Revolution and Evolution in Twentieth-Century Macroeconmics(Micheal Woodford): The birth of Macroeconomics

The Birth of Macroeconomics

Although it can be surely argue that the field nowadays known as macroeconomics had its birth with the famous and ground-breaking book "General Theory" by John Maynard Keynes, this branch of economics had already, at least shyly, begun at the nineteenth century. I am talking about Monetary economics. They developed a few theoretical important ideas such as the quantity theory of money(This theory is one of the most discussed ideas in the economics's history. I will try, in a future blog post, to make a in-depth analysis of this theory.) and the difference between "real" and "nominal variables". But they mostly concentrated in which monetary standard was the best choice at the moment (a gold standard, a silver standard, etc.). This was the main issue of monetarist economists, they were not so much worried about the stabilization of the economy, the general level of prices, employment as they were about the "bank rate". The "bank rate" needed to be controlled in order to maintain the central bank's gold reserves and also to continue in the gold standard.
The more rigorous research in macroeconomics might have started in the first decades of the twentieth century with the study of the so-called "business cycles".

But what are these "business cycles"?

Burns and Mitchell (1946) wrote: "Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle."

So, business cycles are basically that, cycles. The economy generally has a period of economic growth, of expansion and then it comes a recession and then the recovery and finally then the growth again. Because of the lack of rigorous mathematical and empirical research at that time business cycle economist held a wide variety of views, even if the economists were in the same school of thought. At that time there were basically two main school of thought. On one side you have the "Austrian" economists. They believe that these "cycles" were inevitable and there was nothing that the government can do to prevent them.
Schumpeter, a business-cycle harvard economist, argue the following:" recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to undigested remnant of maladjustment, new maladjustment".
The other school of thougt was Cambridge. Although their economists also held a myriad of different opinions about the causes of these fluctuations, they were much more optimistic about what the government can do with their stabilization policies.
Neither theories of both school had much effect upon public policy prior to the 1930s. Because of the lack of quantitative analysis in their theories business-cycle economists were unable to predict what will happen if alternative policies were carried through. Their "models"- I am not sure whether they have real models- were unable to accurate forecast the output of different policies. Thus until the Keynesian revolution came, these economists were mostly focus in gathering empirical research to prove that the economy had these cycles. But just data from different events was unsufficient to accurately predict the effects of alternative scenarios.

Information extracted form: Micheal Woodford, "Revolution and Evolution in Twentieth-Century Macroeconomics", 1999