facts, principles and theories. The end result of economic analysis bring order and meaning to facts by tying them together. And generalizing upon them. According to boulding (1966), theories without facts may be barren, but facts without theories are meaningless.
Principles and theories are meaningful statements drawn from facts, but facts, in turn, serve as a check on the validity of principles already established. Economists must continually check principles and theories against the changing economic environment because facts may change with time. Economists theorize to give meaning to a maze of facts which would otherwise be confusing and useless, and to put facts into a more useable and practical form.