| JuryFury.com
A New Issue Every Monday ! SUBSCRIBE NOW !! Online School of Politics |
||
| Areas of Interest THE USA American Foreign Policy US House and Senate US Presidents State & Local Politics Regional Politics Politics of China The British Commonwealth Indian Subcontinent Middle East The European Union Africa Latin America ASEAN NATO United Nations The Non-aligned Movement Eastern Europe New Nations of the 20th Century General Topics Constitutional Law Human Rights Nuclear Disarmament & Treaties International Warfare Environmental Law Peace Treaties Economic & Social Alliances International Organizations Journalism & Media Racism and Democracy Women in the Workplace Family Law Courts and Practices The Judicial System Higher Education Education and Government Health Care & Insurance Rights of the Disabled Copyright & Working Online Legal Representation Legal Insurance Pornography Domestic Violence Religion & Law Workers Rights Employers Rights Prison & Life after Social Organizations Welfare & Poverty Taxation and Democracy Third World Aid Programs Space Exploration Alternative Energy Petroleum Industry & Cars Nuclear Power Programs for the Arts Sports Education Policing the Internet Privacy and freedom Immigration Food and Regulation War on Drugs War on Pharmaceuticals Public Housing Pollution and Control Sexual Harrassment Discrimination Electoral Process Consumers Rights Investors Rights Abortion Death Penalty Social Security Gender & Sexuality Grassroots Organization ACLU World Watch Oxfam UNICEF United Negro Fund Ford Foundation (suggestions welcome at our chatsite) Law of the Economy Join I-Traderschool, our sister magazine, for debates and news. |
Economics : A Postmortem Necessary
by Sophia Barkat In light of our discussion, I have decided to re-read my old text books in Economics and to progress to new ones. As a student I spent all my time locating problems with theories. After I graduated, I thought I had left the demons behind. Unfortunately, since this subject has hijacked society and causes unnecessary problems, I feel the need to study it again. I'm starting my column, "Economics, a Postmortem" on a regular basis. Comments are welcome. Until I declare a new book, the present one is "Macroeconomics" by Robert Hall and John Taylor. It's staple Intermediate Macroeconomic Theory text in colleges. I'll be critiquing it each week. This Week's Title: "Economic Output: An accounting mistake" Abstract: It follows what Economic Output is a useless quantity used in destructive ways. It shows that such accounting practices carry no real information that can be useful to businesses and have been used to hurt businesses as well as the work force. The Paper: Output, as counted in Economics, adds production of all goods and services in an economy. Essentially, this is adding oranges and apples if you take away the common denominator, i.e. money, from the equation. So, the question remains, why add apples with oranges, at all? What does it mean when you say Country ABC made X number of apples and Y number of oranges this year? Would it reveal something about how people are faring relative to say, if Y number of apples were made and Z number of oranges? Economists think this information matters, as does the fact that a total sum of apples and oranges in monetary terms matters. And they don't just stop there. They have decided that the sum total of output in this manner if increased over time represents a good thing called Economic Growth. And so, every year, Governments and the Investment community alike try to see if this sum total has increased. One cannot but help ask them why having more of this sum total is considered good. One explanation might be given - and it would be a poor excuse -- that since populations dictate needs, and populations rise over time, having more output is a good thing. Perhaps, having just enough economic growth to accommodate the population growth is a good thing. With this as the reason to pursue economic growth as we call output growth one runs into a dilemma when one considers countries where populations are falling. Examples are many European countries, some African ones. Should these countries not pursue economic growth then, even if they had decided not to grow? Is this why countries with decreasing populations cannot exploit an economic model based on GNP or GDP growth, but take a more "socialist" approach? In any case, for some reason or another, we have accepted that when this accounting quantity called GNP or GDP grows that a nation is doing better. So much so, Central Banks like the Federal Reserves will hold monthly meetings to announce how much this Output has grown. And what's funnier, some brainiacs have created some kind of mathematical model called the Long-term Growth Rate -- based on population growth, capital growth, and technology : more accounting terms -- that they then compare to actual measurements of Output and say, "We are in a recession or in a boom." If you've been following Greenspan and his effect on corporations you've noticed that his warnings of long-term inflation and then long-term recession have led corporations to re-assess their projected growth rates and thus caused them to lay-off workers. Clearly, the aggregate accounting term of Output - a.k.a. GNP or GDP -- is not only unable to capture if resources are being used to optimize well-being of the nation but to only creates a negative effect on business. Small aberrations from Expected Output -- one percent to three percent -- can bring the house down by creating panic. Clearly, such accounting practices are not making a nation stronger, certainly not in a system where people look for jobs to sustain themselves rather than support themselves via business creation. But why keep such accounting terms in practice? Some exposure to the Stock Market would show that the Stock Market is mostly a speculative market. It has been operating in pretty much the same way -- with some automation and some regulations thrown in -- as it did in 1929. The basic element driving it is a quick buck, and players have decided that they will create the necessary dance of reacting to Macroeconomic and company specific news every hour to facilitate this. As a result, you'll see the market react to aggregates like GNP and GDP. Since the major players in any speculative market like the Stock Market or the Foreign Exchange Market - 30 times the size of the Stock Market in the US - are big trading houses and they generate huge capital gains taxes, no government disturbs the dance. If Macroeconomics news sustains this dance, well and good. As a result, accounting terms like GNP and GDP are kept alive. The smart thing to do would be to make a system of accounting to find out what is happening to businesses. Are businesses failing and why? And to use this information to help them overcome problems. Perhaps Greenspan should be concerned not with actual Output but what is being created, how much, and how consumers, and employees and businesses fare due to this. Perhaps, this information alone should influence how Stocks fare in Stock Markets, or how companies determine how many people to employ or fire. Now, one of the reasons why the Government - like a CEO - does not measure it's success in real terms but resorts to accounting tricks is that it does not know what kind of distribution people are most happy with. By looking at statistics of industry outputs vs. total employment, at most governments can say what kind of resource distribution -- i.e. industry distribution : 4000 cars and 1000 apples and 900 buses etc -- provides the most number of jobs --- is closest to full-employment of labor. The term full-employment technically means when all the factors of production -- land, labor, capital -- are completely employed. As such, only trying to increase labor to full-employment is not perfect. But labor or people are whom any government is obliged to please. Hence policy-makers try to adopt full-employment of labor as a policy agenda. It is when labor is not fully employed that the Central Bank may say the economy is not in full-employment. Whenever Output misses long-term projections or Employment misses full-employment, the Economists will point it out and the people will assume something bad is happening. So, you see, that all these accounting terms have just led to misinformation and misery for people who work -- and get laid off as a result -- and led to profits for speculative traders. In Hall and Taylor, page XX, one gets a clear idea of how causality is misrepresented in Economics. It says, "the Upsurge of Unemployment during every recession seems to us to be one of the IMPORTANT PIECES OF EVIDENCE that recessions are times of economic downturn." I don't know if this fallacy in thinking arises due to Economists in academia -- who author books -- not having industryy work-experience, or because they have no idea how to interpret causality or even correlation. A simple analysis of Output vs. Unemployment data over time will show that in times of recessions -- when actual output didn't meet expectedd output (long-term growth model projection) -- in those times, unemployment rose after such declines in output. We all know who sets off the alarm : economists in the Central Banks etc. The book goes on to suggest that recessions occur due to price and wages being fixed or inelastic, on same page. This too is erroneous. Price and Wages have nothing to do with what models of growth any Central Bank makes. One may only say that GNP and GDP change due to prices and that price inelasticity affect how much GNP's or GDP's change. That is true. However, are wages and prices really the cause of the problem? Salaries and wages may not rise a lot from year to year, but prices usually tend to go up, unless there is real fear in the economy that consumer spending will fall. In fact, a price is something attributed to a market. When something is sold in a market it is given a price. In contrast whatever the government provides is a public good -- paid with taxes. Clearly taxes are more inelastic with respect to Output. They don't change one bit, the cost of "public goods". They rise and fall with your income, but rarely due to demand for public goods shifting. In fact it is this shadowy nature of Government Expenditure, it's failure often to produce goods based on demand, that make one wonder why the idea of Total Output is focused upon so much. Surely, an Economics Professor is just a pawn in the big picture for the dogma to survive. But the dogma must survive so that the nation as a whole thinks about wholes and not parts. For focusing on parts would lead to scrutinizing of politicians. Whereas we can site Totals and say, "Ah! We grew one percent this year!". That's why, I think such accounting terms as Output and Long-term Growth have been around this long. Comments are welcome. It should be noted that Duncan Reilly brought this up in an earlier post, and that we have thrown it about a lot in previous discussions. It became the focus of my topic, because that's what the first chapter of Hall and Taylor starts with. I'll have more to say soon. |
Encourage Discussion Join Juryfury Chat Promote Juryfury.com Join online discussion Groups Archives Writers Needed Be a Columnist Be an Editor Become an Owner Writing Training Program Internship Program for Students Advertise with Us Our Staff & Contributors Our Magazines Quietpoly.com I-Traderschool Juryfury.com The Company Our Address: QuietPoly Inc. 240 W. Saunders. Dr. (#146) Flagstaff, AZ 86001 Tel (928) 214-7365 quietpoly@yahoo.com Our Affiliations (pending member) MediaChannel.org IndyMedia.org |