In the Aspect of Eternity

Spinoza said you must look at things in the aspect of eternity.

— Benjamin Graham

Many introductory economic textbooks focus on short-run macroeconomic fluctuations. This is understandable. Politicians, journalists, Wall Street traders… are all obsessed with the monthly, daily and even hourly movements in economic data.

But this is not the only way to look at the economy. See the graph below! The booms and busts do not stand out. The long-term exponential growth in real GDP per capita is what really boggles the mind.

In his Nobel prize lecture Douglas North points out that while humans became separate from other primates between 4 and 5 million years ago, the beginning of so-called civilization was only 10 thousand years ago, and economic growth started in earnest about 250 years ago. If the existence of humans is represented by a 24 hours clock, the era of modern economic growth (with the associated population explosion) took place during the last 5 seconds! For just 5 seconds there was orders of magnitude more change than in the previous 23 hours and 55 seconds! Why this happened? How can it can continue? The importance of these questions to human civilization can not be overstimated! As the Nobel laureate in economics Robert Lucas aptly said, once you start thinking about economic growth, it is hard to think about anything else.

In the aspect of eternity, humanity’s escape from the Malthusian trap is nothing short of a miracle. We need to focus on these amazing 5 seconds! From this perspective, short-run fluctuations in economic output are nothing but a distraction!

Indeed, economics was born as an inquiry into economic growth. Adam Smith, the father of economics, wrote his magnum opus The Wealth of Nations in 1776, and his main concern was the long-run growth of the wealth of nations. Alfred Marshall, the father of microeconomics, published his seminal textbook Principles of Economics in 1890, and he delved even further into the microeconomic foundations of long-run economic growth.

It was Paul Samuelson’s classic textbook Economics in 1948 that shifted the narrative towards short-run macroeconomic fluctuations. His textbook was truly revolutionary in its emphasis on the emerging Keynesian macroeconomics and its focus on short-term demand management. Samuelson did not just introduce many Keynesian concepts to the mainstream public. He put Keynesianism front and center! Sections on (Keynesian!) macroeconomics preceded the microeconomic sections, the Keynesian cross income-expenditure diagram was printed on the cover, and only John Maynard Keynes was honored with a biographical sketch in early editions.

Such was the spirit of the times. The Great Depression and the Second World War had shaken the world. The Keynesian revolution in the academia was in full swing. It was the age of the short run.

However, practical problems with implementing demand-side policies, burgeoning government debts, the stagflation of the 1970s, and the rational expectations revolution of the 1980s all swung the pendulum back to long-run economic growth. In 1990s, the most successful intermediate macroeconomic textbooks opened their expositions with long-term growth and only then explored deviations from the long-term trend. It was a matter of time before the introductory textbooks followed suit! Enter Gregory Mankiw…

Having written a bestseller intermediate macroeconomics book, and with a stellar academic career, the young Harvard professor Gregory Mankiw was the perfect candidate to write a new introductory economics textbook. His Principles of Economics was published in 1998 and it was a game changer. Mankiw’s book was the first to open with long-run economic growth and only then to delve into short-run fluctuations. The book was a hit! It was adopted by many universities and it set the standard for the next generation of introductory economics textbooks.

In a Journal of Economic Literature article, Greg Mankiw listed the following advantages of starting with long-run Classical ideas before introducing short-run Keynesian ideas:

1. Despite Keynes’s quip about asymptotic mortality, long-run issues are crucial to human welfare.
2. Classical macroeconomics is more closely connected to the lessons of microeconomics.
3. Once students fully understand the economy’s long-run equilibrium, they are better prepared to learn the theory of short-run fluctuations.
4. The Classical long run is simpler to understand than the Keynesian short run because it invokes the simplifying assumption of monetary neutrality.
5. Short-run macro theory is more open to debate than long-run macro theory.

In my opinion, the macroeconomics part of the IB syllabus seemed much more influenced by the classic Samuelson textbook than by the modern Mankiw textbook. Having taught the same macroeconomic topics to both IB and university students for a couple of years, I have come to the conclusion that the Mankiw approach is superior. It is more logical, more intuitive, and more in line with the way economists think about the economy nowadays.