The Macro Economy Today 14th Edition Bradley Schiller

18 THE ECONOMIC CHALLENGE
government directives. This isn’t an easy task. It requires that we know how markets work
and why they sometimes fail. We also need to know what policy options the government
has and how and when they might work.
WHAT ECONOMICS IS ALL ABOUT
Understanding how economies function is the basic purpose of studying economics. We
seek to know how an economy is organized, how it behaves, and how successfully it
achieves its basic objectives. Then, if we’re lucky, we can discover better ways of attaining
those same objectives.
Ends vs. Means
Economists don’t formulate an economy’s objectives. Instead they focus on the means
available for achieving given goals. In 1978, for example, the U.S. Congress identified
“full employment” as a major economic goal. Congress then directed future presidents
(and their economic advisers) to formulate policies that would enable us to achieve full
employment. The economist’s job is to help design policies that will best achieve this and
other economic goals.
Normative vs. Positive Analysis
The distinction between ends and means is mirrored in the difference between normative
analysis and positive analysis. Normative analysis incorporates subjective judgments about
what ought to be done. Positive analysis focuses on how things might be done without
subjective judgments of what is “best.” The Heritage Index of Economic Freedom (World
View, page 16), for example, constitutes a positive analysis to the extent that it objectively
describes global differences in the extent of market reliance. That effort entails collecting,
sorting, and ranking mountains of data. Heritage slides into normative analysis when it
suggests that market reliance is tantamount to “economic freedom” and inherently superior
to more government intervention—that markets are good and governments are bad.
Debates over the core FOR WHOM question likewise reflect both positive and normative
analysis. A positive analysis would observe that the U.S. incomes are very “unequal,”
with the richest 20 percent of the population getting half of all income (see Table 2.3).
That’s an observable fact—that is, positive analysis. To characterize that same distribution
as “inequitable” or “unfair” is to transform (positive) fact into (normative) judgment.
Economists are free, of course, to offer their judgments but must be careful to distinguish
positive and normative perspectives.
macroeconomics: The study
of aggregate economic behavior,
of the economy as a whole.
microeconomics: The study of
individual behavior in the economy,
of the components of the larger
economy.
Macro vs. Micro
The study of economics is typically divided into two parts: macroeconomics and microeconomics.
Macroeconomics focuses on the behavior of an entire economy—the “big
picture.” In macroeconomics we worry about such national goals as full employment, control
of inflation, and economic growth, without worrying about the well-being or behavior
of specific individuals or groups. The essential concern of macroeconomics is to understand
and improve the performance of the economy as a whole.
Microeconomics is concerned with the details of this big picture. In microeconomics
we focus on the individuals, firms, and government agencies that actually compose the
larger economy. Our interest here is in the behavior of individual economic actors. What
are their goals? How can they best achieve these goals with their limited resources? How
will they respond to various incentives and opportunities?
A primary concern of macroeconomics, for example, is to determine how much money,
in total, consumers will spend on goods and services. In microeconomics, the focus is
much narrower. In micro, attention is paid to purchases of specific goods and services
rather than just aggregated totals. Macro likewise concerns itself with the level of total