26 July 2012

Day 55: Measuring the Performance of the Economy: Macroeconomic Objectives

Within the next few blogs we’ll be looking at how economists currently measure the performance of the economy, and by what criteria they are measuring it by. In this blog we’ll be discussing the macroeconomic objectives. These objectives also give a nice indication of what it is that is being valued within the area of economics.

There are about 5 objectives which are regularly listed when looking at macroeconomic objectives:

1)    Economic growth
2)    Full employment
3)    Price stability
4)    Balance of payments stability ( / external stability)
5)    Equitable distribution of income

1.     Economic Growth

Economic growth is considered to be the most important criterion, and is the one criterion which will be given the most weight when evaluating and comparing economies.

Economic growth sounds like a very big concept, but it really just refers to an increase in the total production of goods and services from one period to the next – usually one year.

So this is quite a ‘vague’ and ‘undefined’ goal – as all it stipulates is that there must be some sort of increase in the total production of goods and services – no matter what these goods or services are, or whether they are beneficial to the whole of society or not. A conventional economist might tell you that the goods and services produced will obviously be that which is required to be produced for the good of society, as what is produced and how much is dependent on supply and demand. And so – if someone were to produce something which is of “no value”, no-one would demand it and the person would soon be going out of business – and within this manner the economy eliminates any and all apparently unnecessary goods and services, and justifies what and the quantities which are being produced: it’s demanded! If people are willing to spend money on it, it means they value it, if they value it, it means it brings them happiness --- so, if we produce what is demanded then we are increasing everyone’s happiness and being a good person!

But now obviously, since the majority of the wealth (= money votes) lies in the hands of the minority, then we are really just producing/providing/catering for a handful of people, and only producing/creating things which they think are important, and so all the needs and wants of the remaining majority aren’t catered for because they do not form part of the ‘demand’. And then we go and measure the ‘performance’ of the economy in terms of how much ‘stuff’ is produced – and the more the better. Measuring the performance of the economy this way, gives you no indication whatsoever in terms of how the whole of society is faring – isn’t that what real performance should be about?

2.     Full Employment

Ideally, a country wants all its factors of productions, and in particular ‘labour’ to be fully employed. In practice however, there’s always unemployment. The main concern with high unemployment rates are political and social stability – as high unemployment might disrupt social and political cohesion which then affects the economy as well. Can’t let that happen! These are considered the ‘social costs’ of unemployment. Personal material and psychological suffering is only a personal cost, and is obviously not that big of a deal – otherwise the economy would not be standing on the principles of supply and demand and the starting point of self-interest.

Full employment should really not be such a ‘major deal’ – the only reason why we are making employment so important is because we’ve accepted and allowed ourselves to create a system which requires you to earn your living. And so, if you do not have a job, you are unable to support yourself, and you are rejected by the system. We then have people working multiple jobs getting barely any sleep just to get by, while others live a life of extravagance, having other people employed to do all the work while they do nothing at all. So you see, there are two extreme polarities – and we can easily balance this out so we can have a world where we do not have to work all the time for the majority of our lives. We will then not have full employment, but it wouldn’t be necessary either. Because you’d for instance go to school while you’re still very young, then you work for a few years – and then after that, it’s up to you whether you want to work or do something else. Doesn’t that sound nice?

3.     Price Stability

Price stability as an objective refers to keeping inflation as low as possible. So prices will still change according to the interaction with supply and demand. To check the movement of prices, the Consumer Price Index is used – which will be explained at a later stage. Inflation is unwanted for distributional, economic and socio-political reason, which we’ll explain when we get to inflation (but simply put, inflation is harmful to the economic status quo – as it creates unrest and the system stops working the way it should be, where those who are supposed to lose now win and vice versa).

4.     Balance of Payments

This concept of ‘Balance of Payments’ refers to the money going in and out of a particular country – within the movement of imports and exports, over a particular amount of time. The Balance of Payments is usually calculated every quarter and every calendar year. In theory, the Balance of Payments should be zero, meaning that what goes out (‘debits’) is balanced by what comes in (‘credits’). In practice however, this barely happens – and so the Balance of Payments can be used so show whether there is a surplus or a deficit and from which area in the economy these unbalances are coming from.

Now we actually get to a worthwhile objective, and then this objective is something economists do not like to discuss because it involves subjective/normative issues – and so they rather not say anything about it, expect that it is ‘controversial’ and then move on to the next topic. Very sad.

When looking at the distribution of income, there’s no mention about ‘everyone deserves access to basic resources’ or things like that, no, no – instead they look at how ‘income inequality’ is a means of stimulating saving and investment which apparently would eventually also benefit the poor (but I mean, if you just give everyone a basic income, then you don’t have poor people in the first place – I mean, it’s really that simple). But then they say, on the other side, inequitable distribution of income, can lead to feelings of injustice and unfairness, which may stir up unrest and then affect the structure and development of the economy. So here you have a ‘pro’ and a ‘contra’ for income equality/inequality – but what is fascinating, is that in each of these statements, it is always the interest of the ‘economy’ as some holy spirit/entity which gets to take center stage, where the preserving of the ‘economy’ is the number one priority – and all the unfairness and suffering is secondary. But what is the point of keeping an economy alive which is not Best for All?

The only reason we currently have middle-class, is so they can be the ‘buffer’ between the rich and the poor which keep everything stable and prevent any ‘unrest’ and ‘instability’ for the sake of the Preservation of the Economy. This concept does way back, all the way to Aristotle who saw just the same.

But this basically implies that, if we as humanity could have gone without the middle-class and have an even wider separation between the rich and the poor without it causing ‘unrest’ – we would have done so.


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