Macroeconomic Policy: The ‘Orthodox’ Approach

Virtually all countries now share the problem of trying to prevent serious inflation without bringing about a considerable decline in the rate of economic growth and living standards. The problem is therefore one that needs to be considered in a global context. But as there is no world government it may appear unrealistic to ask what economic policies ought to be adopted for the world as a whole. There are, however, two principal justifications for adopting this approach initially. The first is that unless individual national governments bear in mind the need to approach this problem on a world basis, it is highly unlikely that any of them will successfully achieve the broad aims of macroeconomic policy which are important to them. The second principal justification for beginning with this approach is that it underlines many factors which are important in each individual country, namely those that abstract from the complications of its transactions with the rest of the world. In other words this ‘closed economy’ approach is relevant both for the world as a whole and also to some extent for each individual country (especially large ones). But for individual countries it is relevant only as a first step in the exposition, which may, indeed, need to be greatly modified when account is taken of a country’s transactions with the rest of the world. These complications of an ‘open economy’ must always be borne in mind in making prescriptions for policy for individual countries.