Sunday, December 11, 2011

Thoughts on "what is 'real'"?

I apologize that this exposition is a little disorganized. I'm pretty much figuring this out as I go along.

A few thoughts come to mind after writing part 1.

I define the simplified fundamental identity of real macroeconomics as:
    Production = Consumption + Investment
Note the difference from the fundamental equation of financial macroeconomics:
    Gross Domestic Product = Consumption + Investment + Government + Net Exports
I took Net Exports out just because its easier to assume that a national economy is an isolated whole. But I explicitly did not differentiate government spending. In real terms, that is in terms of physical goods and services, there's no real difference between consumption and investment performed or afforded by the government or by the private sector. A bridge built and/or paid for by the government is just as much a bridge as one built and/or paid for by a private firm.

I also don't distinguish between public and private goods. Public goods, defined as non-rival and/or non-exclusive goods, are still, at the real level, still physical goods. I'm happy (for now) to leave the choice of which goods to produce, public or private, to microeconomics.

When I look at the world specifically as an economist, I don't judge people's wants. If a lot of people want Big Macs, or a badass military, then that's what they want.

I am not yet concerned specifically with distribution of consumption, although distribution will come into play soon enough. Even if one person in a 1,000,000 person economy is consuming all the surplus production of the current capital stock and remaining 999,999 workers' labor, we don't have a macroeconomic crisis unless we cannot produce enough to feed those 999,999, or, for some reason, some of these 999,999 are not working to supply what the one consumer wants to consume. For now, I'm pushing the question of distribution to microeconomics and politics.

I was going to wait to differentiate needs and wants until an actual chapter, but I think the explanation is short enough that I can just include it here.

A need is something we have to produce to maintain the productivity of the labor force. If, for example, we had 1,000,000 people in the economy, but we could produce only enough food to feed 900,000 of them (or feed them all only enough to maintain 90% average productivity) we would not be producing as much food as we need. In contrast, a want is something we want but do not need per the above definition. If, for example, each of those 1,000,000 really wanted an iPad, we would not be compromising our productivity by producing only 1,000.

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