Corey Robin draws an interesting, perhaps flawed, connection between Nietzsche and the Austrians. Robin is aware of his critics, and highlights Kevin Vallier critique from the right, On Robin’s Tenuous Connection between Nietzsche and Hayek, and Philip Pilkington's from the left, The Ideology to End Ideologies – A Response to Corey Robin on Nietzsche, Hayek, Mises, and Marginalism.
I'm somewhat unique. I'm a fiftyish economics undergraduate student who thought and read a lot about economics before I started school, and I have a pronounced Marxist bias. I've also spent many years reading as a lay person about physics and meta-physics (i.e. how physicists and philosophers think about the task of "doing physics").
In a related article Marginal Utility Theory as a Blueprint for Social Control, Pilkington believes that the marginal theory of value is simply absurd, resting on obviously false assumption, and leading to a picture of reality so far removed from the actual reality that it has no real intellectual value at all. In Eb on What they Teach in School, the inimitable Buce weighs in, albeit peripherally.
Even as a Marxist, however, I'm not so sure.
One idea that was drilled into my head in my studies in physics is that a model is a model. The map is not the territory. I look at all the marginalist models I've just finished learning in Intermediate Micro and Macro (the last time, I think, an economics undergraduate will ever look at the underlying models), and I see, well, models. Given some assumptions that seem to hold (or at least be useful) sometimes, they seem to provide some insight into some kinds of behavior. Some sometimes some some. Physicists seem to have few conceptional problems with some and sometimes. I don't see any fundamental metaphysical conflict between the marginal theory of exchange value and the Labor Theory of exchange value; indeed I wrote a paper on the subject: The Labor Theory of Value.
As I see it, there are two fundamentally competing metaphysical views on economics, and these views compete on the descriptive, normative, and valuative levels.
In the descriptive sense (according to my admittedly half-expert understanding) the marginalist/Austrian view, and especially the neo-classical macroeconomic view, maintains that the economy is always in the one and only socially optimal equilibrium, no matter what we might observe happening. There are no "technical" fixes that can be made by anyone, especially the government. The underlying physical fundamentals of the economy — technology, productivity, physical and human capital development — can and do change, but they change only slowly, and it takes a lot of work to change them. All interventions to try to change our economic behavior without changing the fundamentals move us away from equilibrium. The market will adjust automatically and quickly, so the best these interventions can be is ineffective. When interventions are extreme enough to actually alter our economic behavior, the do their worst: they force us to stop trying to change the fundamentals and actively work just to restore the equilibrium the government has disturbed. Hence the response to the Nixon stimuli was the Volker recession. The marginalist/Austrian view in this sense is: it ain't broke; don't try to fix it.
In the descriptive sense, the competing Keynesian view maintains that the economy can, sometimes, be persistently out of equilibrium, or stuck in a socially sub-optimal equilibrium. Individual consumers and firms often, but not always, correct economic imbalances; when they cannot, the government must step in to correct it. The government, in the Keynesian view, is hardly perfect, and they can err; it is a distortion of Keynesianism to say that whatever the government does is good. However, the government can, at least sometimes, do good.
Intertwined with these descriptive views are normative views. In the marginalist/Austrian view, the market outcome is by definition the socially optimal outcome. Not only is the market always in equilibrium, it is always in the socially optimal equilibrium, by definition.
In the Keynesian view, the market outcome and the socially optimal economic outcome, while related, are substantively different things. I'm not talking about values and outcomes that are fundamentally outside the realm of economics; I'm talking about purely economic outcomes. For example, market outcomes tend to produce income and wealth inequality; we might decide, socially, that less inequality is a more socially optimal economic outcome, even though the "market" must be "distorted" to achieve this outcome.
The question of values is not quite as clear. In The Reactionary Mind, Corey Robin makes a strong case that "reactionaries" (i.e. marginalists/Austrians) view political inequality as a positive virtue. Descriptively, political inequality exists when some individuals have the power to arbitrarily command other individuals. (The notion of individual, arbitrary command is different from socialized command, e.g. submission to democratically agreed-upon constraints on behavior.) Reactionaries, according to Robin, think that relations of individual domination and submission are not only a virtue, but the primary, fundamental raison d'être of human civilization. Keynesians value political equality, the state where no individuals can arbitrarily command others.
There's nothing disreputable per se about having political values, and seeking to express those values in a society. Furthermore, all political expression of values involves some degree of coercion and imposition. If the marginalists/Austrians value political inequality, that's what they value, and they are just as much citizens and human beings as I am. I cannot expect but that they will try to express — and, to some degree, coerce and impose — those values in a society. There is, however, something fundamentally disreputable in describing reality inaccurately, intentionally or ignorantly, in order to achieve the political expression of one's values.
Thus, the Keynesian critique of the reactionary, the Austrian, the marginalist, etc. takes place at two levels. The first is on the level of competing values. The Keynesians want political equality; the Austrians want political inequality. They Keynesians are going to like democracy; the Austrians are not going to like it. I know I personally like Keynesian values more than Austrian values, but there is no objective sense with which we can scientifically say that one is more accurate than the other. All we can do is discover who has sufficient will, power, cleverness, skill, and ability to make their values preeminent in society.
The second level of critique, however, goes deeper. We Keynesians assert that in addition to the legitimate and reputable project of imposing their values on society (just as we legitimately and reputably seek to impose our own values on society), the Austrians are guilty of inaccurately describing objective reality. The sort of marginal analysis they use is, while useful and applicable under certain circumstance, not a universal description of economic reality. The sort of perfectly competitive markets they talk about when they assert that markets lead, by definition, to socially optimal outcomes, do not actually exist in reality, and the few markets that even approximate perfect competition are rare, limited, and usually separated from ordinary consumers by a layer of monopolistic or oligopolistic markets. And, as Marx has shown, if all capitalist markets were in fact perfectly competitive, capitalism would self-destruct. That capitalism has not (yet) self-destructed does not by itself disprove Marx; it shows only that capitalists are not, in fact, actually capitalists in an economic sense. Capitalists have enough intelligence to know that they cannot subscribe in practice to the ideology they endorse in theory.
Showing posts with label philosophy of macroeconomics. Show all posts
Showing posts with label philosophy of macroeconomics. Show all posts
Tuesday, May 14, 2013
Monday, February 18, 2013
Incentives: Defining and classifying incentives
My economics professors are typically surprised that I call myself a communist, especially since I tend to do very well in their classes learning capitalist economics. They really shouldn't be that surprised; Marx and Lenin make the case that the problems of capitalism are inherent to the theoretical structure of capitalism itself, and nothing in three years of undergraduate education — and by the end of this semester, I will have completed all the courses in basic capitalist theory — have led me even to suspect Marx and Lenin might be wrong, at least about the nature of capitalism.
Yesterday, my professor discovered, to his astonishment, that I really was a communist. He's cool with that (all of my professors, even the Libertarians and Republicans, have been cool with my communism), but he wanted me to think about one concept: incentives. He didn't make any argument explicitly, but I think the underlying argument is that capitalism has a complex and powerful set of institutional and systemic incentives, and these incentives have been the primary social cause of the massive industrialization and overall increase in the material standard of living that capitalism has achieved over the last 200-300 years. If we do away with those systemic incentives, we risk backsliding into the inertia, complacency, and inefficiency of the pre-capitalist era. Is that what I really want?
Marx and Lenin have, I think, adequately covered the problems with capitalism's systemic incentives. Briefly, by rewarding the accumulation of money and capital, capitalism requires ad hoc incentives (mostly government stimulus) to increase consumer spending when the economy has accumulated excess capital relative to aggregate demand. Ad hoc incentives can happen, but they are weaker, temporary, and don't have the self-reinforcing character of systemic incentives. The welfare state is an attempt to create systemic incentives (mostly fiat money, social transfers, and continuous government deficits) but the capitalist class will never give up its implacable opposition to the welfare state. They have been making gains against the welfare state for forty years, until it lies in tatters today. But that's not the issue: as bad as capitalism might be, communism could be worse.
But how do incentives actually work?
An incentive is a social institution that encourages some or all citizens to do what they would not do without the incentive (or discourages some or all to not do what they would otherwise do).
As I see it, there are five kinds of incentives. (Keep in mind that I am more-or-less arbitrarily defining labels, and I find discussions about whether or not I use the "correct" labels or "correct" definitions to be tedious. If you want to criticize arbitrary definitions, it's interesting only if you critique them at a more sophisticated level.)
First, there are psychological incentives, which individuals use to reconcile conflicts within their own minds. For example, some people generally have an internal psychological conflict between their desire to lose weight and their desire to eat. Some find it helpful to create psychological incentives, such as the social solidarity offered by organizations such as Weight Watchers, to reconcile these conflicting psychological desires. Although we can and do use many psychological incentives in a political sense, such as raising excise taxes on tobacco to reduce smoking, I don't see these kinds of incentives as being of primary interest in talking about large scale political-economic institutions such as capitalism and communism.
Second, there are natural incentives. We do not need social incentives to encourage people to do what they usually want to do. We do not, for example, need to incentivize people to eat food or come in out of the rain. People will do these things on their own. These incentives seem trivial precisely because we don't need them, but they have some meta-ethical significance, which I'll discuss later.
Third, there are coercive incentives. If, for some reason, a dominant minority wanted to get the majority to do something the majority had no natural desire to do. We would have to have some sort of social incentive if, for example, we wanted people to cut off their left pinky fingers. These incentives also seem trivial, because why would we want to encourage people to do what they just don't want to do? But these definitions also have meta-ethical significance.
Fourth, there are negotiated incentives. If I want something from you, I have to offer you something you want more than you want what I want. For example, if I want you to give me a bicycle, I have to give you a case of beer, which you want more than you want the bicycle. Since trade can make both parties better off, and since people by definition naturally want to be better off, people will naturally want to trade; there's a natural incentive at the abstract level to offer negotiated incentives at the concrete level. Since there's an abstract natural incentive to trade, we don't need to do much at the institutional level to support the idea of trading.
Fifth and finally, there are game-theoretic incentives. When there is a natural incentive to do something, but doing it works only if (most) everyone does it, then we need to create game-theoretic incentives so that people can trust others to do it. The concept of the promise is the most obvious game-theoretic incentive. When we can use promises as negotiated incentives, we can achieve a lot of long-term benefits that are extremely difficult, and perhaps impossible, without promises. However, promises work only if (most) everyone keeps her promises, and there are short-term natural incentives to break promises. If I promise to give you a case of beer tomorrow in exchange for a bicycle today, we get a benefit — i.e. it is more efficient for me to use the bicycle today than for you to use it — that we couldn't get without the use of promises. However, once I have the bicycle, I have a short-term natural incentive to renege on the promise of beer tomorrow. If even a few people don't keep their promises, the whole edifice of using promises collapses, and we lose the benefits of using promises.
So when we create game-theoretic incentives to keep our promises (such as the possibility that men with guns will come to my door, take possession of the promised case of beer, and give it to my neighbor who gave me the bicycle) we are not saying we need to be forced to keep our promises. We know rationally that keeping our promises has rational benefit. Instead, we are saying by adopting game-theoretic incentives that we are committed to keeping our promises, that we are eliminating the possibility of free-riding on the system; in other words, we use game-theoretic incentives to establish trust. And we require political-economic institutions to establish precisely these kinds of game-theoretic incentives.
Yesterday, my professor discovered, to his astonishment, that I really was a communist. He's cool with that (all of my professors, even the Libertarians and Republicans, have been cool with my communism), but he wanted me to think about one concept: incentives. He didn't make any argument explicitly, but I think the underlying argument is that capitalism has a complex and powerful set of institutional and systemic incentives, and these incentives have been the primary social cause of the massive industrialization and overall increase in the material standard of living that capitalism has achieved over the last 200-300 years. If we do away with those systemic incentives, we risk backsliding into the inertia, complacency, and inefficiency of the pre-capitalist era. Is that what I really want?
Marx and Lenin have, I think, adequately covered the problems with capitalism's systemic incentives. Briefly, by rewarding the accumulation of money and capital, capitalism requires ad hoc incentives (mostly government stimulus) to increase consumer spending when the economy has accumulated excess capital relative to aggregate demand. Ad hoc incentives can happen, but they are weaker, temporary, and don't have the self-reinforcing character of systemic incentives. The welfare state is an attempt to create systemic incentives (mostly fiat money, social transfers, and continuous government deficits) but the capitalist class will never give up its implacable opposition to the welfare state. They have been making gains against the welfare state for forty years, until it lies in tatters today. But that's not the issue: as bad as capitalism might be, communism could be worse.
But how do incentives actually work?
An incentive is a social institution that encourages some or all citizens to do what they would not do without the incentive (or discourages some or all to not do what they would otherwise do).
As I see it, there are five kinds of incentives. (Keep in mind that I am more-or-less arbitrarily defining labels, and I find discussions about whether or not I use the "correct" labels or "correct" definitions to be tedious. If you want to criticize arbitrary definitions, it's interesting only if you critique them at a more sophisticated level.)
First, there are psychological incentives, which individuals use to reconcile conflicts within their own minds. For example, some people generally have an internal psychological conflict between their desire to lose weight and their desire to eat. Some find it helpful to create psychological incentives, such as the social solidarity offered by organizations such as Weight Watchers, to reconcile these conflicting psychological desires. Although we can and do use many psychological incentives in a political sense, such as raising excise taxes on tobacco to reduce smoking, I don't see these kinds of incentives as being of primary interest in talking about large scale political-economic institutions such as capitalism and communism.
Second, there are natural incentives. We do not need social incentives to encourage people to do what they usually want to do. We do not, for example, need to incentivize people to eat food or come in out of the rain. People will do these things on their own. These incentives seem trivial precisely because we don't need them, but they have some meta-ethical significance, which I'll discuss later.
Third, there are coercive incentives. If, for some reason, a dominant minority wanted to get the majority to do something the majority had no natural desire to do. We would have to have some sort of social incentive if, for example, we wanted people to cut off their left pinky fingers. These incentives also seem trivial, because why would we want to encourage people to do what they just don't want to do? But these definitions also have meta-ethical significance.
Fourth, there are negotiated incentives. If I want something from you, I have to offer you something you want more than you want what I want. For example, if I want you to give me a bicycle, I have to give you a case of beer, which you want more than you want the bicycle. Since trade can make both parties better off, and since people by definition naturally want to be better off, people will naturally want to trade; there's a natural incentive at the abstract level to offer negotiated incentives at the concrete level. Since there's an abstract natural incentive to trade, we don't need to do much at the institutional level to support the idea of trading.
Fifth and finally, there are game-theoretic incentives. When there is a natural incentive to do something, but doing it works only if (most) everyone does it, then we need to create game-theoretic incentives so that people can trust others to do it. The concept of the promise is the most obvious game-theoretic incentive. When we can use promises as negotiated incentives, we can achieve a lot of long-term benefits that are extremely difficult, and perhaps impossible, without promises. However, promises work only if (most) everyone keeps her promises, and there are short-term natural incentives to break promises. If I promise to give you a case of beer tomorrow in exchange for a bicycle today, we get a benefit — i.e. it is more efficient for me to use the bicycle today than for you to use it — that we couldn't get without the use of promises. However, once I have the bicycle, I have a short-term natural incentive to renege on the promise of beer tomorrow. If even a few people don't keep their promises, the whole edifice of using promises collapses, and we lose the benefits of using promises.
So when we create game-theoretic incentives to keep our promises (such as the possibility that men with guns will come to my door, take possession of the promised case of beer, and give it to my neighbor who gave me the bicycle) we are not saying we need to be forced to keep our promises. We know rationally that keeping our promises has rational benefit. Instead, we are saying by adopting game-theoretic incentives that we are committed to keeping our promises, that we are eliminating the possibility of free-riding on the system; in other words, we use game-theoretic incentives to establish trust. And we require political-economic institutions to establish precisely these kinds of game-theoretic incentives.
Saturday, September 03, 2011
An efficent economy
It's a matter of controversy not only how to measure macroeconomic efficiency, but also if the notion of macroeconomic efficiency is even meaningful.
Consider the game of chess as an extended metaphor. From any individual player's perspective (i.e. the "micro" perspective), efficiency seems rather obvious*: efficiency is the number of games won divided by the total number of games. There might be some subtleties, but basically each player wants to win as many games as she can. But what happens when we take an aggregate ("macro") perspective and look at all the players in all the games? No matter what happens to any individual player or sub-group of players, our "aggregate efficiency" is always exactly 50%. For every winner, there's a loser. Considering efficiency as the proportion of games won to games played, there's nothing at all we can do at all to change the aggregate efficiency of chess.
Not only does this measure of individual efficiency fail to be interesting at the aggregate level, there is no interesting or meaningful aggregate measure of chess efficiency at all. The smallest aggregate we can look at is both players of a single game. For an individual, there are more or less efficient moves—an efficient move is one that makes winning more probable. But the aggregate efficiency of each move, considered from the perspective of both players simultaneously, is exactly 50%. The purpose of a game of chess is to determine which player is, at least at the moment, the better chess player. The best way to determine the better chess player is to let each player make whatever legal move she decides to make. Any interference, prohibition or compulsion beyond the legal moves actually detracts from the purpose of the game. An "efficient" chess game is one with no outside interference.
Alternatively, consider the art world as another metaphor*. To preserve the analogy with macroeconomics, assume we cannot change the total amount of resources devoted to art. (In macroeconomics, we cannot add any outside resources to the whole economy.) Given a fixed amount of resources, how can we produce art "efficiently"? If we differentiate it from superficially popular entertainment, art is just "for itself"; a work of art serves no purpose other than to just exist. Again, any external interference by definition takes away from the "itselfness"; there can be no useful measure of efficiency.
My point here is not to argue that economics really is a zero-sum game like chess, or that it's "for itself" like art. I want instead to understand as charitably as possible how modern economists and modern realist political scientists see the world. With this understanding, I think it's easier to explain the fundamental differences between on the one hand laissez faire economics/political realism and on the other hand communism as an economic and political theory.
Consider the game of chess as an extended metaphor. From any individual player's perspective (i.e. the "micro" perspective), efficiency seems rather obvious*: efficiency is the number of games won divided by the total number of games. There might be some subtleties, but basically each player wants to win as many games as she can. But what happens when we take an aggregate ("macro") perspective and look at all the players in all the games? No matter what happens to any individual player or sub-group of players, our "aggregate efficiency" is always exactly 50%. For every winner, there's a loser. Considering efficiency as the proportion of games won to games played, there's nothing at all we can do at all to change the aggregate efficiency of chess.
You should, of course, treat my use of "obvious" as a red flag. When I say "obvious", I'm begging you, gentle reader, to carefully examine my assumptions.
Not only does this measure of individual efficiency fail to be interesting at the aggregate level, there is no interesting or meaningful aggregate measure of chess efficiency at all. The smallest aggregate we can look at is both players of a single game. For an individual, there are more or less efficient moves—an efficient move is one that makes winning more probable. But the aggregate efficiency of each move, considered from the perspective of both players simultaneously, is exactly 50%. The purpose of a game of chess is to determine which player is, at least at the moment, the better chess player. The best way to determine the better chess player is to let each player make whatever legal move she decides to make. Any interference, prohibition or compulsion beyond the legal moves actually detracts from the purpose of the game. An "efficient" chess game is one with no outside interference.
Alternatively, consider the art world as another metaphor*. To preserve the analogy with macroeconomics, assume we cannot change the total amount of resources devoted to art. (In macroeconomics, we cannot add any outside resources to the whole economy.) Given a fixed amount of resources, how can we produce art "efficiently"? If we differentiate it from superficially popular entertainment, art is just "for itself"; a work of art serves no purpose other than to just exist. Again, any external interference by definition takes away from the "itselfness"; there can be no useful measure of efficiency.
*I'm not committed here to any particular philosophical theory of philosophy; I'm just trying to use a particular theory of art as a metaphor.
My point here is not to argue that economics really is a zero-sum game like chess, or that it's "for itself" like art. I want instead to understand as charitably as possible how modern economists and modern realist political scientists see the world. With this understanding, I think it's easier to explain the fundamental differences between on the one hand laissez faire economics/political realism and on the other hand communism as an economic and political theory.
Saturday, August 13, 2011
Money doesn't matter
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
Part II: Money Doesn't Matter
In Part I, I showed that conceptually, we can treat a national economy as a "whole", existing more-or-less in isolation. One important consequence of looking at something as a whole is that concepts that identify relations between parts of the whole do not apply to the whole itself. The most important concept that identifies relations between parts of an economy — households and businesses — is money.
In ordinary circumstances, money is a debt held by an individual household or business and payable by society. If I hold a \$100 bill, then society "owes" me some amount of goods and services: I can go into any store, present my debt, and have it satisfied in goods and services. Money is debt both in a "fiat" currency as well as in a "hard" currency such as gold. Gold is money only if most everyone in society sees it denoting a debt they have a duty and interest in monitoring; without this social agreement, gold would be valuable only to people who had some actual use for it, such as jewelers or electronics manufacturers. The only difference between a fiat currency and a hard currency is how these representations of debt are authenticated. Money, therefore, is a relation between one part of the economy, the household or business holding the money, and the rest of the economy. Looked at as a whole, however, every debt has a net value of zero. The individual that holds the \$100 is +100; the rest of society, who owes the goods and services, is -100. As a whole, +100 + -100 = 0. The net value of all the money in an economy is zero.
There are a few other ways of looking at money in a macroeconomic sense. Suppose, for example, in one day we were to multiply everything about money by a billion (10^9). Thus, if yesterday you had \$10,000 in your bank, today you have \$10,000,000,000,000. When you go to the grocery store, a loaf of bread that cost \$5 yesterday today costs \$5,000,000,000. If you paid \$1,000 for your mortgage or rent payment last month, this month you'll pay \$1,000,000,000,000. It seems pretty clear that nothing much would change, even increasing the amount of money by many orders of magnitude. Or suppose that one day all the money in the economy were to simply disappear. We would still have all our farms, factories, oil wells and refineries, cars, houses, cell phones and computers. We could still physically produce the same amount of stuff we produced yesterday*. Money does of course matter even in a macroeconomic sense, and I'll talk about how it matters in a later installment. But money doesn't matter in the way that it matters to ordinary people acting as a part of the economy.
Every ordinary capitalist macroeconomics textbook will show the "long run aggregate supply" — how much goods and services the economy as a whole can produce — plotted on a graph with real (i.e. physical) output on the x axis and "price level" (the value of money) on the y axis. It's plotted vertically, meaning that in the long run the total amount of stuff we can produce does not vary by the price level. Increase or decrease the total amount of money in the economy by 1%, 10%, 10 times or 10^9 times; the total amount of physical goods and services we can produce in the long run stays the same.
Part I: The National Economy
Part II: Money Doesn't Matter
In Part I, I showed that conceptually, we can treat a national economy as a "whole", existing more-or-less in isolation. One important consequence of looking at something as a whole is that concepts that identify relations between parts of the whole do not apply to the whole itself. The most important concept that identifies relations between parts of an economy — households and businesses — is money.
In ordinary circumstances, money is a debt held by an individual household or business and payable by society. If I hold a \$100 bill, then society "owes" me some amount of goods and services: I can go into any store, present my debt, and have it satisfied in goods and services. Money is debt both in a "fiat" currency as well as in a "hard" currency such as gold. Gold is money only if most everyone in society sees it denoting a debt they have a duty and interest in monitoring; without this social agreement, gold would be valuable only to people who had some actual use for it, such as jewelers or electronics manufacturers. The only difference between a fiat currency and a hard currency is how these representations of debt are authenticated. Money, therefore, is a relation between one part of the economy, the household or business holding the money, and the rest of the economy. Looked at as a whole, however, every debt has a net value of zero. The individual that holds the \$100 is +100; the rest of society, who owes the goods and services, is -100. As a whole, +100 + -100 = 0. The net value of all the money in an economy is zero.
There are a few other ways of looking at money in a macroeconomic sense. Suppose, for example, in one day we were to multiply everything about money by a billion (10^9). Thus, if yesterday you had \$10,000 in your bank, today you have \$10,000,000,000,000. When you go to the grocery store, a loaf of bread that cost \$5 yesterday today costs \$5,000,000,000. If you paid \$1,000 for your mortgage or rent payment last month, this month you'll pay \$1,000,000,000,000. It seems pretty clear that nothing much would change, even increasing the amount of money by many orders of magnitude. Or suppose that one day all the money in the economy were to simply disappear. We would still have all our farms, factories, oil wells and refineries, cars, houses, cell phones and computers. We could still physically produce the same amount of stuff we produced yesterday*. Money does of course matter even in a macroeconomic sense, and I'll talk about how it matters in a later installment. But money doesn't matter in the way that it matters to ordinary people acting as a part of the economy.
*As best I recall, I first heard about this idea from Buckminster Fuller.
Every ordinary capitalist macroeconomics textbook will show the "long run aggregate supply" — how much goods and services the economy as a whole can produce — plotted on a graph with real (i.e. physical) output on the x axis and "price level" (the value of money) on the y axis. It's plotted vertically, meaning that in the long run the total amount of stuff we can produce does not vary by the price level. Increase or decrease the total amount of money in the economy by 1%, 10%, 10 times or 10^9 times; the total amount of physical goods and services we can produce in the long run stays the same.
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 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.
Because of effective national sovereignty, therefore, we are justified in treating (with the correction of net exports) a national economy essentially as a whole.
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.
**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.
**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.
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