Classical economists of the eighteenth and nineteenth centuries, from Adam Smith to J.S. Mill (and neoclassical economists like Marshall and Pigou who followed them in the late nineteenth and the early twentieth century prior to Keynes) conflated the big picture-the nation and trade-with the small picture-households, workers and firms. They had it right because the big and small pictures are inextricably linked. You can't look at one without considering the other.

Keynesianism produced a pedagogical schism in economics that has no relevance at all for the way economies work. Textbooks were divided into two parts: microeconomics and macroeconomics. Macroeconomics took on a life of its own. It was and still is a Keynesian world of aggregates, seemingly distinct from the economic forces at work among households, workers and firms. Keynes and his followers invented a new artificial world which, in fact, has no relationship to underlying economic forces. It has no underpinning. It has no legs. Trying to understand how the economy works, and how to put it right, through macroeconomics is like trying to understand how an engine works, and how to fix it, without regard at all to its constituent parts and how they work together.

full story