Wednesday, August 10, 2011

The philosophy of macroeconomics

Disclaimer: I'm fairly intelligent, I'm used to delving into the philosophical foundations of various modes of thought, and I've read a fair bit beyond my coursework. I am, however, still a very junior economics student, so take what I say with a grain of salt.

Part I: The National Economy

The textbook definition of macroeconomics is the study of the economy as a whole (in the aggregate), as opposed to microeconomics, the study of economics one actor (individual, family or business) at a time. But what does it mean to study the economy "as a whole"?

We could simply talk about the global economy, but there are several reasons why that definition of "the whole" isn't really convenient or illuminating. Instead, macroeconomics usually focuses on the national economy, the economics of an individual country. International (global) economics might dominate the economic activity of a smaller nation, but for a larger nation, such as the United States, China, Russia, Australia, or England*, the majority of economic activity (about 70%) is entirely internal. In macroeconomics, we ignore international economics at the fundamental level. Macroeconomics takes international trade only as a relatively small (in a large economy) correct factor, net exports, to Gross Domestic Product. Overt, active international coercion is usually not plausible, especially for larger nations; countries rarely go to war for the payment of debts**. Most importantly, by definition, the government of a national economy defines its own currency, and some or all of its government debt is denominated in its national currency. The control of currency — control that individual actors do not have in microeconomics — is the decisive factor that makes macroeconomics substantively different from microeconomics.

*The eurozone, the 17 countries of the European Union that use a single currency, the euro, poses interesting and unique macroeconomic issues, but that's a topic for another day.

**I am, of course, ignoring covert, subtle coercion (e.g. assassination or coups), which does happen.

The view that international economic concerns should dominate our national economic policy is almost completely mistaken. Unlike an individual within a national economy, no nation can forcibly collect real, physical assets to satisfy a monetary debt. If a person or a business default on a debt to a bank, the bank can and will send armed men to satisfy that debt. If, however, the United States were to default on its debt to China, the Chinese will not send the People's Army to seize our assets. There would be negative consequences to such a default, but they would not be as catastrophic as losing our national wealth or, if we were to resist, imprisonment or death. If it were more beneficial to default on our international debt than to honor it, we could, practically speaking, choose to do so. Our creditors (those that are large enough) know they cannot forcibly collect, so it is incumbent on them to always ensure that our rational consideration of the benefits coincides with their own. Essentially, international economics between large nations is a good exemplar of pure voluntary cooperation.

Section 4 of the Fourteenth Amendment* makes an outright default difficult and unlikely. However, because the United States government** controls the value of money, any foreign debt could, if we so chose, be arbitrarily reduced inflating the currency. Inflation has real effects in the short term — it's not a panacea — but it is an viable option.

*"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

**Taking the Federal Reserve Bank as part of the government. The United States Treasury, by only executive order without additional legislation, could also create new money.

Because of effective national sovereignty, therefore, we are justified in treating (with the correction of net exports) a national economy essentially as a whole.

1 comment:

  1. Larry, I'd be interested in a Marxist analysis of defaulting on our national debt.

    What I mean is, assuming we default and China doesn't invade, how else could the Capitalists separate us from our money?

    For example, would the govt. say we HAVE TO sell off our national parks for the money to pay China back.


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