An Introduction to Macroeconomics

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[This
is a lecture to a class in macroeconomics at a university whose
president had no warning that I was scheduled to lecture. This is
called hit-and-run higher education.]

Ladies and
Gentlemen. . . .

I have been
invited to address this class by your distinguished professor who,
not being on a tenure track, is probably putting his academic career
on the line. But, since he is old enough so that, should he ever
be granted tenure, he will by then reside in a retirement facility,
he figured “Why not?”

This is a
course on macroeconomics. I wonder what would happen if, on your
midterm, the first question was this?
Discuss
the difference between microeconomics and macroeconomics, with illustrations
from the textbook.
Nobody ever asks
this question on an exam because the two courses are not taken sequentially.
This is an important aspect of teaching modern economics, since first-year students are never expected to understand the difference, nor
are they encouraged to understand the difference.

How did this
situation come about? Mainly because macroeconomists hate microeconomics
almost as much as microeconomists hate macroeconomics. Each group
is doing whatever it can in the department to remove the other’s
course from the list of prerequisites that are required to earn
a degree in economics.

The only thing
that keeps both courses on the required list is that the economics
department needs both courses in order to generate enough students
to meet the university’s faculty hiring quota. There may be disagreements
over economic methodology, but there is unanimity about the fundamental
goal of university-level education, namely, to keep from getting
laid off.

If you understand
economics, you understand this principle.

Actually,
you can understand the difference between microeconomics and macroeconomics
by understanding the reasons why there is departmental unanimity
regarding the policy of offering both microeconomics and macroeconomics.

The microeconomist
explains human action in terms of economic self-interest. He believes
in the effectiveness of the bargaining strategy known as tit for
tat, a strategy which makes possible long-term cooperation of competitors.
So, he votes to keep the macro course in the curriculum, in the
expectation that the macroeconomists will vote to keep the micro
course.

The macroeconomist
also explains human action in terms of personal self-interest. It
is in his interest to keep university funds flowing into the department,
where for the moment, at least, macroeconomists don’t have enough
votes to purge the microeconomists. His operational principle is
not “tit for tat.” It’s “bide my time.”

DEFINITIONS

This leads
me to formal definitions of microeconomics and macroeconomics. I
must warn you in advance. If, on the Graduate Records Exam in economics,
you are asked to write on essay on microeconomics and macroeconomics,
you would be unwise to write down my definitions. It would be best
if you could regurgitate some conventional definition, possibly
from Wiki. But if you really want to understand what microeconomics
and macroeconomics are all about, my definitions will save you a
lot of research time and memorization.
Microeconomics:
The study of who has the money and how I can get my hands on it.

Macroeconomics:
The study of which government agency has the gun, and how we can
get our hands on it.

There are, of
course, intermediary positions. In the West, the study of these intermediary
positions is called political economy. It has two major manifestations:
democratic capitalism and social democratic capitalism.
Democratic
capitalism: A cooperative enterprise to earn enough money to buy
enough Congressional influence to gain control over the government’s
guns so as to get even more money for your special-interest group.

Social democratic
capitalism: A cooperative enterprise to promise sufficient government
benefits to enough voters to gain control over the government’s
guns so as to keep any other special-interest group from getting
as much power as yours.

The primary social
goal of both systems of political economy is for middle-aged men to
attract good-looking younger women. Democratic capitalists believe
that good-looking younger women are attracted mainly by money. Social
democratic capitalists believe that they are attracted mainly by power.

In America,
the democratic capitalists are mainly Republicans. Their role models
are Rudolph Giuliani and Newt Gingrich, each with three wives, although
sequentially. The social democratic capitalists are mainly Democrats.
Their role model is Bill Clinton, who did not have sex with that
woman, Miss Lewinsky, nor did he inhale.

PRINCIPLES
OF MACROECONOMICS

Macroeconomics
rests on a series of assumptions, none of which is ever discussed
in a first-year textbook on economics. These represent the underlying
principles of macroeconomics.

Here is the
primary assumption: two dozen individuals who have proven unable
to make more than $60,000 a year in an unregulated free market possess
the ability, when serving as members of a Congressional committee,
to regulate a subsection of the economy that generates at least
a hundred billion dollars a year.

It rests on
a secondary assumption, namely, that after a Congressional bill
is signed into law, it will be enforced fairly and efficiently by
salaried employees of one or more Federal agencies, which are ostensibly
under the authority of the President, but whose employees are protected
by Civil Service legislation and cannot be fired for any reason
except malfeasance in office, which in most cases must be on a par
with inadvertently launching a nuclear missile.

Nowhere in
your textbook will you be shown the fundamental operational principle
of every bureaucrat. Only in rare cases does any bureaucrat discuss
this principle in public. An exception took place in 1976, in the
year I was a staff member for Congressman Ron Paul of Texas. I remember
this incident very well.

A woman who
was reputed to be the longest-serving bureaucrat in Washington was
about to retire. This appeared to be an ideal human interest story,
so a reporter from the “Washington Star” — R.I.P. — was
sent to interview her.

Inevitably,
the reporter got to the standard question asked of any long-term
survivor of anything. “How did you last so long in this department?”
Because she was about to retire, she decided to reveal the fundamental
secret of survival that has governed every bureaucracy since the
era of the Middle Kingdom Pharaohs.

“No matter
what anyone from outside the department asked me if he was allowed
to do, my answer was always ‘no.’ ”

The reporter,
not realizing that he was close to the philosopher’s stone of bureaucratic
management, asked why. Her answer will ring true down through the
ages. It will still be recognized as the central operational principle
of all government bureaucracies on the day that the four horsemen
of the apocalypse mount their stallions and ride. She said:
“I
said ‘no’ initially because, if I was later forced by the rules
retreat to ‘yes,’ I made a friend. But if I was forced to retreat
to ‘no’ after having said ‘yes,’ I made an enemy. Around here, you
don’t want to make needless enemies.”
The fourth assumption
of macroeconomics is that changes in the economy will take place within
parameters assumed by Congress as readily enforceable by the government’s
law-enforcement system. Put a different way, it assumes that no change
will take place anywhere in the economy that will distort the coordination
of the macroeconomy so unpredictably that anything dangerous or harmful
will take place before new legislation can be passed and new administrative
rules published in the “Federal Register.”

I have handed
out a sample page of the Federal Register. Few Americans
have heard of it, let alone seen a page from it. As you can see,
it is three columns wide. The 8-point typeface is more suitable
for people your age than mine. I
have selected a page from the December 31, 2007 issue: 74193.

Note:
the Federal Register does not include commas in its pagination,
in a major move toward typesetting efficiency. Every little bit
helps.
I want you to
understand that this Summary is more coherent than most of the summaries
I have read in the Federal Register, simply because it applies
to something that is at least remotely conceivable by the non-specialist:
drug testing for railroad employees. We will now recite as a class
the first paragraph. Ready? Go:
Using
data from Management Information Services annual reports, FRA has
determined. . . .

There! Do
you now feel as though 74,000+ pages per year of equally coherent
regulations have made your life safer, more profitable, and possibly
even more meaningful?

On the other
hand, do you think having interrogators read 20 pages a day of this
to prisoners at Guantanamo would be the equivalent of waterboarding
and therefore prohibited by the Geneva Convention? Attorney General
Mukasey has not yet rendered an opinion on either practice, but
I know where I stand.

THE
PROBLEM OF SKU’S

One of the
familiar defenses of macroeconomics is this:
“Because
of the growing complexity of a modern economy, society requires
an impartial system of regulations, administered by experts, to
coordinate the overall system, in order to prevent major disruptions
that would adversely affect the economically defenseless.”
This argument
is made by people who imagine complexity as being three pages in the
“Federal Register.” It would not hurt to consider briefly the complexity
of a market economy.

Macroeconomists
underestimate the magnitude of market complexity. I offer the following
examples from a recent book by Eric Beinhocker, The
Origin of Wealth
. In order to keep matters within the bounds
of human comprehension, Dr. Beinhocker limited his discussion to
New York City.

Retailers
use an administrative inventory system called “stock keeping units”
or SKU’s. A number is assigned to each item in the store. Five types
of blue jeans would require five SKU’s. There are, of course, far
more than five types of blue jeans — and none of them would
fit me the way they did back when there were steel buttons, not
zippers, and a man of style rolled up his pants legs in folds no
taller than two inches.

According
to Dr. Beinhocker’s admittedly non-scientific estimate, the number
of SKU’s in New York City’s economy is something in the range of
10 billion (p. 9).

He points
out that the SKU system covers products. It does not cover services.
The service sector’s percentage of the American economy is in the
range of 60%.

Complexity?
Indeed.

Macroeconomists
assure us that Congressional committees can and do provide the overall
judicial framework governing market coordination, which Civil Service-protected
employees can then enforce coherently, so as not to risk major disruptions.

Macroeconomists
also assure us that they do not inhale.

TYING
A SHOELACE

Macroeconomics
rests on written legislation that is enforceable in a court of law
or in an administrative law court, which is the official name given
to an in-house tribunal set up by executive agencies to handle alleged
violations of rules written by the agencies and interpreted by administrative
law judges. (The phrase “judge, jury, and executioner” comes to
mind.)

Macroeconomics
assumes that written rules must be clear. If they are not clear,
then the agencies can enforce a law any way they see fit.

As an exercise
in macroeconomic planning, I would set up two-person teams. I would
challenge each member to write the rules for tying a shoelace. Then
each would hand the written instructions to the other, who would
be required to tie his shoelace by no other procedure than the one
on the instruction sheet.

That is the
easy part. I would make things more realistic by setting up the
teams with a right-handed member and a left-handed member. Each
member would be required to write the rules for a person with a
different dominant hand. The right-handed person’s instructions
would have to be followed, word for word, by a left-handed partner.

I would not
require the right-handed person to write the rules for a left-handed
person. I do not expect miracles.

Macroeconomists,
on the other hand, think that Congressional committees can and do
write effective legislation governing an economy with (say) 20 billion
products and an unknown number of services.

CONCLUSION

Macroeconomics
became dominant in academia after the publication of John Maynard
Keynes’s book, The
General Theory of Employment, Interest, and Money
,” in 1936.
Not many people have read The General Theory. I have. I suggest
the following. You will learn more, page for page, by reading the
Federal Register. If you refuse to take my advice in this
regard, then I suggest even more strongly that you do not read the
book while smoking in bed.

The underlying
premise of macroeconomics is that we can trust the abilities of
Congressmen to pass legislation which tenured bureaucrats can and
will administer fairly, coherently, and safely, so that the free
market’s allocation principle of “high bid wins” cannot become the
governing principle of economic distribution.

If you think
of a camel as a horse designed by a committee, you will begin to
understand the operation of an economy administered under the watchful
supervision of government regulatory agencies, which in turn direct
supply and demand away from the helpless bidders at the great American
auction and toward the auctioneers, who of course are licensed by
the government in order to protect the weak.

From
now on, when you think “macroeconomics,” think, “I’m from the government,
and I’m here to help you.”

February
16, 2008

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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