Macroeconomics of Growth Cycles and Financial Instability

Macroeconomics of Growth Cycles and Financial Instability

New Directions in Modern Economics series

Piero Ferri

In light of the recent economic crisis and in keeping with Hyman Minsky’s analysis of financial instability, this book considers the important interaction between cycles and growth, via the interplay between demand, supply and real-world financial issues.

Chapter 3: Macroeconomics, Uncertainty and the Fallacies of Composition

Piero Ferri

Subjects: economics and finance, post-keynesian economics


MACROECONOMICS, BETWEEN PARTIAL AND GENERAL EQUILIBRIUM Since the approach followed in this book is mainly macro, it is a necessary preliminary to understand the nature of the theoretical system along with the methodology characterizing its construction. While the methodological aspects will be dealt with in the present chapter, the status of macroeconomics will be considered in the next one. Macroeconomics was developed by Keynes (1936) in order to understand the working of the whole system. The ‘General Theory’ is such for at least three reasons. Firstly, because, as has already been mentioned, it is a systemic approach. Secondly, because it includes the neo-classical analysis as a particular case, the particularity being represented by the hypotheses of full employment, complete markets and full information. Finally, it is general also because it goes beyond the partial equilibrium analysis that seemed to characterize the neo-classical approach, Pigou being one of the most outstanding examples. One of the merits attributed to Keynes has been the overcoming of the fallacies of composition that flawed Pigou’s analysis. One wonders if these merits persist nowadays when a general equilibrium approach has been adopted and macroeconomics reduced to its operative branch. It is important to discuss these points initially, not only for their scientific relevance but also for their practical implications. In our opinion, one of the reasons why the beginning as well as the development of the recent turmoil have been missed by mainstream economics is the fallacy of composition that its approach still implies. Consider, for...

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