Chapter 42: Microeconomics and Macroeconomics
Updated: 4/13/20
Praise the Lord. Blessed is the man who obeys the Lord, who greatly delights in his commandments. His descendants will be powerful on earth; the descendants of the godly man will be blessed. Wealth and riches are in his house; his righteousness will endure forever. Light shines in the darkness for the godly person; he is gracious, merciful, and just. It goes well for the man who deals graciously and lends money, who conducts his affairs with honesty (Psalm 112:1–5).He fed you in the wilderness with manna that your ancestors had never known, so that he might humble you and test you, to do you good in the end, but you may say in your heart, ‘My power and the might of my hand acquired all this wealth.’ But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today. It will happen that, if you will forget the Lord your God and walk after other gods, worship them, and reverence them, I testify against you today that you will surely perish. Like the nations that the Lord is making to perish before you, so will you perish, because you would not listen to the voice of the Lord your God (Deuteronomy 8:16–20).
The Bible teaches that there is a predictable cause-and-effect relationship between covenantal obedience and success, including wealth. Ethics and economics are covenantally related. This relationship applies to individuals and families. It also applies to entire societies. Christian economics is therefore both microeconomic and macroeconomic. It applies to individual decision-making (micro) and corporate decision-making (macro).
This God-imposed correlation between ethics and wealth is supposed to give hope to covenant-keepers. This is part of God’s providential administration of the affairs of men. It is an aspect of cosmic personalism. This is reflected in the famous aphorism of Benjamin Franklin in the late 1700s: “Honesty is the best policy.”
The New Testament makes it clear that this covenantal structure of ethical effects in history is dominant. The positive sanctions of individual covenantal faithfulness accumulate into the hands of covenant-keepers. This is the basis of Paul’s optimistic eschatology regarding history (doctrine of last things). “Then will be the end, when Christ will hand over the kingdom to God the Father. This is when he will abolish all rule and all authority and power. For he must reign until he has put all his enemies under his feet. The last enemy to be destroyed is death. For “he has put everything under his feet.” But when it says “he has put everything,” it is clear that this does not include the one who put everything in subjection to himself. When all things are subjected to him, then the Son himself will be subjected to him who put all things into subjection under him, that God may be all in all” (I Corinthians 15:24–28). [North, First Corinthians, ch. 17]
The language is clear: there will be a corporate victory of Christendom in history. This victory is not restricted to individuals. Neither was the original dominion covenant to Adam restricted to individuals. In the Great Commission, we are given the theological foundation of this joint dominion: the doctrine of the Trinity. God is a single God made up of three persons: Father, Son, and Holy Ghost (Matthew 28:18–20).
The dominion covenant will be extended in history. This fulfillment will not be perfect. That is because sin exists in history. It will not be fulfilled in the new heaven and new earth. That is because God is infinite, and the creation reflects God. Man will never have exhaustive knowledge. The extension of the dominion covenant is therefore eternal. But there is a temporal dividing line between history and eternity. That dividing line is the last judgment. Individuals participate in this program of kingdom extension during their lifetimes. Their covenantal heirs will also participate. Individuals live and die, but the kingdom of God does not die. Individuals are told to seek first the kingdom of God, and all things will be added to them (Matthew 6:33). But this inheritance is also corporate. It will eventually be transferred to Christ, who will in turn transfer it to God the Father. That is the message of I Corinthians 15.
There is covenantal consistency between ethics-based individual success and ethics-based corporate success. This means that there is consistency between ethics-based microeconomics and ethics-based macroeconomics. It is a conceptual error to separate microeconomics from macroeconomics. Methodological individualists are microeconomists. The most consistent of them deny the conceptual legitimacy of macroeconomics. In contrast, methodological holists deny the conceptual legitimacy of microeconomics. Methodological covenantalism affirms both, but only on this assumption: the Trinity, which is both one and many. Autonomous man refuses to accept the biblical covenant as the means by which God structures the economy. He therefore cannot reconcile logically methodological individualism and methodological holism. Microeconomics and macroeconomics remain in conflict. They may appear as separate sections of a college-level textbook, but these sections are taught as separate one-semester courses.
This has been a continuing debate, going back to classical economics.
1. Adam Smith vs. Karl Marx
In The Wealth of Nations (1776), Adam Smith argued that the basis of increasing national wealth is the free market, which is the product of what he called “the natural system of liberty.” He did not speak of ethics, either personal or corporate, as the foundation of wealth. But he did in his earlier book, Theory of Moral Sentiments (1759). This book has had no impact on economic theory. Economists have never relied on the ethical analysis in the 1759 book to explain the economic logic of the 1776 book. They have built their defenses of the free market in terms of a hypothetical ethical neutrality.
Socialists and defenders of the welfare state have long complained that Smith made a conceptual error. He explained the economic success of nations in terms of the economic successes of individuals. This is an illegitimate argument, critics said. It is not possible conceptually to go from individual successes to national success. There is no cause-and-effect connection between the successes of individuals and the success of a nation. Karl Marx argued that the profits of the rich come at the expense of the poor: a theory of exploitation. He argued that this would lead to an inevitable proletarian revolution in industrialized nations. The laws of profit that apply to one segment of the economy do not apply to the whole. His was an early version of the distinction between microeconomics and macroeconomics.
I must now deal with economic theory as it has been taught in universities, beginning in 1948. This focus is unfortunate in a book that I hope will still be read in a century or even longer. This discussion dates this book. I do not think that the Keynesian approach to economic theory will maintain its grip on economists a half century from now. Other interpretations of economic theory will replace it. Its fundamental error is that it is committed to methodological holism or collectivism, although not to the degree that socialist economics was. Socialists preached the state’s ownership of the means of production. That intellectual tradition is now defunct. The visible failure of the Communist economic experiment in mainland China, 1948–1978, and its replacement with a government-regulated system of private ownership, beginning in 1979, produced the fastest rate of economic growth in a large nation in history. The subsequent failure of the Soviet economy in the late 1980s, and the replacement of Soviet Union by the Russian Federation in December 1991, ended the appeal of socialism for most economists. That left Keynesianism as the dominant heir to the tradition of methodological holism. This is called macroeconomics.
2. Keynes and Samuelson
Academic economics distinguishes between microeconomics and macroeconomics. This distinction is built into Christian economics. It is the implication of the doctrine of the Trinity. Academic economics did not clearly make the distinction between macroeconomics and microeconomics until the era of the Great Depression (the 1930s). The first economist to use the term “macroeconomics” was a Norwegian, Ragnar Frisch, in 1933. The concept is usually associated with the work of John Maynard Keynes, beginning with his book, The General Theory of Employment, Interest, and Money (1936). The concept did not begin to gain wide acceptance in academia until the fall of 1948, the publication date of what soon became the most widely assigned college textbook in the United States: Paul Samuelson’s Economics.
Economics as taught in college textbooks today is overwhelmingly Keynesian. The few textbooks that are not Keynesian do not show students why Keynesianism is incorrect. They remain silent. Keynesianism teaches that economists who advise politicians and central bankers can devise scientifically valid policies that will avoid national recessions. This is not central planning according to socialism, where the state owns the means of production. Rather, it is central planning in the form of specific kinds of economic incentives. These incentives are provided by the national government’s policies of spending more money than it collects through taxation, i.e., borrowing from the private capital markets, and also by the expansion of the monetary base of the nation’s central bank when it purchases the debts of the national government with newly created fiat money.
Keynesian theory depends on an unstated assumption that politicians actually pay attention to the specific policy recommendations of economists. There is little historical evidence that politicians adopt specific spending and taxing policies in terms of advice from economists. They adopt spending and taxing policies in terms of getting re-elected. Thus, causation is reversed in macroeconomic theory. Politicians make spending decisions in terms of specific budget expenditures. When these decisions produce a government deficit, as they usually do, a few incumbent national politicians feel the need to justify their corporate spending decisions. They invite a few Keynesian economists to testify publicly in favor of the politicians’ deficit spending policy. These economists vocally support the politicians’ policies, and thereby they indirectly support the politicians’ re-election campaigns. This practice began in the 1930s. Western national governments ran huge deficits, beginning in 1931. Keynes’ famous book, published in 1936, offered an arcane theoretical justification for these policies. He gained the support of British politicians and also a hard core of younger economists.
The following explanation is not a scientific one. It is surely not one found in any college textbook on economics. Nevertheless, it will help you understand the relationship between microeconomics and macroeconomics in civil government. This will in turn help you to understand the relationship between microeconomics and macroeconomics in economic theory. Imagine a group of people who agree to the following arrangement. Each of them is given a credit card. There are no limits on individual spending. At the end of the year, the total bill of all the cards (macroeconomics) will be paid for in equal shares by each credit card holder (microeconomics). In this arrangement, there is no economic incentive for anyone to reduce his spending. Every participant’s goal is to spend more than his share of the bill. Every participant tries to outspend each of the others. Therefore, the total bill (macroeconomics) is larger at the end of the year than it would have been if each participant had been required to pay all of his own bill but none of the others’ bills (microeconomics). Now apply this logic to the spending policies of politicians. This is why national governments’ deficits never end as long as interest rates on government bonds do not rise. Politicians prefer to have the government borrow money from the capital markets, which most voters ignore, rather than pay for all of the government’s expenses through taxation, which taxpayers resent and may decide to resist politically at the next election.
Keynesian economic theory would not have been plausible prior to World War I. Peacetime government spending was a small percentage of any national economy. This was because the taxation powers were limited by law. Therefore, running a deficit in a government’s budget would have had no politically manageable effect on any national economy. Taxes were low. Spending was low. In 1911, three years before World War I began, Great Britain established an income tax. In 1913 in the United States, the Constitution was amended in order to allow an income tax. Within months after the war began in August 1914, taxes were raised in Great Britain. But most of the war’s expense was funded by government borrowing, not taxation. Rising taxes took place in the United States as soon as the United States entered the war in 1917. Rates of income taxation on the rich rose to unprecedented levels: around 70%. During World War I, European nations funded the war by massive increases of income taxation and massive expansions of fiat money by the respective national central banks. The war established a triple precedent of high taxation, high borrowing, and central bank monetary expansion. This triple precedent was never abandoned. It remains dominant in the world today.
3. Irreconcilable Approaches
A major problem with microeconomics and macroeconomics as taught in the textbooks is this: they cannot be reconciled. Microeconomics begins with individual purposes and decisions. This is methodological individualism. Mises was adamant in his rejection of methodological collectivism. He wrote this in his book on epistemology, The Ultimate Foundation of Economic Science (1962). “In studying the actions of individuals, we learn also everything about the collectives and society. For the collective has no existence and reality but in the actions of individuals. It comes into existence by ideas that move individuals to behave as members of a definite group and goes out of existence when the persuasive power of these ideas subsides. The only way to a cognition of collectives is the analysis of the conduct of its members” (p. 81). He referred to “the mythology of methodological collectivism.” This perspective is the logical outcome of all forms of nominalism. Nominalism begins with the individual; it ends with the individual. There is no way to add up objective economic value, given the premises of nominalism. There is no such thing as objective economic value, given the premises of nominalism. Mises was a philosophical nominalist. So was Carl Menger, the founder of the Austrian School. In contrast, macroeconomics treats the national economy as a separate autonomous force. On the first page of the Preface of the first edition (1948) of his economics textbook, Keynesian Paul Samuelson wrote this: “National income provides the central unifying theme of the book.” His analysis was based on methodological collectivism.
These are rival concepts of economic causation. They lead to rival policies of government intervention. This conceptual separation is a stumbling block in modern economic thought. Is not some minor academic issue. It lies at the very heart of the rival views of the economy that are held by Keynesians and Austrian School economists. The other schools of economics can be found somewhere in between Austrianism and Keynesianism.
In first-year college courses in economics, one semester is devoted to microeconomics. The other semester is devoted to macroeconomics. Students are allowed to take either course first. That is because there is no logical connection between the two courses. They really are separate academic enterprises. You do not learn microeconomics by studying macroeconomics, and you do not learn macroeconomics by studying microeconomics. This is an operational academic schizophrenia in modern economic theory. Textbooks attempt to paper over this schizophrenia. Students wind up either confused or taking sides. Most of them take sides with Keynesian economics because this is the dominant outlook of most of the textbooks. Never really understanding the logic of Keynesianism, and unable to remember the formulas, most first-year students retain a political proclivity for deficit spending, but this not an outlook based on comprehension.
Keynesianism accepts the free market for the bulk of economic production and exchange. Keynesians insist, however, that the market’s pricing system is insufficient to avoid economic recessions. In order to avoid recessions, central planners, meaning politicians who do not actually plan anything except their re-election campaigns, supposedly must expand government spending. Most politicians applaud this advice. Keynesianism was invented overnight in 1936. This was at least six years into the Great Depression, when the entire Western world had already adopted the policies that Keynes recommended: deficit spending and central bank monetary expansion. Keynesianism was a belated academic justification for interventionist policies that had already been adopted by national governments throughout the West. That remains its function today: policy justification, not policy formation. There is no scientific budgetary planning at the national level. Politicians simply spend as much money as they can to support projects that will keep people in their districts employed. There is nothing scientific about this. There has never been anything scientific about this. Keynesianism provides the fig leaf of what is said to be science to justify increased spending by national governments.
4. Three Hypothetical “Ifs”
Keynesianism rests on three “ifs.” These “ifs” apply to what Keynes said his theory could accomplish if governments would adopt them, as if governments had not universally adopted them over half a decade earlier, with few positive results in overcoming the Great Depression. He ignored this background, as do his disciples. In Chapter 24, the “Concluding Notes” of The General Theory, he wrote this. I highlight the “ifs.”
Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards. If we suppose the volume of output to be given, i.e. to be determined by forces outside the classical scheme of thought, then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them. Again, if we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively. Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before (pp. 378–79).
These three “ifs” are the theoretical foundations on which mainstream academic economic theory rests its case. They are hopes regarding the wisdom of central planners and also the wisdom of politicians who will take the advice of the central planners. But economic recessions still come, despite the dominance of Keynesianism in academic institutions and government agencies. Also, price inflation never goes away, for central banks never go away.
As I have already written, reconciliation is found theologically in the doctrine of the Trinity. The Bible’s ethical and judicial policies favor the free market social order. They are the basis of collective prosperity. The clearest statement of this is found in Deuteronomy 8. Moses announced: “He fed you in the wilderness with manna that your ancestors had never known, so that he might humble you and test you, to do you good in the end, but you may say in your heart, ‘My power and the might of my hand acquired all this wealth.’ But you will call to mind the Lord your God, for it is he who gives you the power to get wealth; that he may establish his covenant that he swore to your fathers, as it is today” (Deuteronomy 8:16–18). [North, , ch. 22] The positive and negative sanctions that are found in Leviticus 26 and Deuteronomy 28 apply to individuals and the nation. The covenant applied to individuals and the nation. The nation had sworn allegiance to this covenant in Exodus 19. Immediately thereafter, God announced the Ten Commandments (Exodus 20). Then he announced the case law applications of the Ten Commandments (Exodus 21–35). These laws are detailed. My comments on them fill two volumes of my commentary on Exodus, Authority and Dominion.
As a Trinitarian, I affirm the moral and judicial legitimacy of both the one and the many. I therefore affirm the moral and ethical legitimacy of both macroeconomics and microeconomics. But the macroeconomics that the Bible affirms is not the macroeconomics of Keynesian economists. Keynesian economists believe that the national civil government should intervene into the affairs of the market in order to thwart the outcomes of the voluntary market process. Keynesian macroeconomics is a form of central economic planning. Keynes admitted this in the Foreword to the German-language edition of The General Theory, which targeted German economists living in Hitler’s Germany. This would have included economic advisors to the national government and the central bank.
The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced.
The Bible does not affirm either the legitimacy or the efficacy of central economic planning. The macroeconomics of the Bible affirms the existence of positive and negative economic corporate sanctions in history that come as a result of widespread individual allegiance or disobedience to the economic laws that God has established with respect to property, personal responsibility, legal liability, and ethics. There is no evidence of central economic planning in the Mosaic law or the New Testament’s laws. The main example of central economic planning in the Old Testament comes from Joseph in Egypt. Joseph used the famine to make permanent bondservants of the Egyptians to the Pharaoh. He saved their lives, but only at the cost of their freedom. This was God’s judgment against Egypt, and Joseph was the enforcer.
I call my position methodological covenantalism. I distinguish it from both methodological individualism and methodological holism/collectivism. My position is not based on the autonomy of the individual human imputer or the autonomy of the representative imputers who act as agents of the national government. The Bible does not affirm that the central government has any legitimate authority to plan the economic outcomes of individual owners’ non-violent and non-fraudulent use of their property. Civil government is required by God to enforce a few laws against violence, theft, slander, accidental damage, and fraud: “dishonest weights and measures.” The outcome of such enforcement will be God’s blessing in the form of national economic growth. Moses wrote: “If you listen carefully to the voice of the Lord your God so as to keep all his commandments that I am commanding you today, the Lord your God will set you above all the other nations of the earth. All these blessings will come on you and overtake you, if you listen to the voice of the Lord your God. Blessed will you be in the city, and blessed will you be in the field. Blessed will be the fruit of your body, and the fruit of your ground, and the fruit of your beasts, the increase of your cattle, and the young of your flock. Blessed will be your basket and your kneading trough. Blessed will you be when you come in, and blessed will you be when you go out” (Deuteronomy 28:1–6). [North, Deuteronomy, ch. 69]
This is why it is possible to measure national economic growth. This is why statistical aggregation is possible. If it were not possible, then it would be impossible to assess whether a nation is advancing economically. Economists proclaim the legitimacy and desirability of economic growth, but this assumes that there is some way to aggregate prices in such a way that the aggregation will reflect either national economic prosperity or national economic recession. Such techniques exist: sampling and data correlation.
People do have an awareness of whether their economy is getting richer or getting poorer. People who lived during the Great Depression were well aware that the world economy was in a massive slump. Unemployment rose. Bankruptcies rose. There were signs all around of economic malaise. These negative economic factors were measured statistically by governments during this era. This was the era in which such measurements became more sophisticated. This was also the era in which macroeconomics first began to be developed as a separate academic subdiscipline of economic theory. The statistical aggregates confirmed the widespread subjective evaluation of millions of citizens. People believed the economy was in a slump, and they were correct.
This does not justify governments’ collection of economic data. The collection of past data provides the illusion that government bureaucrats can somehow wisely guide the future economy by means of widespread government interventions. In contrast, there is nothing illegitimate about the use of privately collected data to gain an assessment of the economic performance of the nation. These data may also confirm the biblical idea that God’s benefits for individuals are also benefits for collectives.
The fact that the free market enables individuals to prosper is an argument in favor of the free market’s benefits to the nation. The national one and the market’s many are in agreement. The visible success and the statistical success of the free market in the final third of the twentieth century, plus the first two decades of China’s economic growth in the twenty-first century, have silenced socialist critics everywhere. The economic success of the market order has been demonstrated around the world. Nevertheless, it is not illegitimate for humanistic defenders of the free market to use such statistics as evidence against socialist central planning. Pure nominalism denies this, but pure nominalism is conceptually incorrect regarding collectives. Pure nominalism is the philosophy of polytheism. It insists that there is no unified God who imputes value, including economic value, to collectives.
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The full manuscript is posted here: https://www.garynorth.com/public/department196.cfm