New macroeconomics teaching for a new era: Instability, inequality, and environment

Abstract

The financial crisis of 2008 and its aftermath offer an opportunity to institute significant reform in economics teaching, starting at the introductory level. Mainstream macroeconomics texts still rely heavily on a classical assumption of a long-run full employment equilibrium, which underrates the possibility, severity, and duration of economic crises. They have little treatment of inequality, virtually no consideration of its macroeconomic effects, and pay almost no attention to the environment. A better approach starts with the use of a dynamic AS/AD model, with inflation rather than the price level on the vertical axis, avoiding the spurious implication that there is some stable price level at which the entire macroeconomy will reach equilibrium. With this approach, there is no presumption that the economy will automatically return to a situation of full employment. Rather, there is an important role for conscious fiscal and monetary policy. In this context, it becomes possible to discuss how economies can be characterized by different equilibria and disequilibria, varied growth paths with different environmental impacts, and inherent instability. The analysis can be used to illustrate recent and historical shifts in the economy and economic policy responses. While not necessarily tied to the concept of a ‘green economy,’ a more dynamic analysis is strongly compatible with an environmental interpretation of macroeconomics, including environmental policy to respond to global climate change and other problems.