Month: November 2008

Macroeconomics and Microeconomics: Part I

Macroeconomics (the study of aggregate economic activity), in most expositions of it that I have seen, fails on two counts. First, macroeconomics usually ignores or accounts inadequately for microeconomic behavior, that is, the behavior of individual persons and firms. Second, it aggregates that which cannot be aggregated, namely, disparate forms of economic activity performed by disparate actors.

Regarding the first point, macro without micro is meaningless. Macroeconomic aggregates have no independent existence.

Secondly, an aggregate is meaningless if it represents disparate phenomena. A foot (measure of distance) is a meaningful measure only if it represents a collection of inches (or fractions thereof); a pound (measure of weight) is meaningful only if it represents a collection of ounces (or fractions thereof); and so on. But a foot is a foot, and a pound is a pound; the two cannot be aggregated because they measure different things. (Yes, there is in physics a measure of force known as the foot-pound, which “is the amount of energy expended when a force of one pound acts through a distance of one foot along the direction of the force.” But “foot-pound” is something distinct from “foot” and “pound”; it is a measure of force, not a way of making length and weight commensurate.)

This post illustrates both points. Consider A and B, who have discovered, through trial and error, that each can have more clothing and more food if they specialize: A in the manufacture of clothing, B in the production of food.

Our primitive pair also has discovered a “just right” balance in the amount and allocation of clothing and food that they make and consume. Through voluntary exchange (bargaining), they have found a jointly satisfactory balance of production and consumption. A makes “just enough” clothing so that he can cover himself adequately, keep some clothing on hand for emergencies, trade the balance to B for “just enough” food, and enjoy “just enough” leisure. B does likewise with food. Both A and B might like to have more clothing and/or food, but both are doing as well as they can do in a voluntary relationship.

A and B’s respective decisions and actions are microeconomic; the sum of their decisions, macroeconomic. The microeconomic picture might look like this:

  • A produces 10 units of clothing a week, 5 of which he trades to B for 5 units of food a week, 4 of which he uses each week, and 1 of which he saves for an emergency.
  • B, like A, uses 4 units of clothing each week and saves 1 for an emergency.
  • B produces 10 units of food a week, 5 of which she trades to A for 5 units of clothing a week, 4 of which she consumes each week, and 1 of which she saves for an emergency.
  • A, like B, consumes 4 units of food each week and saves 1 for an emergency.

Given the microeconomic picture, it is trivial to depict the macroeconomic situation:

  • Gross weekly output = 10 units of clothing and 10 units of food
  • Weekly consumption = 8 units of clothing and 8 units of food
  • Weekly saving = 2 units of clothing and 2 units of food

You will note that the macroeconomic metrics add no useful information; they merely summarize the salient facts of A and B’s economic lives — though not the essential facts of their lives, which include (but are far from limited to) the degree of satisfaction that A and B derive from their economic activities.

The customary way of getting around the aggregation problem is to sum the dollar value of microeconomic activity. But this method simply masks the aggregation problem by assuming that it is possible to add the marginal valuations (i.e., prices) of disparate products and services being bought and sold at disparate moments in time by disparate individuals and firms for disparate purposes. One might as well add two bananas to two apples and call the result four bapples. The essential problem is that A, B, and everyone else will derive different types and levels of enjoyment from clothing and food (both of which come in many forms), not to mention the vast array of other kinds of goods and services that are bought and sold. (For a long disquisition on this point, go here.)

In sum, macroeconomic concepts (e.g., aggregate demand) are not exogenous entities that exist independently of microeconomic activity. At best, they are ambiguous, qualitative proxies for a host of disparate microeconomic activities.

In future installments I will cover such topics as recession and fiscal policy.

Putting Risks in Perspective

According to the Centers for Disease Control, about eight-tenths of one percent of Americans died in 2005 (the most recent year for which CDC has published death rates). That’s about 800 persons (825.9 to be precise) out of every 100,000.

To put that number in perspective, imagine a dozen dozen eggs (i.e., a gross of eggs, for those who still know the numeric meaning of “gross”). Only about one of those eggs is broken in the span of a year, in spite of all of the hazards to which the eggs are exposed.

Remember that analogy the next time you read or hear about the “threats” posed by heart disease, cancer, Alzheimer’s, motor-vehicle accidents, firearms, etc., etc., etc. The combined effect of all such “threats” is close to nil; more than 99 percent of Americans survive every year, and more than 70 percent of those who don’t survive are old (age 65 and older). But that’s not the kind of “news” of that sells advertising.

(For much more about mortality in the United States, go here.)

November 22, 1963

I have said all that I wish to say about November 22, 1963, as a political event, and about JFK’s performance as president. My purpose here is simply to mark what ranks as the third-most shocking day of my lifetime. The most shocking, because I remember it all too well, is September 11, 2001. The second-most shocking, which I remember not at all (because I was so young), is December 7, 1941.

JFK’s assassination was a mighty shock for two reasons:

  • It had been 62 years since the assassination of a president (William McKinley, 1901).
  • There was, in the early 1960s, less of the intense political polarization that would now render a president’s assassination almost unsurprising.

Why Settle for a Theoretical Estimate…

of the Laffer Curve, when you can have the real thing? The author of the first-linked item suggests that the amount of income remaining in private hands is maximized at an overall tax rate of 25 percent. My empirically-based estimate (second link) puts the private-income maximizing tax rate at 15 percent. The latter figure is a practical minimum:

The normal peacetime burden of government spending between the end of the Civil War and the eve of the Great Depression ranged from 5 to 10 percent of GDP,1 enough to maintain law and order and to provide minimal “social services.” To that I would add 5 to 10 percent for the kind of defense that we need in these parlous times. (See this post, for example.)

You can’t have a vibrant economy without law, order, and defense from foreign enemies.

Mussina to the Hall?

I once opined that a

Hall of Fame [starting] pitcher will have

  • at least 300 wins
  • or, at least 250 wins and an ERA+ of 120 or higher. (Go here and scroll down for the definition of ERA+.)
  • or, at least 200 wins and a W-L average of .600 or better and an ERA+ of 120 or higher.

I opined, further, that an ” ‘immortal’ pitcher will have at least 250 wins, a winning average of at least .600, and an ERA+ of at least 120.”

Well, it turns out that, by my definition, Mike Mussina qualifies as an “immortal”: 270 wins, a winning average of .638, and an ERA+ of 123. Not so fast.

Mussina, who has just announced his retirement, deserves to be in the Hall of Fame; I have no quibble with his qualifications on that score. But Mussina doesn’t strike me as an “immortal,” which is an honor that I would reserve for these starting pitchers:

Pete Alexander
John Clarkson
Bob Feller
Lefty Grove
Carl Hubbell
Walter Johnson
Tim Keefe
Christy Mathewson
Kid Nichols
Jim Palmer
Eddie Plank
Charley Radbourn
Tom Seaver
Cy Young

Accordingly, I must add another criterion for “immortality” among starting pitchers: at least five seasons with 20 or more wins. Mussina had only one such season: his last.

If — in this era of the relief pitcher — there is never another “immortal” starting pitcher, so be it. Tom Seaver will then have the honor of being the last of the breed.

Musical Memories

The six songs I remember from an early age:

I’ve Got Spurs That Jingle Jangle Jingle” (probably sung by Gene Autry)

You Are My Sunshine” (probably sung by Jimmie Davis, who wrote it)

Cool Water” (sung by the Sons of the Pioneers)

Always” (sung by Dinah Shore)

Mairzy Doats” (probably sung by the Andrews Sisters)

Let It Snow

Presidential Heights

I once remarked on the longevity of presidents:

The [following] graph highlights trends (such as they are) in the age at which presidents have died (or to which they have survived if still living), the age at which they were elected or succeeded to the presidency, and the number of years by which they survived (or have thus far survived) election or succession. (I have omitted assassinated presidents from the data for age of death and number of years surviving, thus the gaps in the first and third series.)

It seems to me that the early presidents were generally “healthy and wise” (and wealthy, by the standards of their time). That is, they were of superior genetic stock, relative to the average person. Their successors have tended to be of less-superior stock, and it shows in the downward trends after 1836.

The general rise in life expectancies since 1900 masks the relative inferiority of twentieth century presidents. The rising age of accession to the presidency after 1932 and the rise in years of survivorship after 1924 (both with wide variations around the trend) should not be taken to indicate that presidents of the twentieth century are on a par, genetically, with the early presidents. They are not.

These observations are consistent with the following graph of presidents’ heights (here including only those men who were elected to the presidency):

Source: “Heights of United States presidents and presidential candidates” at Wikipedia.

With the notable exception of Lincoln, presidential heights generally diminished from the late 1700s to the late 1800s. The upward trend since 1900 attests to the general health and vigor of the population; it says nothing about the relative robustness of the men who have been elected to the presidency in the 20th and 21st centuries.

Random Thoughts

Why is “gunite” pronounced gun-ite, whereas “granite” is pronounced gran-it?

If, in 1950, Harry Truman had said “four score and seven years ago,” he would have been referring to 1863, the year in which Abraham Lincoln uttered that famous phrase.

In the computer industry, “email” is preferred to “e-mail.” But it seems to me that “e-mail” better represents the phrase “electronic mail.” The meaning of “e-mail” is immediately obvious to me; “email,” at first glance, looks like a typo.

If the dismal northern weather of early April and late October — which delayed the start of the 2008 baseball season in some cities and then disrupted the World Series — doesn’t convince Major League Baseball to lop two weeks from each end of the regular season, nothing will.

One of the funniest movies I’ve seen is Harold Lloyd’s Dr. Jack (1922). It starts slowly, but builds to a hilariously frantic finish. Lloyd’s Safety Last! is better known — and deservedly considered a comedy classic — but it isn’t half as funny as Dr. Jack.

Between novels, I have been slogging my way through Thomas K. McCraw’s Prophet of Innovation: Joseph Schumpeter and Creative Destruction. There’s too much armchair psychology in it, but it whets my appetite for Schumpeter’s classic Capitalism, Socialism, and Democracy, which (I hate to admit) I haven’t read. Schumpter’s famous term for capitalism, “creative destruction,” often is applied with an emphasis on “destruction”; the emphasis should be on “creative.”

I must observe, relatedly, that my grandmother’s lifetime (1880-1977) spanned the invention and adoption of far more new technology than is likely to emerge in my lifetime, even if I live as long as my grandmother did.