03 November 2010

Krugman, Yet Again

Paul Krugman tries to show the world again how he and other (like-minded, of course) economists are just smarter that those knuckle-dragging capitalists pigs that actually make the world go 'round.
Macroeconomics is hard, far too hard you regular folks to understand. Firms, he claims, are "open systems" The macro-economy is bound by the identity Y=C+G+I+NE* and companies are free to do whatever they want.

He forgets that firms are also bound by an identity, A=L+OE. Assets are equal to liabilities plus owner's equity. Spending money today either comes from cash on hand or you pay a premium (interest) and amass liabilities to borrow money. This liability is someone else's asset. While there is interdependency, just like there is in the world economy, there are no fully closed systems or fully open systems.

But to his main point, one that many of his commenters agree with, is that macroeconomics is just too hard for businessmen to understand is horsefeathers. Macro is relatively straightforward. To be sure it was been grotesquely over-complicated by those who try to make a social science based mostly on individual preferences (billions of times over) and mostly rational expectations into a hard science that has the complicated predictability of, say, physics, which ain't going to happen (one of the reasons Austrian economists eschew neoclassical mathematical models isn't because they aren't good at math, they have passed the same calculus classes as any other professional economist, it's because all of the models that have ever been designed only explain things after the fact when data have been manipulated and have never predicted anything).

*Y=C+G+I+NE is GDP. Production (Y) is equal to Consumption (C) plus Government spending (G) plus Investment (I, which is equal to national savings) plus Net Exports. From this relatively simple formula there are spin-offs galore, caveats, not-reallys and other obfuscations. But for (very) general purposes, it works. Stating broadly what a nation's worth is (GDP) where being off a few hundred million is inconsequential (and I'm not being a smart alek here) is one example.

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