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“Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.” –Bryan Caplan

Arnold Kling offers a very nice commentary on macroeconomics

Does the U.S. economy in early 2008 need a stimulus? If so, will tax cuts or attempts by the Fed to lower interest rates do the trick?

I used to be able to answer such questions with confidence. Now I cannot.

The theory of the causes of unemployment, interest rates, and inflation falls under the subject known as macroeconomics. Macroeconomics is like astrology or Freudian psychology, in that a lot of people used to believe it, and a lot of people still do, but many with a scientific bent tend to stay away from it.

Upside-down Economics

In ordinary economics, goods and services are scarce, and leisure is preferable to work. From that perspective, saying “we need to create jobs” or “consumers aren’t spending enough” would be as silly as saying that “we need to burn down our house” or “people aren’t wasting enough gasoline.”

John Maynard Keynes called his seminal macroeconomic treatise The General Theory of Employment, Interest, and Money. It could well be called “The General Theory of Make-Work Bias.” Bryan Caplan, quoted above, sees make-work bias as a naive fallacy. But Keynes used make-work bias as the basis of his entire treatise, which in turn became the foundation of what we call macroeconomics.

Once you accept the notion that jobs can be scarce, you can turn the rest of economics upside-down as well.

–In ordinary economics, the choice to save or consume is only important in that more saving raises long-term productivity. In macroeconomics, more saving is “contractionary” and more consumer spending is “expansionary.”

–In ordinary economics, a good trade is one in which the value of what you buy is higher than the value of what you sell. In macroeconomics, it is bad to have foreign trade in which the value of what we buy is greater than the value of what we sell. Thus, a trade deficit is “contractionary” and a trade surplus is “expansionary.”

–In ordinary economics, government should only borrow as a last resort, because borrowing generally crowds out private investment. In macroeconomics, a balanced budget or surplus can be “contractionary,” while a deficit is “expansionary.”

No wonder first-year economics students end up knowing very little economics. What they learn in micro gets canceled out in macro.

History of Thought

If I were to teach a course in macroeconomics, I would teach it as history of thought. Beliefs about macro have evolved in interesting ways.

Keynes was part of a general intellectual trend in favor of centralization and strong government, a trend which culminated in socialist experiments prior to World War II in Russia, Italy, and Germany and after World War II in Western Europe as well as the Soviet sphere. Keynes himself was not a believer in the sort of nationalization of industry and central government planning that took hold in the middle of this century, but he strongly favored government public works projects long before he developed his General Theory.

Keynes’ basic thesis was that investment and saving are not regulated by market incentives. Instead, consumers have natural propensities that govern their desire to spend or hoard their incomes. Businesses are driven by “animal spirits” to invest in new ventures. When these spirits wane, investment dries up, plants have to shut down, and unemployment ensues.

…Still, there is an element of selective memory at work. The standard prediction in 1981 and 1982 was that the Reagan tax cuts would be highly inflationary, not contractionary. Macroeconomic forecasting and policy in the 1970’s was so bad that graduate school courses more or less threw out conventional Keynesian macro (although it was retained in the undergraduate texts). Over the past twenty years, Keynesian forecasters, such as Morgan Stanley’s Stephen Roach, have predicted many phantom recessions–slumps that never took place. In order to remain attractive, the picture of Keynesian economics has to be heavily airbrushed.

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