Crash

Recently I’ve been finding all I’ve learned about economics turned on its head. As someone recently graduated from a university undergraduate program, I am not too far removed from economic abstraction. How economics should work, an ideal if you will.  Real world effects either confirm or confuse what’s been learned in the classroom. One such effect is to see how two accepted economic models react to a recession. On one side, we have the microeconomic model of the firm and it’s pathway to success, and on the other, the macroeconomic model of growth of a domestic economy. I accepted both of these models from lesson one. Now I see how one can work against another.

In a microeconomic model of the firm and its means to real profit, a business reacts a certain way to revenue. They reinvest, and try to grow the business. The business does not discriminate income, whether it is from a productive source, like other businesses and private consumers, or from the non-productive government. A dollar by any name still smells as sweet. A business can pay their people, fund their projects, and produce more products or services. Therefore, a business has every incentive to chase down a dollar, whereever it may lay. It could be with a private company or it can be with government work. A business does not have a social responsibility to discriminate dollars. Those who do so are bound for bankruptcy. A government injection of dollars provokes a stampede toward that money. This is all rational. A business owner wants to stay open tomorrow and the next year. If he can’t find business in the open market, then why not the government?

In a macroeconomic model of an economy and its means to real growth in GDP, the behavior I just explained is counter-productive. A business will eat into social profits by precluding competition. He will get monopoly and he will spend a certain amount to gain and maintain his monopoly. The best way to provoke this kind of behavior is to put massive spending power at the government’s whim. Companies no longer compete based on a good product, decided by an open market. They now compete for the ears of politicians, and lobby for favorable action. They compete for monopoly power. This leads to a degradation in product and an overall higher price for a product. Governments are best served by making laws, enforcing them, and settling disputes. So goes the theory anyway.

So it looks like my economic training has lead me to a fatal flaw between the models. When the macroeconomic model I just explained is run by government money, it inevitably chokes and sputters. But it is completely rational for the single business owner to want the money. But it turns his motivation from the customer to the government. What is good for the individual may not be good for the whole. That is why it is dangerous for the government to spend like it does, and budget like this. The worst part about this economic crisis is that there is no consensus answer. All this spending may be in vain. People are losing personal wealth at an alarming rate. The government cannot substitute for that. The lost efficiency will slow a downfall and slow a recovery. I guess we’ll just have to guess at how bad it is until we’re there, which we won’t know til we’re past it. That’s the breaks.