Economics is the science of scarcity. The world is full of resources: labor, land, capital, and various other holdings that people value. But, since there is a finite amount, or scarcity, of these resources, not everyone can satisfy their extensive desire for them. Therefore, in order to gain something, you have to give up something else. So, people have to make decisions in this world of scarcity, and weigh the costs and benefits of these decisions.
But, why was the concept of economics split into two different realms: macroeconomics and microeconomics? Well, let’s start off with a simple definition for each. Macroeconomics is the study of how the economy works on a large scale. In this realm, the topic of interest is usually a nation. When studying the macro side of things, economists look into all markets in a nation, and how they interconnect to form what we call aggregate variables. The micro side of things, on the other hand, is focused on the economy on a smaller scale, and the examination of single markets and individuals.
Now that we have established a simple definition for macroeconomics and microeconomics, let’s dive into how these separate studies emerged. Originally, economics was one topic: “the study of how human societies organize the production, distribution, and consumption of goods and services” (International Monetary Fund). The study began with the theories of early economist Adam Smith, who is widely known as the “father of economics”. For example, Smith’s theory of the “invisible hand” stated that competition and self interest act as a force to regulate a free market economy. With Smith’s theory, and the theories of other economists, the field of economics came to life during the Industrial Revolution.
With this new study, economists simply accepted that markets would be in equilibrium. They thought that prices would automatically change to balance supply and demand. They thought that large crises in the economy would simply fix themselves. Overall, they assumed that the examination of specific markets would provide data that would carry over to the tendencies of aggregate variables (eg. national income, gross domestic product or GDP).
However, this widespread belief took a turn after the Great Depression (1929-1939). Economists could not provide a reason for the unstoppable and drastic collapse of the economy. Typically, they looked into business cycles, which corresponded to changes in the economy and usual crises. But, with the premeditated assumption that markets would always be in equilibrium, economists could not provide any explanation behind the economic collapse in the early 20th century.
In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money, which mainly focuses on the lack of stability in aggregate variables. In this book, he introduced the concept of “disequilibrium economics”, which is the study of the deviation from general equilibrium. This new study not only provided an explanation for the happenings of the Great Depression, but also created a branch of economics that would be called macroeconomics, which consists of interactions between markets, and how they form aggregate variables.
Furthermore, the separation between macroeconomics and microeconomics was first made in 1933, by Ragnad Frisch, and later expanded upon in 1941, by Pieter de Wolff. Since people studied individual markets and made general assumptions about equilibrium in other markets before the Great Depression, microeconomics was still the study of individual markets at the time.
Overall, the distinction between macroeconomics and microeconomics has proven to be much more accurate and complex than what we had once known as economics before the Great Depression. With this distinction, we are able to better understand individual markets, and how they interact to form aggregates, while maintaining the ability to dive deeper into each market separately.
https://academic.oup.com/book/1936/chapter-abstract/141728926?redirectedFrom=fulltext
https://conversableeconomist.blogspot.com/2019/05/origins-of-microeconomics-and.html
https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Micro-and-Macro
https://www.investopedia.com/terms/m/macroeconomics.asp
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