In a surprisingly sensible essay in The New York Times, on Sunday October 17, 2010, David Segal gives a pretty good explanation of why macroeconomics is so unsuccessful. It's human nature, stupid. People just aren't predictable – will they do this or that when provided with easy money from the government? Is soaking the rich really a good idea – suppose they would do much more good with their money than would government? Do the poor really deserve a break in tax policy or are some quite irresponsible and thus not good candidates for giving them tax breaks?
As Segal concludes his piece, "But the economy is a hugely complex problem. So we either simplify the problem and offer a solution, or embrace the complexity and do nothing." Yes indeed, and it is the second alternative that makes the best sense. Why?
Because while "we" – which is to say, governments – may do nothing, that is by no means the end of the story. While governments do nothing, the rest of us may very well do a great deal. Indeed, it is probably in large measure because the government does nothing that most of us do something, something with the funds the government does not extort from us. If we can keep those funds, they will not usually be put under our mattresses but spent on various projects that we want to get done and which then will create jobs that are actually achieving something that is wanted by people instead of the allegedly "shovel ready" jobs no one needs and government merely invents (like all that road work in my neighborhood that involves repairing what does not by any reasonable assessment require being repaired).
One thing that Mr. Segal's essay brings to light is just how unprincipled is much of macroeconomic theory, the type that fancies itself capable of managing a country's economy. In one of his passages Segal relates Harvard econ professor N. Gregory Mankiw's thought experiment from his book Principles of Economics (Thomson/South-Western, 2004), in which "a town must maintain a well. Peter, who earns $100,000, is taxed $10,000, or 10 percent of his income, while Paula, who earns $20,000, hands over $4,000, or 20 per cent of her income." Never mind that being taxed isn't exactly "handing over" a portion of one's income (although such language does show just how thoughtless is a lot of macroeconomic thinking). Notice, instead, that in the thought experiment, which is, all in all, a pretty realistic one, it is taken as given that the town must maintain a well.
But towns are not people. They are not even corporations – they are populated by people, some of whom may not want or need a well at all, some of whom do, and some of whom may find a well useful up to a point, after which they might elect to pay for water brought in from somewhere else. The kind of thinking that treats the people of the town as some kind of beehive or ant colony is way off.
A town – and, of course, a country like the USA which the government macro-economists embark upon managing – is made up of a lot of very different individuals, with very different goals, abilities, virtues and vices, and so forth, and to lump them together is utterly misguided and must produce bad policies. And once the economic issues are treated not as those faced by towns but by various individual human beings in the various groupings of their own choice, the situation presents itself quite differently. For one, ethics enters the picture. And in nearly any ethical code human beings have identified as guidelines to how they ought to conduct themselves, it is unacceptable to confiscate funds from Peter and use it to support Paula unless the two of them reach an agreement to enter some such arrangement. It is not to be dictated from above, as is macroeconomic policy, with no regard for the niceties of ethics or morality. (Which is what's so bad about centrally planned economies.)
One reason the human race has come up with certain general ethical principles – contained in, for example, Aristotle's list of virtues, the Ten Commandments, Kant's categorical imperative, or the various school of morality – is that these are thought to be sound clues to what kind of actions people may take and what they ought to avoid taking. Not everyone will follow the advice but it is no surprise that if they do not, mayhem is produced.
And that is just what happens in interventionist macroeconomic policy. So not doing anything – given the real complexity of human affairs and the broad ethical guidelines that actually prohibit doing what macro-economists propose doing – is a good alternative to simplistic meddling.
