by Frank Shostak
It is common for commentators and economists in their discussions to continuously refer to something called the “economy” — which sometimes performs well and at other times poorly. This “economy” is presented as a living entity apart from individuals.
For example, various experts report that the “economy” grew by such and such percentage, or the widening in the trade deficit threatens the “economy.” What do they mean by the term “economy”? Does such an entity actually exist?
What is “the Economy”?
The term “economy” is part and parcel of a “hampered” economic environment. In an environment free of government interference, the “economy” doesn’t exist as such.
It must be realized that at no stage does the so-called “economy” have a life of its own, independent from individuals.
While in a free environment the “economy” is just a metaphor and doesn’t exist as such, in a “hampered” environment the government gives birth to a creature called the “economy” via its constant statistical reference to it.
The “Economy” as a Justification for Government Tampering
By lumping the values of final goods and services together, government statisticians concretize the fiction of an “economy” by means of the GDP statistic.
By regarding the “economy” as something that exists in the real world, mainstream economists reach a bizarre conclusion that what is good for individuals might not be good for the “economy,” and vice versa. Since the “economy” cannot have a life of its own without individuals, obviously what is good for individuals cannot be bad for the “economy.”
Within this framework the “economy” is assigned paramount importance while individuals are barely mentioned. In fact one gets the impression that it is the “economy” that produces goods and services. Once output is produced by the “economy” what is then required is its distribution amongst individuals in the fairest way.
In reality, however, goods and services are not produced in totality and supervised by one supremo. Every individual is pre-occupied with his own production of goods and services.
Also, following mainstr
eam thinking, the “economy” is expected to follow the growth path outlined by government planners. Thus whenever the rate of growth slips below the outlined growth path, the government is expected to give the “economy” a suitable push.
In order to validate the success or failure of government interference, various statistical indicators have been devised by which the government and central bank officials react by means of fiscal and monetary policies.
For instance, a strong reading of an indicator such as the gross domestic product (GDP) is interpreted as success while a weak number is viewed as failure. Periodically though, government officials also warn people that the “economy” has become overheated (i.e., it is “growing” too fast). At other times, officials warn that the “economy” has weakened.
Whenever the “economy” is growing too fast government officials declare that it is the role of the government and the central bank to intervene so as to prevent inflation. Alternatively, when the “economy” appears to be weak the same officials declare that it is the duty of the government and the central bank to maintain a high level of employment.
Do We Need Statistics on the Macro Economy?
In a free environment it doesn’t make much sense to measure and publish various macroeconomic indicators. This type of information is of little use to entrepreneurs.
The only indicator to which any successful entrepreneur must pay attention to is whether he makes a profit. The higher the profit, the more a particular business activity is in tune with the consumers’ wishes.
Paying attention to consumers’ wishes means that entrepreneurs have to organize the most suitable production structure for that purpose. The information on various macroeconomic indicators will be of little assistance in this endeavor.
What an entrepreneur requires is not general macro-information, but rather specific information about consumer demand for a product or a range of products. Government aggregated macro-indicators will not be of much help to entrepreneurs.
The entrepreneur himself will have to establish his own network of information concerning a particular venture. Only an entrepreneur will know what type of information he requires in order to succeed in the venture. In this regard no one can replace the entrepreneur.
Thus if a businessman’s assessment of consumers’ demand is correct then he will make a profit. An incorrect assessment will result in a loss.
The profit and loss framework penalizes, so to speak, those businesses that have misjudged consumer priorities and rewards those who have exercised a correct appraisal.
The profit and loss framework makes sure that resources are withdrawn from those entrepreneurs who do not pay attention to consumer priorities to those who do.
The “Hampered” Environment and Macroeconomic Data
While in a free environment an entrepreneur will have little use for macro data such as gross domestic product, the state of the country’s balance of payments or the consumer price index, this is not so in a hampered environment.
A businessman cannot afford to ignore changes in various macro-economic indicators given that government and central bank officials react to changes in these indicators.
For instance, if the central bank is expected to tighten its monetary stance in response to a strengthening in the gross domestic product, a businessman must take this into account in order to succeed in his business.
In a hampered environment, businessmen must try to interpret various economic indicators in terms of how authorities will respond to them and how this response is going to affect their business environment in the months ahead.
As one could see, businessmen, rather than totally devoting themselves to accommodating consumers’ requirements, are likely to allocate some of their resources to assess the responses of government and central bank authorities to various economic indicators. Obviously, this undermines the process of real wealth generation.
Note that the government, in order to construct various economic indicators, is busy collecting the data from businesses that are allocating resources to supply the government with the information.
The construction of various economic indicators generates employment opportunities for economists and experts in other fields such as mathematics and statistics. These experts are employed not only to compile various economic data, they are also employed to interpret the data and provide guidance to businesses. These activities most likely would not be required in a free environment.
In a free environment, what possible use can an entrepreneur make of information about the growth rate in gross domestic product (GDP)? How can the information that GDP rose by 4 percent help an entrepreneur make a profit?
Or what possible use can be made out of data showing that the national balance of payments has moved into a deficit? As we have seen, this type of information becomes very important in a hampered environment.
To succeed in a hampered environment entrepreneurs tend to respond to the prevailing conditions, which are influenced by the central bank and government policies. As a rule when things are going badly it is businesses that are blamed for the bad results.
For instance, the 2008 financial crisis was blamed on lenders in the real estate markets and on various financial engineering schemes. Central bank policies were never seriously criticized.
Strong lending activities at the time and various financial engineering schemes should be seen as businesses’ attempts to make a success in an environment generated by the loose monetary policies of the central bank. Businesses did not generate these conditions, they were simply responding to the conditions generated by the loose monetary policy.
Comment by R. Nelson Nash — Frank Shostak adds more evidence to my contention that the term “Macroeconomics” is absurd. The term is nothing more than an attempt by statists to gain validity to their “top-down thinking.”