An Introduction to Macroeconomics

[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.

Copyright © 2008 LewRockwell.com

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