Labor, Capital and Balance: How to Survive The Clash of The Titans
Based on Macroeconomics by Greg Mankiw
Macroeconomics primarily concerns the study of growth while microeconomics focused more on equilibrium. When we speak of growth, we speak of available labor and capital to form a certain production function and the growth of this function. Population growth is a source of labor growth and so is capital growth that net exceeds the rate of depreciation. We generally model output as labor times capital reflecting that each unit of labor can utilize all the capital available. Labor and capital are generally raised to a fractional power reflecting how output depends on labor and capital in absolute terms if a unit of labor or capital is added to the picture. Because capital growth is the result of savings, there is a question of whether the entity is saving enough. In the United States, it appears like savings is too low. In some countries such as German and Japan, enormous rates of growth occurred after world war destroyed much of their capital and this can be attributed to capital building itself up rapidly as if the savings rate is constant, the savings will flow through to capital from the output and given the capital is initially very low while production may be high from labor, capital will grow quickly, especially if in Japan and Germany savings rates are already higher than savings rates in America. The question of whether capital level is too high because too much savings has led to so much capital that depreciation becomes hard to maintain and actually lowers consumption: this question is answered by examining whether the marginal product of capital, the increase in output by adding a unit of capital, offsets depreciation, because if the marginal product of capital more than offsets depreciation, we can add more capital and consumption will increase net of depreciation, so we should continue to save or save even more to raise the capital amount and there isn’t too much capital. In the United States, savings appears too low as marginal product of capital well exceeds depreciation by most estimates. Production is accounted for by GDP which adds together consumption, investment and net exports and government spending.
Accounting identities make us see that trade balance is driven by increases and decreases to foreign direct investment in a given country, for example, if net exports increase, we acquire foreign currency which we must invest in other countries by virtue of holding the currency and conversely, if foreign direct investment rises in our country, we will have capital with which we must purchase foreign goods as imports in that measurement period or the money has no place to go except to invest back abroad but that is why we speak of net foreign direct investment in these accounting identities. Trade balance is not affected by protectionist policies but overall trade falls when there is protectionism. Production on the labor side is not so much driven by unemployment but unemployment is a problem in of itself, that leads to unequal distribution of production provided we have workers capable but unable of getting a job but in practice most unemployment spells are short so we tend to think government policies to help unemployed may inadvertently lengthen unemployment by discouraging workers from trying hard to get a job, while longer term unemployment of the type that requires retraining to overcome is a problem that unequally affects workers at different compensation levels and what they gain in unemployment benefits is helpful but does not address their fundamental structural discord in the economy which must be addressed in other ways by the government if the private sector does not sufficiently provide new opportunities for them. The dot com crash in America for example created a lot of structural unemployment among formerly affluent upper to middle management in tech companies who went into underemployment roles at other facets as the dot com crisis continues to drag upon the United States economy in the aftermath of a disbelief in traumatic terms of the skyrocketing potential of equities as a cure in themselves for economic ills because no one trusts the stock market on its own to be rational and lift the rest of the economy into rationality after the dot com crisis which shook faith in capitalism itself and set the stage for socialist challenges for the capitalist order through politics in the United States. On the bright side, America had joined other western advanced democracies in having free health care even at a very limited level for the public and in some states such as Massachusetts there are very good state level plans for public welfare.
On the other end of the spectrum are systematic crises in the financial sector which shook the faith of United States in financial innovation as a means to creating liquidity and now there is a lot of stigma for real reasons on people who accumulate too much debt and spend beyond their means as liquid markets just aren’t there to provide them investment opportunities for their financial and physical labor should they arrive in debt and be in a liquidity crunch such as for example a company or employer of theirs going out of business. This has created ghost stories in America about the unemployment line and has led to risk aversion and closeted mindsets regarding spending decisions and what is deemed as necessary spending and has even crimped onto the image of luxury goods which are viewed as a waste of money when the only waste of money is being so scared of being without money that one does not pursue positive net present value projects such as getting a better job if one runs out of money and instead saving and borrowing on private pools of capital like within families as an example of a liquid financial system with some of the deepest bond markets in history running amok that one needs to turn to kin and close relationships to solve problems better solved by idle capital and efficient distribution of this capital at fair market interest rates. Finally, we see that macroeconomics is closely tied to economic history as macroeconomics ties your own bank account to global events, while before macroeconomics your bank account was not considered part of history and while you worried about history you had to equally worry about whether you would fall out of history by running out of money but macroeconomics ties your fortune which in part is financial by design to the fortunes of nations and policies of leaders you elect.
Macroeconomics gives us a rational way to interact with each other as nations for the better good of output and consumption and we assume benevolent governments wish for higher consumption of their peoples, and we see that macroeconomics primarily substitutes for what we would consider subconscious or emotional views of history where we aim for outcomes that aren’t reflected in a higher standard of living. This substitution is a desirable one given macroeconomics can worry about nations and policy making while other views of history can be studied by historians in a confined realm that deals with questions that in macroeconomics fall outside the scope of growth or game theory in microeconomics but instead into the realm of competing narratives that politicians trained in history are best equipped to handle. Macroeconomics enables a specialization and delegation of labor, as a primary motive and achievement. Macroeconomics in investment should be used cautiously however as forecasting growth rates of different industries and subfields as related to the greater economy is highly speculative and should be left to speculators rather than people who primarily consider themselves investors such as myself. Macroeconomics rather provides a framework for processing a wealth of information that governments look at and we can use this information to inform our views on corporate finance which is the primary means of investing through valuation. Microeconomics can help us understand the competitive dynamics within the corporate framework.
So we see now that valuation is not done in a vacuum but is done through macroeconomics lens and microeconomic equilibrium but forecasted valuation should generally not be done directly through macroeconomics however tempting as it is fool’s gold to be able to forecast the histories of whole nations and whole people as Vladimir Putin said about Hitler. We create self fulfilling prophecies when we make bland our macroeconomic theses to better allow us to make speculative judgments about specific industries in what is known as sector rotation in stocks which is in of itself a very dubious strategy after transaction costs. Macroeconomics is highly complicated and mathematical ways of predicting little things of grand importance not many things in simple ways such that we can speculate on for example clean coal improving environmental achievement to allow for higher GDP growth at early industrial revolution rates. In the time it took me to make that up, Thoreau pulled out his hair and said we should live consciously and shut down our power plants for twenty years at the start of the industrial revolution to clean things up. I give these examples to show the economy is not an abstraction but the real decisions and sum of behaviors of people who live together and for the most part desire growth in living standards where the part of human behavior which is irrational or outside the models of wishful improvement falls into the realm of labor efficiency or technological progress.
One of the big reasons Marx was discredited in macroeconomics is he forecasted declining productivity in capital as there is increased capital leading to class division between capitalized and uncapitalized workers but this war between machine and man did not occur where machine would actually be the labor in factories that organizes itself in political machines, but instead moved to compassionate capitalism in United States which was a George W. Bush keyword that refers to technological progress becoming the focus and driver of economic growth, something that happened with computerization in the 1970s which at first reduced productivity as the labor force learned new skills. Technological progress allows capital to improve output without declining in quality with more capital and allows for sufficient capital for there to be an ownership society where most people judge each other by what they own rather than their income which would be an enlightenment because much of what we own is not market appraised while bringing it into market recognition would improve equality as living in a district with a good high school for example would be valued in an ownership society but not necessarily in a dog eat dog income driven society where there is competitor for rent seeking roles based on winner takes all models. Regardless of our views on society, technological progress is certainly important in nations at war and we note Malthus said innovations abound when a nation faces scarcity or hardship which compels innovation. This happens naturally in capitalism where individuals are constantly in a state of scarcity because money is used up to create capital and there is a shortage for consumption. In feudalist societies this is not the case as generally there is sufficient capital owned by a few that agricultural surpluses are used to feed everyone in the village. Feudalism is not necessarily desirable, far from it though, because only capitalism is capable of raising the level of capital to levels where income per capita is much higher than in feudalistic systems. It is simply important that we do not forget our inheritance from feudalism and seek to maximize capital at all costs without considering consumption. For example, a writer may not want to put all his ideas into books which are his capital but save some for his consumption by retaining the consumption maximizing function from feudalism. That is why they say you should not speak on everything you notice.
Macro trading is based on macroeconomics and that is a game where forecasting and speculation on sectors is allowed but to play that game generally a good understanding of credit is required and a decent understanding of rates. We try not to mix trading strategies until we know we have one legitimate strategy as just as perfect numbers, beautiful and perfect things are few and far between while ugly and imperfect things are quite common per ancient European wisdom. I am American though and I will say if you want to be Berkshire, ignore macroeconomics all you want but if you want to be General Electric, especially General Electric management as the stock price didn’t do too well considering financial crisis in 2008, especially if you want General Electric finance division, you must learn macroeconomics to run businesses of global scale like that of power plants and advanced electronics. In modern day, General Electric can be thought of as the art of business while Berkshire Hathaway as the writing of business. For art you need micro and macro, valuation, and accounting, and all the business fields. For writing you just need to know one area very well and move on from there. Economics I know well and finance I’m working on. Business is both but economics is sufficient for business.
Business does not enjoy a climate of free speech in the United States so while it is tempting to treat coworkers as friends and a company as a party you interview to get into, better to leave parties for politics or for relationships and friends as people who you may pool your assets into a mutual fund for. That is because you have much greater of freedom of speech in parties and especially among friends than you do at work even if you don’t notice the restrictions because work is focused not on productivity as it would seem where free speech is important but on society where free speech is more and more limited depending on whether what you say is responsible which means it affects other people. In short, macroeconomics does not cure all ills but gives us a means of a comprehensive worldview that uses math to think about big questions of data instead of how math is typically used to solve intricate puzzles of rather low complexity. It also relates these puzzles of macroeconomics to economics history which gives us a grounding in modernity. Indeed, one can say modernity results from macroeconomics. Microeconomics and the economics of city merely make for the romantic era where nature is glorified as an equilibrium different from manmade ones which are often polluting because we give up which results in the tragedy of the commons. The strength not to give up is known as labor. The ambition and means to use it and pursue it per Lady Macbeth is capital. All the world is a stage and all the men actors, and this refers to our greatest innovators the technology crowd. Courage, is what we have to face the financial crisis in the western world in general and the dot com crisis in the east as the dot com was a technology crisis which afflicted the east coast of the United States, a very established affluent economy, and finally the last member of this theater which is the currency crises which afflicted Great Britain when wealthy speculators attack and destroy wealth on immense scales in established economies by overpowering central banks which defend currencies of countries by maintaining their soundness in trade. Then we should not forget the trade wars which loom between large nations like China and America. If this sounds like the position of Germany in the Second World War, probably I have deliberately used that model just as body language of wrapping arms around yourself means different things when it is actually cold than when you are in room full of grumpy cranks. The Titanomachy a war between gods may yet see the American Greek gods unite with the British titans Hyperion, Prometheus and Oceanus and Phoebe to tackle problems of disease which afflict us. I’ve been told by a British that my own affliction will never be his, and I hope that means well if I have a British name adopt a Chinese name, for I have no country to give just my heart is my own.