Bryan’s recent article about another “unexpected” fall in consumer confidence caused me to reflect a bit on different branches of economics. An analogy could be drawn to the different branches of medicine: if you fall, can’t walk, your leg hurts and a piece of bone is sticking out, it would be better to go to an orthopedist than to a dermatologist. I suspect that failure adequately to consider one branch of economics, combined with over-emphasis on another, may be a big part of our economic health problem, of which declining consumer confidence is one symptom.
The two basic and different branches of economics are macroeconomics and microeconomics. The former deals with such big league stuff as monetary policy and its various aspects such as inflation and deflation and how to try to control them by regulating interest rates and money “creation.” The latter deals with how businesses actually work — things such as supply and demand, productivity, regulatory impact and the like.
Consumer confidence has much to say about the things that increase or diminish it. When businesses find it necessary to lay off workers and inadvisable to hire more, unemployment increases. Unemployed people and those facing likely unemployment are unlikely to spend as much money as those fully employed and confident that they will remain so. That diminishes demand and that in turn causes more unemployment. These are matters too little considered by our governmental economic masters. It’s as though they try to decide which way to turn when driving a car by looking in the rear view mirror instead of forward; in many respects, that’s about all they can do.
It was about half a century ago, but when I majored in economics in college, I avoided macroeconomics because it seemed too theoretical and statistics oriented. I focused instead on microeconomics because it looked at business practicalities at the micro level. I wrote my honors thesis on how the automotive replacement parts industry functioned and, based on that, such things as the nature of the regulatory and other obstacles it faced. Later, after law school and before going into the Army JAG Corps, I worked at the Antitrust Division of the Justice Department. There, I was assigned to study the prescription (then referred to as the “ethical”) drug industry and to what extent more or less antitrust enforcement of what sorts would make things better. Antitrust enforcement nearly always involves microeconomics rather than macroeconomics. So of course does just about every other type of business regulatory activity.
Although it seems unwise for the federal government to get any more intimately involved than it already is in microeconomics — through bailouts, increased regulatory intervention and the like — it would be really great were more consideration to be given to the subject of how different businesses actually work and, when the don’t, why they don’t. Generally, I suspect that things could be made far better by getting the government’s hands off the tiller, off the sails and out of our pockets. The notion that “the beatings will continue until morale improves” does not work well.
How many economists specializing in macroeconomics, and how many specializing in microeconomics, have been appointed to the President’s Council of Economic Advisers? How much thought has been given to microeconomics in regulatory decision making? What level of consideration has been given to the impact on business of NLRB, EPA and other regulation? I don’t know how to find the quantitative answers to those questions, but suspect that the results make it obvious that very little though has been given to microeconomic considerations and far too much to macroeconomics.