A Longer-term Perspective on Macroeconomics and Distribution: Time, Expectations, and Incentives

Many of the most important modelling and policy issues in both macroeconomics and income distribution revolve around the emphasis placed on the length of the time horizon, the role of expectations, and the responsiveness of behaviour to incentives.1 These three concerns continually arise in various theoretical models and empirical studies addressing the most fundamental concerns of economists. Debates over the potential efficacy of activist monetary (and indeed, fiscal) policy in stabilizing the economy; the optimal redistributive tax/transfer system; and the determinants of long-term growth all must come to grips with these central issues. While debates currently rage on the appropriateness of the ‘new classical macroeconomics’, ‘optimal tax theory’, etc., as bases both for descriptions of economic performance and prescriptions for economic policy, the three elements mentioned above that these and other recent advances have brought to the forefront of economic analysis are likely to remain key elements of the economist’s tool kit well beyond the life-cycle of any particular model or school of thought. In fact, future historians of economic thought may well view these as the most enduring components of economic research in recent years. The focus on time horizon, incentives, and expectations permeates much day-to-day economics, for example, the type of information used for evaluation of government policy proposals.