A vast number of economists just love the big side of the subject, this macroeconomics. Because everyone gets to talk about the whole economy, and interest rates, growth, consumer demand, taxes ‘n’ stuff. They’re talking about the whole, d’ye see? And from that talking they then derive what we should all be told to do.
And, well, I’m not a fan. One reason I’m not in fact an economist is that I’ve absolutely no chance whatever of following the maths used in it. Sorry, this head just doesn’t work that way. That could also be why I’m so dismissive of the macro part of economics. As I can’t do it therefore I demean it. Hey, despite my obvious omniscience - which is, as we all know, different from omnicapability - I am still human with all the petty spites that entails. But it is also true that the macro part is the part of economics that doesn’t work very well.
One of my claims - one of the wilder ones but I still think it supportable - is that there’s not one single macroeconomic theory that we could get all living Nobel Laureates in economics* to sign up to. We’d get a lot of agreement on a lot of the basics of microeconomics but perhaps nothing in macro that all would sign up to.
But onto actual examples.
So, yes, it’s true that - other things being equal - an economy that invests more will see decent economic growth. Both because that investment means people are employed mixing steel, smelting cement and so on. That they are employed and gaining an income means they spend, this employs other people and so on. Borrowing to invest is, in this macroeconomic short term, a good thing:
Among expert economists a consensus is emerging that under-investment is a central cause of the UK’s poor recent economic performance and the root of many of the problems we now face as a country (“Reeves faces Whitehall cuts revolt”, Report, September 6).
This under-investment has resulted in a vicious circle of stagnation and decline, whereby low investment leads to both a weaker economy and greater social and environmental problems.
The new government is right to argue that a change of direction is needed, one that puts the country on the path to greater prosperity and longer-term fiscal sustainability.
One failure point is that when unemployment is already as low as it can really go - it is - and we’re worried about inflation not a falling economy - we are - then this sort of thing is contraindicated.
Well, sorta. Because of course if we invest in lovely things that will make the future richer then that’s a reason to do it anyway:
This macro analysis rests on the implicit assumption that higher investment spending will result in higher productivity which, in turn, will generate higher growth. However, at the micro level, that assumption is questionable unless vested interests and outdated practices can be overcome, especially in the public sector.
That macro idea of more investment being lovely fails when we consider exactly what is to be done with it. Spending - as has recently been done - £270 million on the planning stage of a tunnel under the Thames is not future enhancing. That’s lawyers taking the piss.
We actually have no evidence whatsoever that government will spend the money on something future enhancing. Even though the macroeconomics is fair enough it fails at that micro level - the general gurning incompetence of our rulers.
So, into another example:
It presents a threat to Sir Keir Starmer’s plans to make Britain the fastest-growing economy in the G7. Consumption makes up around two-thirds of GDP, so household spending is vital to growth.
Before Covid, households set aside around £5.50 for every £100 they earned, which mostly went into their pensions. During the pandemic, when people were stuck at home with less to spend on, savings spiked to a peak of more than £27 for every £100.
This was not predicted to last. “Revenge spending” was expected to sweep the nation once Covid restrictions ended, as shoppers, diners and holidaymakers made up for lost time.
But after dipping to around £6.60 in mid-2022, the savings rate has climbed back up to unusually high levels.
In the early months of this year, more than £11 out of every £100 earned was set aside for a rainy day, according to the Office for National Statistics (ONS). Excluding the pandemic, the savings rate was the highest seen in more than a decade.
OK, consumer demand is about 70% of the economy. So, if people have doubled the amount of their income they save - from £5.50 per £100 to £11 - then growth in consumer spending is going to be difficult to find. More technically, the marginal propensity to save has risen. That’s a micro change with those macro connotations.
Some would say that peoples’ behaviour should change so as to make the macroeconomics work. There are undoubtedly people out there considering how to get people to save less - lower interest rates perhaps?
Me, I work the other way around. I’ve no actual plan for the economy. If we’re all free to do as we wish - no third party harms - then the end point of society is just the interaction of what we all do. That’s fine by me - a free society and up as the result of what free people do.
So, folk change their saving ways and bully for Two Tier’s desire to grow the economy.
Except that’s not what actually happens. So, people save more. That means there’s more saved money around to be invested. Which - presumably after some lag or whatever - means that more investment happens. It’s just that it’s done by the private sector - less likely to piss it away, or perhaps less likely to piss it all away - and we get the two types of growth we desire. Both the boost from resources being used in the here and now and also that richer society in the future.
That is, the macroeconomic problem is solved by microeconomics. Savings have risen therefore so will investment because S=I. After all, there is nowhere for savings to go other than into investments.
Which brings us to the other reason I prefer microeconomics. I despise both politics and politicians. Therefore I intensely dislike macroeconomics because it always does lead to politicians doin’ stuff. Just set the basic rules - property rights, the rule of law - and leave well be. Not because we cannot show, on paper, that doin’ more is always a bad idea. But because that more is always done by politicians and that always is a bad idea. Always.
And, no, I didn’t get here just because I can’t do the maths. Not only, anyway.
*Yes, yes, not a real Nobel, Swedish Risksbank in memory of etc
“when unemployment is already as low as it can really go - it is…”.
Is that really the case? Sure, it’s true of the *official* measure of unemployment but we’re often reminded that there is a separate log of people of normal working age who are “not in employment, education or training”, some 5 million people, who are clearly also unemployed. Yes, that total includes idle bastards like me who prefer to live off the accumulated fruits of previous decades of toil, now wisely invested (ho ho), but in a free society that’s ok if we’re not a burden on the rest; but it also includes millions who are signed off work for year after year with medical conditions such as stress who in a more tough love culture would certainly be considered as belonging in the official log of the unemployed.