Integration of Micro and Macro Analysis
The distinction between micro and macro approaches, intended to investigate the individual units and aggregates respectively, has created a confusion that these two approaches are quite independent of each other and hence no connection or link exists between the two. Such a notion is clearly misleading and disastrous.
It is true that almost entire classical and neoclassical economic investigation followed micro technique. The value and price theory, the theory of the household and that of the firm and the industry were off shoots of micro-economic approach. In the same way, the welfare analysis was essentially developed with the help of micro-economic tools and thinking. As against it, the monetary theory, the growth theory and the business cycle theory are certainly the outcome of aggreagtive thinking.
When we make such a compartmentalization of various fields of economic literature, we become guilty of creating a cleavage between these two approaches. Such a cleavage actually does not exist. It is impossible to draw a clear line between the regions or domains of micro and macro approaches. The two modes of thinking and investigation really overlap each other. It is indistinguishable where the domain of micro-economic ends and where from that of macro-economic begins. In fact, the entire economic thinking has throughout been a blend of micro and macro approaches. It is another thing that over certain areas of economic enquiries, we find a thick mass of micro-substance coated with a thin layer of macro-analysis and vice-versa. A truly general theory of the economic system must embrace both of them.
For a clear understanding of the working of the economy as a whole and to identify and possibly measure the forces which significantly influence the levels of output, income and employment, we must be equipped with a large variety of multi-purpose tools and instruments. The problem itself is very complex. The aggreagate output is composed of a very large number of goods and services. These are the results of the actions, behaviour and decisions of numerous small production units. Suppose we want to reach a conclusion about the whole and it has been considered necessary to examine each and every small unit before making the generalisation. The job is not simply difficult but actually impossible. There is always in such generalisations a danger of committing a fallacy of composition which has been referred as macro-eonomic paradoxes by Boulding. It may be possible for a person to save more and become prosperous, but the same policy followed by the entire economy must land the system into a variable depression. Similarly an individual wagecutting firm may be able to expand employment but a general wage reduction will have quite adverse repercussions on the general level of employment. Thus the micro-economic thinking is not the appropriate way for dealing with all situations. If a number of blind persons try to identify the elephant from its different limbs, it reflects an utter lack of complete perspective. The micro-economic analysis is. undoubtedly, equipped with a very delicate, detailed and sophisticated system of examination, but it lacks the span of perspection.
The myriads of production and decision-making units can be reduced to manageable proportions through the process of aggregation. The individual consumers, producers and workers etc. are aggregated into homogeneous sub-aggregates and then further summed up to give the whole or aggregate. While dealing with the aggregate, we can safely assume. the ironing out of all disproportions. A uniform average behaviour pattern gets evolved and reasonably true and valid generalisation can be derived.
Thus in the aggregative approach the span of enquiry covers the entire economic system. It, however, lacks that minute and sophisticated system of examination which is characteristic of only micro approach. Because of this flaw, the macro-economic conclusions are sometimes greatly at variance with the situation existing for an individual unit. It is often found that the general price index is rising but the prices in a particular sector or sub sector are declining. During the depression of the 1930’s when the entire economy had been tumbling down, the sugar industry in India was on its way to phenomenal expansion.
In view of these facts, it is evident that neither micro nor macro apporach, in exlusion of the other, is fully equipped to make a through investigation of the working of the forces in the economics system. Both the approaches are, in reality, complementary to each other. In this connection, Samuelson observes, “There is really no opposition between micro and macro-economics. Both are absolutely vital. You are less than half-educated if ou understand the one while being ignorant of the other.” They form an integrated whole and it is a clear folly to consider them separate or disjointed. The economic system must be analysed as an aggregate as well as constituted of small myriad units.
Even though micro and macro approaches need to be treated as integrated, yet for reaching meaningful results, one precaution, as suggested by Gardner Ackley, must be taken. The macro-economic problems should be approached with the macro-economic tools and micro-economic problem with micro-economic tools. If we try to investigate the micro-economic problems with macro-economic tools and equipment or vice-versa, there is bound to arise a big jumble of misleading and fallacious conclusions.
