Limitations of Macro-economics

Limitations of Macroeconomics

There are, however, certain limitations of macroeconomic analysis. Mostly, these stem from attempts to yield macroeconomic gener alisations from individual experiences.

 (1) Fallacy of Composition. In Macroeco nomic analysis the "fallacy of composition" is involved, i.e. , aggregate economic behavior is the sum total of individual activities. But what is true of individuals is not necessarily true of the economy as a whole . For instance, savings are a private virtue but a public vice. If total savings in the economy increase , they may initiate a depression unless they are invested . Again, if an individual depositor withdraws his money from the bank there is no danger. But if all depositors do this simultaneously, there will be a run on the banks and the bank ing system will be adversely affected. 

( 2 ) To Regard the Ags as gregateHomoge neous . The main defect in macro analysis is that it regards the aggregates as homogeneous without caring about their internal compo sition and structure. The average wage in a country is the sum total of wages in all occu pations , i.e. , wages of clerks , typists , teachers , nurses , etc. But the volume of aggregate ememployment depends on the relative structure of wages rather than on the average wage.  If , for instance , wages of nurses increase but of type ists fall , the average may remain unchanged .  But if the employment of nurses falls a little and of typists rises much, aggregate employ ment would increase. 




 (3) Aggregate Variables may not be Im portant Necessarily.  The aggregate variables which form the economic system may not be of much significance .  For instance, the na tional income of a country is the total of all individual incomes.  A rise in national income does not mean that individual incomes have risen.  The increase in national income might be the result of the increase in the incomes of a few rich people in the country.  Thus a rise in the national income of this type has little sig nificance from the point of view of the com munity.  Prof.  Boulding calls these three difficulties as " macroeconomic paradoxes " which are true when applied to a single individual but which are untrue when applied to the economic sys tem as a whole. 

( 4 ) Indiscriminate Use of Macroeconomics Misleading .  An indiscriminate and uncritical use of macroeconomics in analysing the probe lems of the real world can often be misleading .  For instance, if the policy measures needed to achieve and maintain full employment in the economy are applied to structural unemployment in individual firms and industries, they become irrelevant.  Similarly, measures aimed at controlling general prices cannot be appliedwith much advantage for controlling prices of individual products . 

 (5) Statistical and Conceptual Difficulties.  The measurement of macroeconomic concepts involves a number of statistical and con ceptual difficulties.  These problems relate to the aggregation of microeconomic variables.  If individual units are almost similar, aggre gation does not present much difficulty.  But if microeconomic variables relate to dissimi lar individual units, their aggregation into one macroeconomic variable may be wrong and dangerous.


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