Monday, February 20, 2012

Time to Minimize "Macroeconomics"

I remember when, in 1981, the stock market fell sharply immediately following passage of President Ronald Reagan’s tax cut package. When asked what he thought about Wall Street’s plunge, Reagan quipped, "I have never found Wall Street to be a source of good economic advice." I’d say the same thing about many of today’s economists. Why? In part because too many rely on a form of pseudo-economics, which we call "macroeconomics".

Macroeconomics is defined by Investopedia as follows:

The field of economics that studies the behavior of the aggregate economy.
Macroeconomics examines economy-wide phenomena such as changes in unemployment,
national income, rate of growth, gross domestic product, inflation and price

Macroeconomics is focused on the movement and trends in the economy
as a whole, while in microeconomics the focus is placed on factors that affect
the decisions made by firms and individuals. The factors that are studied by
macro and micro will often influence each other, such as the current level of
unemployment in the economy as a whole will affect the supply of workers which
an oil company can hire from, for example. [Investopedia]

"Put … simply, the whole idea of macroeconomics is a fraud." – Steve Forbes

Amen! But it’s worse than a fraud. As Forbes points out, macroeconomics "has been a critical enabler for the obese growth of Big Government"; in other words, statism. It has served as a rationalization for government central planners to "do something" to correct real or imagined problems – imposed on us with our wealth through taxing and government spending, and at the expense of our freedom.

The economics profession has been corrupted by the absurdity called macroeconomics – the study of the economy "as a whole"; i.e., without focussing on actual human beings. In the definition cited above, notice the statement: "The factors that are studied by macro and micro will often influence each other." Often? When does the micro – "decisions made by firms and individuals" - not "influence" the "the economy as a whole?" When you cut through all of the political rhetoric and rationalizations, it all boils down to a very simple answer; whenever the policymakers feel like it. The "not" is the opening wedge of the fraud. The separation of the macro from the micro – i.e., the forest from the trees, meaning of the economy from the people – leads to the disconnect of economic policy from economic reality. With no connection to reality – i.e., any rational, objective standard – politicians are free to offer up any rationalization for their economic policies their whims – and their power-lust - dictate.

Just what is the "whole" as apart from individual firms and people?

The economy is not some disembodied entity that can be studied in an abstract statistical vacuum. Statistics may give you a lead, but they are rarely definitive, and should never be the primary basis for government policy.

Fundamentally, the economy is the production and trade engaged in by single, autonomous individuals thinking, acting, and interacting with each other, each in pursuit of some goal of his own. Consumption is the final result of this process. The economy begins with production. The fundamental source of production is thinking; human reason. Productive work, the next step, is the application of reason to physical labor, which leads to the creation of valuable products that can be traded for the products produced in the same manner by other human beings. Underneath all of the complexities of a modern economy is this basic process. All of it is long-term oriented; i.e., a process of planning ahead. The more complex the productive process, the more long-term the thinking is and must be. Money doesn’t alter this process. It merely facilitates it – and, unfortunately, serves to camouflage its nature. Without the productive process, there can be no money.

Modern macroeconomics ignores this whole process, and zeros in on statistics. For example, it measures economic activity not in terms of wealth production but in terms of money changing hands, which are not synonymous. Then you get such idiocy as the accepted "wisdom" that consumer spending is 70% of the economy, as if you can consume twice as much as you produce. You get nonsense like the idea that destruction – war, natural disaster, etc – "spurs" economic growth because of the rebuilding that follows, evading the fact that the rebuilding entails resources diverted from the production of new wealth toward the replacing of the previously existing. Plenty of money changed hands, but on balance no new wealth was added. But based only upon statistics, the GDP would have grown.

Under macroeconomic premises, you get meaningless phrases like "aggregate demand" and "deficiency of demand" and simplistic plans to "stimulate" that demand, ignoring the only true source of "consumer demand" – the consumer’s own productive work. You get quick fixes like temporary tax credits to entice a businessman - who thinks years ahead - to hire someone now. You get "to add or keep 275,000 jobs" for $447 billion, according to projections for Obama’s latest stimulus proposal; $1,625,455 per job, paid for by a fortune sucked out of the real private economy. That's a big bump in GDP, but a drag on the real economy. You get nonsensical ideas such as that the government can "jump-start the economy" by forcibly transferring money from some people to others. These policies may appear to "work" because of the vast amounts of money changing hands, evading the fact that wealth has merely been transferred from more productive activities to less productive political favorites, hurting the economy - and violating the rights of those whose wealth was taken, to boot.

There is an old saying: Never lose sight of the forest for the trees. There is nothing wrong with incorporating a macro view of the economy, as a part of economic study. But the corollary - never lose sight of the trees for the forest – is the more crucial flip side of the economics coin. The economy doesn’t exist independent of the productive interactions of actual people. Otherwise, we might as well program the Mars rovers to study the Martian economy. Absurd as that sounds, the essential premise of modern macroeconomics, which originated with the theories of John Meynard Keynes and others, is just that; an economy floating above the reality of actual people.

Washington’s most recent stimulus package - President Obama’s second and the fourth since the arrival of the Great Recession in 2007 – has stalled in congress. Counting such smaller idiocies as Cash-for-Clunkers and temporary subsidies for homebuyers, we’ve lost count. The idea was to increase consumer demand, and thus create jobs. Create jobs? We’ve been reduced to hearing our president brag – with a straight face - about how many jobs were saved! I’ve coined the term "OBushonomics" to describe the policies of the past four-plus years. (Although the modern concept behind the Bush and Obama administrations’ policies goes back to the 1930s, the basic theory of consumption-based economics dates back to 17th century mercantilism. See George Reisman at Mises Daily.

To understand why OBushonomics stimulus # 4 won’t "work" any more than the other 3, the fog of two false premises must be cleared away; the primitive collectivist notion that all wealth belongs to the tribe (society), to be doled out by the tribal chiefs (the government), and the fraudulent obscenity of "macroeconomics", which encompasses the first. Both premises ignore the real source of economic vitality - actual, individual human beings.

Want to know if a particular idea will "work"? Relate it to actual individual people.

If I robbed a convenience store, and used the cash to buy a car, I have created autoworkers’ jobs – on the government stimulus premise. Obama’s latest "jobs" bill is that on a national scale, and nothing more. Only the foggy mind of a collectivist or a macroeconomist can evade its nature. But, as a famous philosopher once said, "You can avoid reality, but you cannot avoid the consequences of avoiding reality." The consequences of robbing some people to employ someone else is immoral and non-productive, and thus spiritually and economically destructive.

Real jobs are those that result from voluntary interactions of thinking productive people. An individual starts a business – he has created a job for himself. He draws customers who voluntarily buy his work product, he pays his suppliers and other costs, and he makes money in the only valid honorable sense: He created value. If he is successful, more and more people desire his product, and he reaches the point when his intellectual energy and ambition exceeds his physical capacity alone to meet his customers’ "demand." He then hires one or more people who voluntarily agree to help him, at mutually agreed-upon wages – he has created jobs for others, who become customers for other businesses created in the same manner. All through the process, voluntary agreement to mutual advantage, not force, is the foundation. All through the process, value is created for all involved, to no one’s detriment. The required social condition for this process is a free market – freedom from forcible interference by criminals or government officials. Force is the enemy of production. Prosperity is built on voluntary, win-win contractual agreements – people getting better together.

The issue is not jobs, but moral, productive jobs vs. immoral parasitical jobs – which means freedom vs. government force. In a free market, jobs abound with no one sacrificed to anyone. When the government supercedes the free market, jobs go to special interests paid for out of the financial hides of the sacrificial victims’ forcibly confiscated property – a lose-win proposition. Any slave state can create jobs. Only free individuals can create real jobs. Get the government out of the way, liberate individuals to think, work, trade, and contract freely, and prosperity follows. Unfortunately, we are a long way from a free economy, as the ongoing economic stagnation attests to. We’ll know we’re on the right track when politicians stop making phony promises about how they will create jobs, and real statesmen arise to, as Forbes columnist Wayne Crews points out, "get things undone" – to undo collectivism, macroeconomics, and hence government interference (Or, more precisely, to leave the doing to free private individuals).

Macroeconomics is not just a nonsensical fraud. By rationalizing consumption-based economics, it is a grave injustice. George Reisman writes:

The idea that by consuming his product, one benefits the producer, by giving him
the work to do of making possible one's consumption, is absurd... Only the use
of money lends it the least semblance of plausibility. If it were true, then
every slave who ever lived should have cherished his master's every whim, the
satisfaction of which required of him more work. A slave should have been
grateful if his master desired a larger house, an improved road, more food, more
parties, and so on; for the provision of the means of satisfying these desires
would have given him correspondingly more work to do.

The belief that the consumption of the government benefits and helps to support the economic system
is on precisely the same footing … as the belief that the consumption of the
master benefits and supports the slave. It is a belief the absurdity of which is
matched only by the injustice it makes possible. It is the means by which
parasitical pressure groups, employing the government as an agent of plunder,
seek to delude their victims into imagining that they are benefited and
supported by those who take their products and give them nothing in return.

Stimulus always fails, for this very reason. Private consumers work for the money they spend, thus producing their own demand. Stimulus politicians - from liberals like Obama to pseudo-conservatives like Bush - do not create demand. They simply steal it.

The source of consumer spending is productive work. The source of government demand-side stimulus policies is economic plunder.

The antidote to macroeconomics is real economics such as embodied in Say's Law of Markets. Say’s law, as Wayne Crews explains in Forbes, is...

…reverentially referred to by another unappreciated market economist, William H.
Hutt, as the "most fundamental economic law" in all economic theory. It
enunciates the principle that "demands in general" are "supplies in
general"--different aspects of one phenomenon."

Or, as Ayn Rand puts it:

But, in fact, consumers qua consumers are not part of anyone’s market; qua
consumers, they are irrelevant to economics. Nature does not grant anyone an
innate title of "consumer"; it is a title that has to be earned—by production.
Only producers constitute a market—only men who trade products or services for
products or services. In the role of producers, they represent a market’s
"supply"; in the role of consumers, they represent a market’s "demand." The law
of supply and demand has an implicit subclause: that it involves the same people
in both capacities.

Or, as Steve Forbes explains:

Adam Smith taught that economic activity is composed of transactions between two
or more parties. For example, I go to a restaurant: They give me food; in return
I give them money, which the eatery then uses to pay for such things as
salaries, utilities, raw food, etc. So, as Amity [Shlaes] asks, how in the world
can consumer spending make up 70% of the economy? We're all consumers, and we're
all suppliers.

All emphasis is mine. The point must be driven home: Only producers are consumers, because only production makes consumption possible. I am not an economist. But one does not have to be an economist to know that ideas must be grounded in reality. Modern macroeconomics is not. It is a tool of state empowerment, and nothing else.

The destructive long-term course America is on can only be reversed when we challenge certain accepted conventional premises. Macroeconomics is one of them. In regard to this last, Steve Forbes believes the turn is at hand:

There's one big story this year [2011] that won't garner headlines but will have
a profound impact on our future: The edifice of post-Great Depression economics
is coming under an ultimately mortal intellectual assault. And a good thing,

Is Forbes’ "Copernican Revolution" in economics really at hand? Let’s hope so. Only when we realize that we must never lose sight of the trees for the forest, and minimize macroeconomics to the status of a tool of economics whose theories must be validated by real-world facts will we begin to see rational economic policies coming out of Washington.


Roger said...

Very nicely done. Do you have a policy on sharing?

Mike Zemack said...

Thank you very much, Roger.

There is a "share" button near the top of the post, to the right of the title. Be sure to first permalink to this post by clicking on the time at the bottom of the post. Then feel free to share.

C.W. said...

One of the best books on economics is "Objective Economics" by Dr. Northrup Buechner. It demonstrates what reality-oriented, man-oriented economics, science is. He also makes excellent criticisms about modern economics.

Mike Zemack said...

Thanks, C.W. I'll check it out.