Monday, January 28, 2013

Macroeconomic manipulation

One problem with using policy to alter macroeconomic results with the goal to improve the standard of living for a society is as follows:

  • true macroeconomic measurements of a society's wealth are incredibly hard to make, because 
    • all values of things are subjective,
  • this is usually dealt with by using a proxy for wealth: the monetary valuation that society places on that wealth as measured by the prices paid for the transfers of this wealth

Care should be taken to keep in mind that this is still the estimation of one thing that is exceptionally difficult to evaluate by using a proxy for it that is much easier to measure.

The fact that a proxy is used, and more to the point, an imperfect proxy, means that this estimation is vulnerable to the manipulation of that proxy by parties whose self-interest lies in the inflating of the measurement.  For example: paying one group of people to dig ditches and another to fill in those ditches would increase monetary activity, but it produces nothing.  Not just nothing of value (because that is subjective), but nothing at all.  I could pass a dollar bill back and forth with my neighbor, and if you measured each transaction then you would see that the GDP of my neighborhood was increasing steadily by such an activity, but only a fool (or a Keynesian....but I repeat myself) would claim that the neighborhood was any better off by that activity.

Attempting to manipulate interest rates or the monetary supply to achieve desired economic results is a similar manipulation of the proxy with the intent to influence the proxy's object.  If we assume good intentions then this is magical thinking; if we assume bad intentions then this is fraud.  I think fraud is the more benign possibility.