Introduction: The Genesis of Macroeconomics
This introductory chapter traces the development of macroeconomics. Macroeconomics received its initial impetus from Sir William Petty, who attempted to measure, for the first time, the wealth and income of the nation. Petty made key distinctions between income and wealth, presented the national income equals national expenditure identity, and introduced the velocity of circulation into monetary analysis. Macroeconomics then developed with considerable rapidity through the Scotsman John Law's efforts to implement his macroeconomic theory as macroeconomic policy through the famous Mississippi System in France. Law introduced into his analysis a wide range of important concepts such as supply and demand, the demand for money, a rudimentary circular flow of income analysis, and the law of one price. Richard Cantillon, an Irishman who made a considerable fortune through the Mississippi System, then tried to rationalize why the System had failed. The Frenchman François Quesnay, building on Cantillon's work, presented the first diagrammatic outline of the circular flow of income process through the “Tableau économique” (the “Economic Picture”). Using this “Tableau économique”, Quesnay and his Physiocratic followers were able to show how economic surpluses could be produced, and how these, in turn, generated economic growth.
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