Macroeconomic Policy and Sustainability

Abstract

The trend in mainstream economic thought about macroeconomic policy has been towards minimalism. In the optimistic Keynesian phase of the 1960's, it was assumed that both fiscal and monetary policy were effective tools for macroeconomic management. But the influence of monetarist and New Classical critiques has led to a gradual erosion of theoretical support for activist government policy. First fiscal policy fell by the wayside, perceived as too slow and possibly counterproductive in its impacts. Then New Classical and rational expectations critiques suggested that even monetary policy was ineffective. Thus the role of government policy has been reduced to a cautious effort not to make things worse - in effect a return to an economics of laissez-faire. In contrast, a sustainability perspective implies that radical and proactive government policies are required to achieve economic development that is both socially just and ecologically sound. The path of laissez-faire leads to increasing intra- and international inequality as well as increasing environmental destruction. To some extent the course of market economies can be steered through the use of sound microeconomic policies. But the fundamental redirection required for sustainable development cannot be achieved without reorienting macroeconomic policy also. Many of the basic tenets of macroeconomic policy need to be redefined in the context of current global problems. The objectives of macroeconomic policy should include economic stabilization, distributional equity, broad social goals such as income security, education, and universal health care, and the management of economic growth. There is an increasing recognition that the achievement of social goals is essential to environmental sustainability. Regarding growth, while earlier macroeconomic theorists generally assumed that growth was good, ecological economists such as Herman Daly have suggested that growth should be limited and that a sustainable economic scale, rather than exponential growth, should be the goal of macroeconomic policy. The time is ripe for a reassessment of macroeconomic theory and policy. The goal should be to provide a theoretical basis for the reorientation of macro policy at the national and international levels, linking efforts to promote local-level sustainability and equity with greening and restructuring of multilateral institutions.