Introduction
Economic theories continue to evolve to conform to prevailing economic situations. In the early 1950s people and governments relied on the findings of Keynes to make their economic decisions. Further research by modern economists has confirmed his findings while others dispute them. Quantity controlled macroeconomics confirms Keynes findings thus contradicting the relationship between macroeconomics and the general equilibrium theory. Coddington thus labels quantity controlled macroeconomics as reductionist. This paper looks at the reasons that made Coddington take that stance.
Macroeconomics is basically involved in policymaking via fiscal and monetary policies. These policies have a direct effect on individual firms. The general equilibrium rule states that supply equals demand. However, when their quantities are controlled they confirm what Keynes proposed about macroeconomics. He called for the government’s intervention in the operations of the market and private sector.
Coddington’s views
Suppose we first understand what Coddington meant by the word reductionist in regards to economics or macroeconomic at a more specific level. Keynes proposes that utilization of resources could be high or low while previous economists stressed the particular case of full utilization. Coddington expresses his opposition to this proposal by saying that quantity controlled macroeconomics promotes a reductionism effect in the levels of performance to a firm or an economy for that matter. He says that market forces can handle the problem with no need for government involvement to limit certain factors. He bases his reasoning on the following. (Markusen, 2001)
General equilibrium calls for non-interference with the determinants of demand and supply in the market both in micro and macroeconomics. Coddington says that limiting the supply of a product or service in the market will pull down the performance of a firm since the firm will lose its market share to competitors. On the macroeconomic front, a government’s reluctance to control the flow and supply of money in an economy, for example, will lead to inflation and an upsurge in interest rates. High-interest rates will hinder the expansion of an economy and other firms as well.
However, Coddington is against this saying that market dynamics should be the ones to determine the interest rates to be charged and the amount of money circulating within a particular system and not the government to set limits. He views that dictating the interests rate that banks are to charge will interfere with their performance. Limiting the supply of money will have the locals lacking access to money according to Coddington. Lack of access to money or liquidity as such will interfere with the collection of taxes and availability of funds to the government itself. Again, the government’s decision to limit the number of reserves that banks should have is not the right way to go about it as per Coddington’s school of thought. This in effect will interfere with how the banks run. When firms are, for example, allowed to import or export without interference the law of demand and supply will take care of the situation.
The relationship between macroeconomics and general equilibrium calls for noninterference and non-limiting of the economic determinants something that Coddington upholds. (Mishkin, 2004)
The reductionism is more apparent in relating interest rates with the performance of banks and government. When banks fail, the effect will trickle down to the government and other firms that keep the government running. It is with this idea in mind that Coddington is against the constraining of economic factors and says that the constraining will have a reductionist effect.
References
Markusen, J. General Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence, Massachusetts: Cambridge, 2001.
Mishkin, Frederic, The Economics of money banking, and financial markets 7th ed. Boston: Wesley, 2004.