On economic thought - 1

(Finance will come soon enough, but for now, economics)

Most introductory courses in economics split the discipline into microeconomics and macroeconomics. Very crudely, microeconomics deals with markets, while macro deals with the entire economy. Government policy spans the entire spectrum, for eg. product market regulations on the micro front, fiscal and monetary policy on the macro.

Microeconomics is a set of assumptions, assertions, observations and models on which the foundation of economic thought is built. While a fair bit of it (especially in its mainstream form) is mathematical, it is essentially just a modeling of human behaviour, action and interaction. On the other hand macroeconomics is highly mathematical, deals with huge amounts of data, employs complicated econometric models and often deals at an uncomfortable level of abstraction. To be sure, there are assumptions, assertions and comments on human behaviour galore. However, at all points of time, the attempt is to analyse the cumulative sum of all agents in a given economy.

Therefore, microeconomics tends to be easier and much more intuitive than macro. For example, to assert that 'government inspection of schools is debilitiating' requires only a certain level of knowledge and competence. To claim that 'the correct way for India to fight inflation is to sell its dollar reserves' takes a wholly different level.

Most non-academic thinkers and commentators miss this fact. As ordinary citizens, what influences us most is government policy, and that straddles both micro and macro. Somehow, the average commentator on economic policy tends to assume that if he is able to, say, critically evaluate the regulatory aspects of tax, he is also able to make very informed comments about the ideal fiscal policy. In the past, it has often amused as well as irritated me to see inflation-is-a-monetary-phenomenon-explained-for-dummies type of posts floating around in the blogosphere. However, I have always reserved comment, for I was one of the dummies myself.

To be sure, the basic relationships between macroeconomic variables can be broadly understood by a single course in macro, or even casual reading. What I am refering to here are the prominent macroeconomic debates. Many of these tend to very fine-grained and extremely non-trivial in nature. While one side of the debate may seem intuitively more appealing if explained properly, criticism of the other side should typically be left to the experts. Most dilletante commentators are only projecting their policy biases when they take sides. Uninformed macroeconomic analysis mixed with policy bias makes for a terrible concotion.

Another key point that we often miss out is that many economic (micro and macro) debates are academic in nature, centred on a theoretical contention or on interpretation of avaliable data, and may not have any policy or ideological implications. For example, neo-classical economics (mainstream microeconomics as it is taught at most places) assumes that technology is exogenous to all firms in the economy. The macro-level implication is that technology can be treated as an exogenous variable to the economy and changes in technology lead to 'shocks' or transitions between different 'equilibrium' states of the economy (more on equlibriums later). I find this assertion to be patently absurd on the micro-level. Of course, no neoclassical economist lives or dies by this theory and it is only a model-simplification. However, I find this simplification extremely distortionary. Sure enough, it has been criticized on many fronts by many economists who also find it absurd. But does this criticism have any policy implications? Most probably not.

If I was to argue that this flaw in neoclassical economics means that the capitalist economic system that it serves as the foundation of is principally flawed, it would be a stupid argument. Yet, often enough, people believe that by finding out one flaw with a system of economic theory they have destroyed the credibility of the policy implications of that system. More commonly, one finds people trying to place their own understanding of a purely academic debate on a simplified policy spectrum of left and right, socialism and capitalism.

Of course, there are many other tenets of economic theory that have direct policy implications. A blow to one of these tenets would lead to genuine policy debates. One prominent example is that of the ridiculous idealization of perfect competition. But more on imperfect competition and other such things later.

(this is the part 1 of an n-part series, n is as yet undecided)