Monday, March 01, 2010

Day 1 of Macroeconomics

Don't worry this won't turn into a daily series of posts, I just wanted to comment on my initial impression of 'Macroeconomics 2' my first subject of my second degree.

Mark Twain said 'Don't let School get in the way of your Education' and never was a truer word spoken. The knowledge being taught is not useless, or even unscientific... just incomplete.

So we started with a recap on how to calculate Equilibrium Income or in plain english A sutainable level of Income, But 'Income' is equated to GDP (Gross Domestic Product) calculated in the 2 sector model as 'Consumption plus Investment' (or Consumption plus Savings).

What does that mean? It means are sustainable income is based on the assumption that everything produced must be consumed preventing either over consumption or under consumption. So what we don't save is consumed. Or I guess amongst everything produced some is used up immediately (consumed) the rest is saved.

One may instantly have it pointed out that this is pretty much describing what would happen to anything produced it would A) be consumed or B) be not consumed. What use is it?

And that question I feel is an important one, because it puts this wretched science (not my words) in context - straight up, I won't go into the 3 and 4 sector models or the Keynesian 45 degree equilibrium line doodad thingy. Suffice to say Government Taxes and Government expenditure get factored in.

To my so far insufficient understanding - if a high Real GDP (or Equilibrium income) is considered good, taxes already look bad - a bias against big government or socialism. That in turn is underpinned by an assumption that our well-being is underpinned by our ability to consume. Something I am satisfied has been proven to be false.

That's why who'se this for? Who is this useful to? Questions are important and need to be asked. I don't believe states are necessary, and underpinning every human organisation is a 'game' or power struggle. I won't express it as an equation because after deciphering 5 symbols at a time to read Macro equations, my brain is shot for the day. But basically it is finding a balance where you have maximum incentive to seek power balanced by minimum incentive to throw you out of power.

Various states have various games. For Mugabe and Kim Jong Ill it's the juggling act between keeping the people you use to do the oppressing happy enough to oppress the people who are angry enough to act against you (including foreign states). You can screw it up by pissing off your security forces (who are cheap to upkeep compared to a truly participative form of government, hence many democracies actively support their regimes and undermine any attempts at social reforms) or pissing off your people to the point where their anger stops them from caring about the next worst repurcussion.

Democracy is pretty much the same, except with a higher standard of wellbeing for the general population and lower relative wellbeing for the security forces (who generally are not employed against the general population).

The people in power are just making the (incorrect) assumption that GDP = Wellbeing, and as GDP increases so too does the satisfaction of the people with them.

Macro is admittedly, broad, sweeping and large in impact though comprised of millions of billions of details that create the effects. It looks at aggregates and averages, and as such if Mugabe and Kim Jong Ill just got stupendously rich enough their people would look pretty well off.

So I'm angry to feel this mentally exhausted learning about a measure of wellbeing as useless as GDP. But then it's good to know the language of fools so you can understand when fools are planning something foolish.

My experience of marketing was that in the 'real world' people use about 7% of the theory they learn in their degree. Usually the 'fundamentals' eg. 'Benefits sell not features' and 'Cognitive vs. emotional purchase decisions' and the 4P's. I imagine much of the reserve bank just sits around calculating money supply and real GDP rather than thinking deeply about the underpinning assumptions of this economic system. This thought scares me.

I'm not too concerned for myself, because I'm doing this Economics and Finance degree for the 'Finance' more than the 'Economics', but I do hope I can challenge each assumption I spot in my tutorials. The professors should love/hate me.

No comments: