Microeconomics versus macroeconomics

[Collin Li]

So, what are the reasons you're taught for government intervention?

Microeconomics basically teaches us that we rarely need a government right?

So how does macroeconomics ever fit into this? Why should the government be controlling GDP growth, unemployment and inflation? Sure, these all relate to society's well-being, but we know from microeconomics that well-being is maximised by individuals interacting in the free market. Why does the government have a role in this?

Does anyone wish to tackle this beast of a question?

If anyone is interested in the schools of Economic thought behind this, I believe this is a point of conflict between the Chicago school (pro-macroeconomics) and the Austrian school (anti-macroeconomics).

[ReVeL]

Could be wrong.. but

I think that government intervention is required when an open market fails to allocate resources to best satisfy societies needs and wants(i.e when market failure occurs).

Government intervention is essential for things like Public Education and Healthcare(an open market would be unlikely to provide these at free or subsidised prices to the public due to lower profits), Restricting socially undesirable goods and services(alcohol, cigarettes, porn etc) and so on.

I'm not sure that "well being is maximised by individuals interacting in the free market" is true.

Sellers want maximum profits and buyers want maximum satisfaction. In theory this works well, but in reality I don't think it performs as well.

The poor would be worse off and the rich better off wouldn't they?

Might be wrong but thats how I see it.

[Collin Li]

And you're taught that market failures occur when there are:

* externalities
* monopolies

These are both fixed by microeconomic policies. Taxes and subsidies to internalise the costs. Another way to deal with this is also to simply rely on property rights. For example, if we privatise lakes, pollution to lakes would be prevented by the owner who has an interest in maintaining it's quality, in order to sell its water, or sell access to it for enjoyment and recreation, for example. As for monopolies, there are watchdogs set up to regulate these, but also, because of the profit incentive, the market often finds ways to produce substitutes to compete with the monopoly, to grab a share of the market power.

Unfortunately, the VCE Economics course does not explicitly show you that "well-being" is maximised by individuals interacting in the free market (in the absence of market failures). This is shown in any introductory microeconomics course. Think about a two-party voluntary transaction. Consider a carton of milk being sold at the milk-bar. I buy it because I benefit more than it costs me, and the owner sells it because he will benefit more than it cost him. If that was not the case for either the buyer or the seller, the trade could not have gone ahead! It takes two to tango! Hence, it should be clear from this simple example that voluntary trade-offs only increase "well-being," it cannot reduce it - unless our expected net cost-benefit of the transaction was wrong, in which we would revise our expectations for next time (trial and error, the evolutionary process, and the buzz-word: equilibrium, are actually all related).

Why would the poor be worse off, and the rich be better off? The relative wealth gap may increase (not clear, can you show this?), but the poor certainly would not be worse off under a system of voluntary transactions (a free market). They simply wouldn't accept the transactions that would lower their well-being.

You have pointed out some microeconomic policy concerns, and I have replied to show how microeconomics is employed to attempt to fix these problems. But more importantly, none of the arguments you brought up actually justify the macroeconomic policies that aren't designed to target any of these problems, such as the manipulation of credit (monetary policy), and the aimless fiscal policy used to control the "macroeconomy."

[Eriny]

Macroeconomics is much more fun to study, I feel that it's more related to what I see in the world and more relevant to politics which I find interesting. I don't really like some of the assumptions employed by microeconomics, but I suppose those assumptions have to be made, otherwise you can't build any models at all.

[Collin Li]

IMO, macroeconomics is a silly game played by politicians and economists designed to toy around with a few economic variables and objectives, when the only one we want to maximise is utility, and we don't need central planning to do that.

[costargh]

But don't we need the government to stop large cyclical booms and recessions?

[Collin Li]

It's almost an assumption the business cycle just occurs. Here's one theory that believes central banks are actually the problem:

http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory

[Fyrefly]

Four Words: Tragedy of the Commons.
Governments come in handy there.

Oh, big picture: governments exist 4 reasons beyond the realm of economics, though their very existence causes inherent economic problems.


I got shit micro tute test result 2day, so I'd rather not think bout anything economics beyond that this evening.
Thankfully only the best 3 count, so I can count this as my stuff-up.

*wanders off*

[Collin Li]

Four Words: Tragedy of the Commons.
Governments come in handy there.

Oh, big picture: governments exist 4 reasons beyond the realm of economics, though their very existence causes inherent economic problems.

What you say is valid, but nothing you said supports the need for macroeconomic toying around that currently happens.

Tragedy of the commons is because there is a lack of property rights. It's a problem of communist societies, more than capitalist societies, because proper capitalist societies have well-defined property rights. You don't have commons when you privatise. Once again, it's a microeconomic solution to a microeconomic problem.

The question here still persists: what's so important about toying with the macroeconomy?

[ReVeL]

Why would the poor be worse off, and the rich be better off? The relative wealth gap may increase (not clear, can you show this?), but the poor certainly would not be worse off under a system of voluntary transactions (a free market). They simply wouldn't accept the transactions that would lower their well-being.

You have pointed out some microeconomic policy concerns, and I have replied to show how microeconomics is employed to attempt to fix these problems. But more importantly, none of the arguments you brought up actually justify the macroeconomic policies that aren't designed to target any of these problems, such as the manipulation of credit (monetary policy), and the aimless fiscal policy used to control the "macroeconomy."

Well, you clearly know much more about economics than I do, and it seems logical that in a free market when two people meet it is only likely to increase "well-being", otherwise why would they interact..?

But wouldn't market failure still occur?

[Collin Li]

Yeah. Market failure still occurs, but try not to think of it as merely an "excuse" for any government intervention. They are microeconomic issues that should be targeted by microeconomic policies. For example, pollution isn't best targeted by a central bank which increase interest rates, because that won't only discourage pollution, that will discourage spending in general!

The fix is to privatise air (sort of silly, idealistic and impractical), or to tax pollutants (more practical). Respectively, those two solutions are from the Austrian school of thought (more pure classical liberalism) versus the Chicago school (utilitarianism plays a greater role in their analysis).

(There are many other schools of economic thought too, if you are interested. I think Wikipedia will give you hours of reading if you want. These are the two schools of thought I align myself most closely to, however. I am leaning to the Austrian side, but I pick parts from whichever school I think is better.)

[costargh]

How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?

[dcc]

How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?

Economists of the Austrian persuasion disagree with this so-called 'need' on both an economic and moral basis.

[costargh]

But isn't that just one view? What about the generally accepted view...

[brendan]

I think that government intervention is required when an open market fails to allocate resources to best satisfy societies needs and wants(i.e when market failure occurs).

Government intervention is essential for things like Public Education and Healthcare(an open market would be unlikely to provide these at free or subsidised prices to the public due to lower profits),

Of course a free market can't provide "subsidised" places because that is by definition is a government intervention so it is meaningless to say so.  Also since when does "allocate resources to best satisfy societies needs and wants" mean providing things for free?

I'm not sure that "well being is maximised by individuals interacting in the free market" is true.

Generally it is.

The poor would be worse off and the rich better off wouldn't they?

compare south korea and north korea.