Introduction

Hitherto we have considered the actions and interactions of agents (persons, firms) each of which seeks to maximize its own utility. This may lead to situations which (by fairly general consent) are not optimal for society as a whole. Any attempt to formalize such goals as “the greatest happiness of the greatest number” leads to comparisons of the utilities of different persons. More generally, some economists have introduced a social utility function which measures the welfare of society as a whole (or of a specified sub-society, e.g. a family). This may depend only on the utilities of individuals (e.g. their sum) or may be more complicated in structure.

The notion of social utility is distinctly more rarified than that of an individual's utility. It is perhaps not too grossly unrealistic to suppose that an individual, confronted with a number of alternatives, can put them in order of preference. It is much more questionable to think of an order decided by a society as a whole. Indeed, “Arrow's impossibility theorem” shows, subject to some very innocuous-seeming axioms, that it is impossible to construct a social ordering from the preference orderings of the individuals in the society.

Nevertheless, one may suppose that, by some sort of consensus or otherwise, a social utility function is given. An individual agent acts, however, to increase its own utility and this may well decrease social utility. It may be regarded as a duty of Government to maximize social utility either by direct action or by manipulating market forces.

Introduction

Macroeconomic theory considers the working of the economy as a whole, and deals in large aggregates such as “total income”, “total demand”, “saving”, “investment” and the like. It is not always clear exactly what these terms mean, even less how they should be measured in any given situation; and different economists have taken different interpretations. We shall adopt the eminently respectable tradition of pushing these difficulties to one side.

One must consider the ways in which these large aggregates affect each other. It is almost certainly true that everything affects everything else. We shall single out the influences we treat as important, and ignore the others. Economists of different epochs or of different schools have considered different influences to be the important ones, and so arrived at radically different theories: there is less concensus in macro-economics than in microeconomics. We shall follow the paradigm of Samuelson's Economics, itself based on the ideas of Keynes. We start from simple models and work up to more sophisticated ones, sometimes modifying (or even abandoning) hypotheses made earlier.

Some classical economists have asserted that “money is a veil”, i.e. that it obscures our view, but does not affect the workings, of the “real economy”. Hitherto we have indeed treated prices only as constructs which facilitate the mathematical treatment of the “real economy”. We shall now have to consider the interaction of the monetary with the “real” economy.