Two Viewpoints on Macro Complexity
05 January 2017 | Pago Pago, American Samoa
Some have a sense of macro complexity, almost intuitively. Most don't. Its absence creates numerous misunderstandings of much. A knack for understanding macro complexity, whether natural, developed by training or both, allows a person to back away from the immediate, the trivial and the obvious in a situation and see the whole of something from a higher macro vantage point in all its relevant and interactive processes and complexities and to understand the mechanism or situation as a whole. It is a particular forte of good economists and those with excellent economic intuitions and it is particularly missing in those who are too narrowly or poorly educated, in technocrats, in specialists and in most lay people. Why, you might ask.
Complexity, involving multiple interactive processes and competing forces is the brain food of the very intelligent in many fields and such people also tend to be highly and better educated. This is a well know fact of life which displeases not a few. It is also the basis of many conflicting views, often because the viewpoints held, differ so. That which is immediate and readily understandable often conflicts with that which is not, but is real and predictive. Heads butt, policy recommendations differ and politics bifurcate at the extremes into ideology, as a means to handle the complexities of reality when they overwhelm, and apolitical efforts to address those complexities, often when they yield up no ready means of simplification. These too are facts of life.
It is no secret which end of this continuum deals best with macro complexity and there is also no general or ready solution on how to bridge the gap between such splayed viewpoints. Both aspects are what intrigue me most about Facebook, but that is an aside. Let me give you some examples.
Laws are passed revoking judicial sentencing discretion and imposing mandatory sentencing guidelines. Crime drops and the guidelines are lauded by those who urged them, but then crime rises again later and those who sought the guidelines go silent. Others, doubtful about the guidelines' deterrent effect from the beginning, look more broadly for a way to explain the data and after a bit discover that when crime fell, national income and welfare expenditures had risen and that when such income growth dropped or went elsewhere and welfare was cut, crime rose, exactly what was observed. Or another example.
By law the Fed may not buy new bonds sold by the government, but nothing prevents the Fed from buying those bonds from their original purchasers and others once they are already initially sold. Is the Fed then funding government debt? Or if we look in the macro aggregate at how the entire system operates, can it be accurately said the government in fact creates banking reserves when it spends and it destroys reserves when it taxes or borrows. The micro specialist's or technocrat's view is no, none of this can occur, while the truth is all of this occurs. The viewpoints are radically different in regard to macro complexity: one is narrow, focused and legalistic; the other is macro, complex, and economically interpretive and substantive. Each camp declares the other doesn't understand. One final example.
Trickle down economic theory contends tax cuts for the rich increase consumption and real investment expenditure to the benefit of everyone because, within the dated neoclassical economic framework, that is true and what is taught to undergrads. But that is not what is observed in reality. Why not? Because, in reality there is a) substantial income inequality, b) much economic uncertainty, inducing strong preferences for liquidity, and c) few good real investment opportunities because of deficient aggregate demand, so the rich will have a high propensity to hoard, in both cash and passive secondary market assets, their tax cut proceeds, and there will be minimal impact on consumption and real investment, but some small increases in stock and bond prices. Again, the viewpoints and frames of reference differ in macro complexity.
Notice, macro complexity is strongly inclined to the empirical and economic interpretation and its antithesis is more prima facie, micro and less considered in all regards. People seem to line up into the two camps to a surprisingly significant degree, regrettably with most by far in the latter.