M A C R O E C O N O M I
THE LONG AND THE SHORT OF IT
Roger W. Garrison, June 1999
The macroeconomy seems to experience (1) short-run
cycles and (2) long-run growth. Should macroeconomists deal with these
issues one at a time? Or should they look for the fundamental macroeconomic
principles that underlie both? Opinions differ:
One major weakness in the core of macroeconomics
... is the lack of real coupling between the short-run picture and the
long-run picture. Since the long run and the short run merge into one another,
one feels they cannot be completely independent.(1)
Is the "lack of real coupling" between the short-run
and the long run a cause for concern? Or are these two runs rightly decoupled?
Rightly or wrongly, the decoupling and the shift of emphasis-from the long
run to the short-began with the macroeconomics of John Maynard Keynes:
[Trevor Swan's writings serve] as a reminder that
one can be a Keynesian for the short run and a neoclassical for the long
run, and that this combination of commitments may be the right one.(2)
In the long run we are all dead. Economists
set themselves too easy, too useless a task if in tempestuous seasons they
can only tell us that when the storm is past the ocean is flat again.(3)
But if our central controls succeed in establishing an aggregate volume
of output corresponding to full employment as nearly as is practicable,
the classical theory comes into its own again from this point onward.(4)
Keynes certainly offered us no "real coupling." He
offered instead a basis for applying first one set of principles, then
another. Keynesian theory and policy are applicable for an economy functioning
below its full-employment potential; classical theory and policy are applicable
once full employment has been achieved.
In the (Keynesian) short run, considerations of
demand imply that current consumption and current investment move in the
same direction. Scarcity is not a binding constraint. The economy experiences
demand-driven oscillations of both consumption and investment.
In the (classical) long run, considerations of
supply imply that, with allowance for ongoing secular growth, current consumption
and current investment can only move in opposite directions. Scarcity is
a binding constraint. The economy faces a supply-constrained trade-off
between consumption and investment.
A major challenge to modern macroeconomics is
one of reconciling the following statements.
(1) In the Keynesian short run, C and I move
Ludwig von Mises's own reconciliation points the
(2) In the classical long run, C and I can only
move against one another.
(3) The long run is nothing but a sequence of
[W]e must guard ourselves against the popular
fallacy of drawing a sharp line between short-run and long-run effects.
What happens in the short run is precisely the first stages of a chain
of successive transformations which tend to bring about the long-run effects.(5)
1. Robert Solow
(1997). "Is There a Core of Usable Macroeconomics We Should All Believe
In? American Economic Review, vol. 87, no. 2 (May), pp. 230-232.
2. Robert Solow
(1997). Entry on "Trevor W. Swan," in Thomas Cate, ed., An Encyclopedia
of Keynesian Economics. Edward Elgar, p. 594-597.
3. John Maynard
Keynes (1923). Tract on Monetary Reform, p. 65.
4. John Maynard
Keynes (1936). The General Theory of Employment, Interest, and Money,
5. Ludwig von
Mises (1949) Human Action: A Treatise on Economics. New Haven: Yale
University Press, p. 294.