Tuesday, March 14, 2017

Lesson 0. Why Study Macroeconomics

Recently a friend who reads this blog blurted, "I like the blog and all that, but what am I supposed to get out of all your words?" Apparently I have been putting the proverbial cart before the horse. So I am creating one more lesson-style post and numbering it zero to communicate the idea that this is supposed to be the beginning of one’s journey with macro. This is supposed to be the equivalent of those first paragraphs of a first book on macro. And, of course, it is the hardest one to write. But I do have a full glass in front of me. 

One place to start is with the phrase forest from the trees. Macro has a lot of parts, or trees, but macro is bigger than the sum of its trees. Wikipedia defines macro as “the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.” I read that and almost fainted. It breaks every rule of definitions. About the only words I understand in that definition are large and scale – and even those words are misleading. There are lots of large things (e.g. the Goodyear blimp and Refrigerator Perry) but not all of them are macro.

So let’s start over. First, macro is a science. Macro is a science because its main goal is to explain stuff and thus improve our lives. Physics is a helpful science because it tells you that after you throw a sharp dart up into the air, you should move or it might land on your head. Astronomy helps us to understand why the sun “comes up” each morning. Biology explains why eating too many extra-large Big Macs might not be a good idea. Science is our friend.

Macro is our friend too. It takes the economy of the country as its focus. While biology might focus on the whole body, macro asks questions like: How is the German economy doing? What’s up with Greece’s economy? While the concept of a body is very specific, the idea of the economic system of a whole country is less tangible. And thus macro is already in trouble. The doctor can touch your arm but the economist cannot touch the national economy. It is a figment of our imaginations. It exists only in our minds. And some of us have some pretty whacked-out minds. 

That sounds pretty bad. But the truth is that we use such counterfactuals for much good. You read fictional stories to your children hoping they will learn important lessons about life. Scientists stick millions of thingies on semiconductors that are so small that you can’t see them, and yet we are able to do amazing things with cellular phones and their apps. In biology class we experiment on fetal pigs, and despite the fact that they are not human beings, we learn a lot about human biological systems.

With macro, we can learn how the economy impacts our lives. The economy is like a train with many cars. Each car might be very different but when the train goes forward all the cars go forward. We might not be able to touch the national economy but we can try to improve its outcomes. At the heart of macro is something called GDP. GDP is not a tangible thing. It is an idea. It is defined as the nation’s output of goods and services. Think of a huge pile of goods and services and that is what GDP measures for given quarter or year. 

Every nation produces tangible goods like autos and JD. Every nation produces services that disappear the second you consume them, like when the Uber pulls away or the bartender moves on to serve another customer. Your drive in an Uber's Prius is over the second you step out. Okay, you might have a nice memory. In the bartender case you do have a lovely Old Fashioned but that drink is a good. The act of the bartender delivering it was the service.

In 2016 the US produced about $18.6 trillion dollars of goods and services. That's quite a pile! Can you touch that $18.6 trillion? No! You personally bought parts of that amount but the “whole enchilada” is the macro concept. GDP is like a basketball team. We cheer for it. Go GDP! Sure we have favorite players, but it is the team that we focus on year after year. In that sense, a basketball team is definitely not a tangible you can touch. It is a concept (and to many people, a very important one).

When GDP falls in a year, we call that a recession. We frown during a recession because we get less goods and services – and we dislike the fact that many people lose jobs as part of the contraction in output. We smile when GDP rises, and we clap when it rises faster than normal. Just as a basketball coach is expected to produce good results for the team, we expect our government leaders to create the right policies for growth of GDP. And like basketball coaches, even the best leaders win some and lose some. No one is a winner all the time.
I am just about down to the ice cubes. But I think I am almost finished. Macro is a science and as such is supposed to help us improve our lives. Macro uses concepts that are not always tangible but which are developed to help us think more productively about how to improve the nation’s economy. Macro devises policies and sometimes they succeed and sometimes they don’t. But like the meteorologist who missed the exact speed and location of a hurricane that came on land near Sanibel Island, the macroeconomist is constantly evaluating our macroeconomic science and policies with an eye toward learning from one’s mistakes.

Finally – since macro is about a whole nation – it is not about you or me specifically. Macro is not about Hoosiers versus Coloradans. Macro is not about workers versus owners. Macro is not about girls versus boys. Macro is not about JD or corn or oak barrels. Macro is not really about the rich versus the poor. The field of economics has categories to investigate each of those things, but macro tries to focus on the whole economy of a nation. When macro policy starts trying to be everything to everyone, it always fails at doing the one thing it is intended for – helping the economy to grow more so we all have jobs and more goods and services to play with!


  1. Replies
    1. Your diploma and lottery check are in the mail.

  2. I was a GDP at GT! Never did join a sorority!

  3. Give Jim his diploma. He has learned the useful part of macro. From this point forward it becomes more like phrenology and other forms of witchcraft.

    1. Roger, Spoken like a true student of Dr. Professor Louis C Gasper and Jean Draper. :-)