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How useful is macro-economic data?
Dr Frank Shostak
It is generally held that for an economist to be able to assess the state of the economy he requires macro-economic indicators which will tell what is going on. The question that arises is why is it necessary to know about the state of the overall economy? What purpose can such type of information serve? Careful examination of these issues shows that in a free market environment it doesn’t make much sense to measure and publish various macro-economic indicators.
This type of information is of little use to entrepreneurs. The only indicator that any entrepreneur pays attention to is whether he makes profit. The higher the profit, the more benefits a particular business activity bestows upon consumers. Abiding by consumers’ wishes means that entrepreneurs have to organise the most suitable production structure for that purpose.
Following various macro-economic indicators will be of little assistance in this endeavour. What possible use can an entrepreneur make out of information about the rate of growth in gross domestic product (GDP)? How can the information that GDP rose by 4 per cent help an entrepreneur make a profit? Or what possible use can be made out of data showing that the national balance of payments has moved into a deficit? Or what use can an entrepreneur make out of information about the level of employment or the general price level?
What an entrepreneur requires is not general macro-information but rather specific information about consumers’ demands for a product or range of products. Government lumped macro-indicators will not be of much help to entrepreneurs. The entrepreneur himself will have to establish his own network of information concerning a particular venture. Only an entrepreneur will know what type of information he requires in order to succeed in the venture. In this regard no one can replace the entrepreneur.
Thus if a businessman’s assessment of what consumers want is correct then he will make profits. A wrong assessment will result in a loss. The profit and loss framework penalises, so to speak, those businesses that have misjudged consumer priorities and rewards those who have exercised a correct appraisal. The profit and loss framework makes sure that resources are withdrawn from those entrepreneurs who do not pay attention to consumer priorities to those who do.
In the free market environment free of government interference “economy” doesn’t exist as such. Free market environment is populated by individuals, who are engaged in production of goods and services required to sustain their life and well being i.e. production of real wealth.
Also in a free market economy every producer is also a consumer. For convenience sake we can label the interaction between producers and consumers (to be more precise between producers) as economy. However, it must be realised that at no stage the so called “economy” has a life of its own and has independence from individuals.
While in the free market environment the “economy” is just a metaphor and doesn’t exist as such, all of a sudden the government gives birth to a creature called the “economy” via its constant statistical reference to it. Like the “economy” grew by such and such percentage. Or the widening in the trade deficit threatens the "economy". The "economy" is presented as a living entity apart from individuals.
According to the mainstream way of thinking one must differentiate between activities of individuals and the economy as a whole, i.e. between micro and macro economics. It is also held that what is good for individuals might not be good for the economy and vice-versa. Within this framework of thinking the “economy” is assigned a paramount importance while individuals are barely mentioned. In fact one gets the impression that it is the “economy” that produces goods and services.
Once the output is produced by the "economy" what is then required is its distribution among individuals in the fairest way. Also, the “economy” is expected to follow the growth path outlined by government planners. Thus whenever the rate of growth slips below the outlined growth path the government is expected to give the "economy" a suitable push.
In order to validate the success or failure of government interference various statistical indicators have been devised. A strong indicator is interpreted as a success while a weak indicator a failure. Periodically though, government officials also warn people that the “economy” has become overheated, i.e., it is "growing" too fast.
At other times officials warn that the “economy” has weakened. Thus whenever the “economy” is growing too fast government officials declare that it is the role of the government and the central bank to prevent inflation. Alternatively, when the “economy” appears to be weak the same officials declare that it is the duty of the government and central bank to maintain a high level of employment.
By lumping into one statistic many activities, government statisticians create a non existent entity called the “economy” to which the government and the central bank officials react. (In reality however, goods and services are not produced in totality and supervised by one supremo.
Every individual is pre-occupied with his own production of goods and services. Consequently there is no such thing as total national output). By attempting to influence a non existent entity government and central bank policies disrupt activities of businesses and causing economic impoverishment.
We can thus conclude that the so called macro-economic indicators are fictitious devices that are used by the government to justify intervention with businesses. These indicators can tell us very little about the wealth formation in the economy and thus individuals well-being.
*Dr Frank Shostak is a former professor of economics who now works in the private sector
BrookesNews.Com
Monday 25 July 2005