# Macroeconomics explained Macroeconomics is difficult to track. Political events can break and redefine economies, and each country or corporation tends to operate as a separate group among others, with larger ones defining new elements that redefine the economic ecosystem. [Game theoretical models](math-gametheory.md) often capture these distinctions, but only in a broad sense, and with many degrees of uncertainty because countries often *know* other countries are using game theoretical models on them (thus fulfilling [Goodhart's Law](lawsaxioms.md)). Broadly, macroeconomic activity of any entity is measured as "gross domestic product" (GDP), which adds together several major categories: - Consuming (C) - resources spent on needs and wants. - Investing (I) - resources spent to meet future needs and wants. - Government (G) - administrative "maintenance" costs to keep things going (e.g., [police](legal-safety.md), [tax collectors](money-accounting.md)). - Net Exports (NX) - the quantity of goods and services sent out to other groups. Like any other measurable thing, people can play [math](math.md) games to [distort](people-image-distortion.md) GDP compared to a group's actual wealth (e.g., extra government spending), and it doesn't account for human [welfare](people-goodlife.md). There are five major ways macroeconomists track movement: - Taxation - how much does the government take, and how much does it adversely affect who is taxed? - Spending - how much does the government spend, and on what? - Monetary policy - how does the government manage its currency? - Regulatory policy - how does the government make [laws](rules-methods.md)? - Trade - how does a government and its people interact with [other governments](politics-systems.md) and their people? It's worth noting that the entire realm of macroeconomics becomes a matter of controlling individual [decision-making](mind-decisions.md). The motivation for this is either for [power](power.md) or [love](people-love.md) of humanity, depending on your opinion. APPLICATION: Markets are chaotic, so economists make statistical correlations, which [don't necessarily tie to causation](math.md). They'd be out of a job [if they didn't explain cause-and-effect](science.md), even if they're utterly wrong. Authorities can directly control supply, but can't *fully* [influence](influence.md) demand. This is because it's impossible to fully manage others' desires without removing [free will](humanity.md). The closest thing they can do is provoke [fear](mind-feelings-fear.md) to deter [purposes](purpose.md). One popular form of [social engineering](rules-methods.md) in the world of economics is to employ large-scale [design patterns](engineering-design.md) to steer people toward decisions that they "ought" to do ("libertarian paternalism") to influence behavior and send wealth from whoever a government deems unworthy to whoever is deemed worthy. ## Taxes Generally, people will try to avoid a government's taxes, and often hire exceptional [accountants](money-accounting.md) for the job: - Lie about it and not pay it ("tax evasion"). - Avoid certain taxable activities. - Shift how they get their income (e.g., start a corporation or trust, use [cryptocurrency](computers-blockchain.md)). - Move the income somewhere else (e.g., move to another country). There are several unfortunate realities of taxation that combine themselves into a paradox for *every* government: - People from *all* [social classes](people-classes.md) would rather not pay taxes. - If there were no taxes above a certain level of wealth, but an even tax below a certain threshold, people would work *really* hard to earn above that threshold. - Poor people can barely afford to *live*, so it's unethical to tax them as much as wealthy people. - The wealthy *can* afford taxes, but they can also afford *many* tools to migrate their taxes elsewhere, and can afford to hire many [creative](mind-creativity.md) and brilliant [accountants](money-accounting.md) and [lawyers](legal-safety.md) to manage their wealth while avoiding taxes. - If a country closes off *all* the tricks to successfully tax the wealthiest of society, they'll move to another country where they can take advantage of *other* tax benefits. Generally, a good stopping point for raising taxes is when the benefits of the government money spent are *barely* higher than the financial damages caused by taxing people ("Laffer curve"). If taxes are too low, the government won't make enough money, and if the taxes are too high, people will find ways to avoid paying them (including not working or acting illegally). [Conservatives and liberals](politics-conservativeliberal.md) argue where that line draws (somewhere between 27% and 78%), but they'll *all* agree that above that specific mark, a 5% tax increase might become a 1% government revenue increase and significantly more unemployment and poverty. Governments can focus their taxation on certain domains, which creates a type of [social engineering](people-rules.md): - Tariffs, which levy against foreign goods and services, which can prevent a country from competing fairly with other countries if set too high. - "Sin tax", which levies against vice-based goods and services (e.g., smoking, alcohol, prostitution), which can create a perverse incentive to *motivate* people to overconsume their vices to pay for essential public services. - Luxury tax, levied against high-quality goods and services, which can motivate wealthy people (and their money) to move to other countries. - Progressive income tax, levied proportionally higher against wealthy people, which can motivate them to play international [accounting](money-accounting.md) games. One of the most common reductionist myths is that taxpayers "pay" for government programs. Since governments manage the money supply as well, they have more dimensions of control than initial appearances. Many governments try to create costs for unrelated third parties who suffer from a [decision](mind-decisions.md) ("negative externalities"): - Pollution - Damaging public goods - Speeding on a highway - Publicly consuming a [substance](addiction-substances.md) (e.g., drugs or alcohol) [Authorities](groups-large.md) often attempt to prevent negative externalities with [rules](people-rules.md) that come with fines and penalties, but they'll also frequently [make things worse](mgmt-badsystems.md): - [Innovators](people-trends.md) often create [brilliant](mind-creativity.md), [better](results.md) solutions that violate the spirit of the [regulations](people-rules.md) even worse. - Many times, delays from controlling measures will force waste from non-consumption. - Undesirable [social trends](people-trends.md) can often exploit a well-intended thing for bad purposes. Even when they don't outright ban things, governments often set price limits on goods and services to alter everyone's consumption. If prices are too high, suppliers will waste the product because nobody will buy it. If prices are too low, the product will be unprofitable and nobody will make it, which will create a shortage. APPLICATION: By hiking the price on something, consumers won't change up to where they start [changing](people-changes.md) their [motivation](purpose.md) about buying that thing. In fact, extra income for a business often gives more opportunities to make risky and potentially value-adding [risks](entrepreneur-why.md) elsewhere, so increased prices are a net benefit to society if that group hasn't become [dysfunctional](mgmt-badsystems.md). ## Spending While the public sector (e.g., government, [academia](education.md)) creates various public goods, they're often [trend](people-trends.md)-resistant, and often poorly made. The private sector, on the other hand, *requires* [risk](entrepreneur-why.md) to function, which means they'll make [decisions](mind-decisions.md) that'll often yield more rewards. All the [value](values-quality.md) and [innovation](mind-creativity.md) of society comes through private [creations](creations.md), even when public money funded it (e.g., [intellectual properties](legal-ip.md)). APPLICATION: Building wealth is valuable to advancing [the good life](people-goodlife.md) in a society, but only as far as the middle class. Beyond that, any further wealth only runs the risk of [corrupting](morality-evil.md) unless it's used for a [virtuous](morality.md) end. Often, governments can provide "stimulus spending" to provoke more people to spend more money in private markets. This creates a distortion of the market (and the risks from [corruption](mgmt-badsystems.md)) because that money comes strictly from taxation. A government can tweak its monetary policy to offset the timing of the taxation from their stimulus spending, but governments only redistribute things and don't really make them. ## Monetary policy Whatever form of money a government takes, it must be 5 things: 1. Divisible - has easily divided denominations that can break apart for easy trade and [negotiations](people-conflicts-negotiation.md) (e.g., *not* bars of gold). 2. Durable - can withstand many trades without breaking apart (e.g., *not* bread). 3. Recognizable - can't be counterfeited and, therefore, severely drop in value (e.g., *not* car wash tokens). 4. Portable - can allow people to bring it around with them to trade (e.g., *not* paper towels). 5. Scarce - there's a limited amount of it so that people would find it has value (e.g., *not* [computer storage space](computers-memory.md)). The "standard" for paying back was once gold or silver, but most nations' notes for the past century or so have been "fiat" (faith) currency. There are several reasons for this: - Asset-backed currencies are limited by the size of the asset. Economies grow from population, and there eventually won't be enough of that asset available relative to the currency without *severely* devaluing that asset. - Typically, fiat currency is held together with debts for future repayment (i.e., government bonds). This means that the promises of the future determine the people trusting money today (instead of a barter for a valuable object). This is infinitely scalable if the monetary policy manager (e.g., the US Federal Reserve) does a decent job tracking it. From a government's perspective, money is an issued [debt](money-2_debt.md) that people don't collect. In other words, $1 US is a promissory note that the United States government will give $1 worth of...something...in exchange. To avoid inflation, a government has a unique trick with reserve currency: 1. Issue bonds, which are how large organizations [borrow money](money-2_debt.md) from smaller parties but don't actually *do* anything with the money. 2. Set the bond interest rate at a low rate relative to inflation (e.g., 0.25%). 3. Since it's a government, investors will like the bond because it's a proven institution that's incredibly [safe](safety.md). 4. Hold on to that money, meaning it's not in circulation as long as the bond hasn't been redeemed before its "maturity" (i.e., 5-30 years). 5. If inflation ever happens, ratchet up the interest rate (e.g., 4%) to get more money off the market. Within a few months, it'll prevent the value of a currency from dropping too severely, but overshooting it can create *de*flation (where every unit of currency is worth *more* than it was). As of the early 21st century, the exchange currency for the *entire world* is the US dollar, which is from them running a trade deficit for a long time (see below) and other countries pinning their currency's value to a stable comparison. Before this point, other countries like Spain and Portugal held the world reserve currency. The only problem, however, is that [debt](money-2_debt.md) has inherent risks because it's [slavery](people-slavery.md) for institutions as well as individuals. If the debt gets too high compared to the total wealth of an organization, it can make an economy very fragile. There was one time when the debt was canceled, [but it was disastrous](https://en.wikipedia.org/wiki/Stop_of_the_Exchequer). Further, the nature of fiat currency means that the [trust](mind-trust.md) people will have in that currency will be *far* less than a tangible thing that could be redeemeda at any time, such as gold or silver. - This is highly dependent on whether that *nation* is trustworthy, so it's not a hard-and-fast concept: a reliable and relatively uninvolved government will have more [good faith](https://gainedin.site/good-faith/) than a commodity-backed country with a terrible history of honoring their commitments. When looking at the [accounting](money-accounting.md) of a country, make sure the balance sheet and income statement numbers aren't crossed for projections. The total debt is a balance sheet item (as well as a nation's wealth), while GDP is an income statement item (as well as debt payments). ## Regulatory policy Individual motivations magnified to a massive body can blow vast sums of money on niche needs ("concentrated benefits" and "dispersed costs"). - A multi-million dollar subsidy to a small community is significant but doesn't feel like much when it's a few cents across a few hundred million people. - However, a few cents at a time for several thousand programs can become a tremendous tax burden. Lenders are *very* powerful multipliers of money: 1. By taking in money, then distributing loans, a lender effectively multiplies the amount of "active" money in a region. 2. During prosperous times, lenders will magnify money as-needed. 3. The free market also works during an inflationary period by destroying the banks with the weakest balance sheets, which creates a [social evolutionary](science-life-evolution.md) equilibrium. Making products illegal is a very difficult economic problem. - Illegalizing things requires enforcement to regulate. - Too little enforcement means people do things anyway, and the illegalization was pointless. - If a product is highly desirable (e.g., alcohol), people are almost guaranteed to quietly disoby the rules. - Too much enforcement against an illegal, popular thing will create a severe backlash, and may lead to [complete political collapse](people-conflicts-war.md). - Setting incentive structures around the action is also risky. - Giving bounties and rewards will bring private citizens into the decision, but can create a hostile [culture](people-culture.md) as people [fear](mind-feelings-fear.md) disclosing information. - Legalizing the product but setting severe fees on the product creates a long-term government dependence on the product. - Eventually, an addictive and legalized product will almost require *encouragement* by a government for continued use for the purpose of keeping schools, roads, and emergency services funded. - Therefore, the most cost-effective efforts against a black market is in attacking the [supply chain](logistics.md) of the cartels. - This effectively prices the product out of the market for most people, which makes enforcement easier against the remaining people who continue to do it. - However, this doesn't work for [religion-based](religion.md) decisions, since the people will defy the government for a higher power. Irrespective of centrally-managed or black market conditions, people will always make arrangements to [borrow money](money-2_debt.md) for various reasons. - In the Middle Ages, it was considered [usury](history-church-6_politics.md) to lend to another believer with interest (i.e., since they were Catholic, basically everyone in the community). The solution was to give terms with a clear late fee, and the borrower would *always* be at least a day late to pay that fee. In a free society where private individuals have [power](power.md), governments aren't free of company [influence](influence.md). While free markets may regulate [evil](morality-evil.md) somewhat, [large companies](groups-large.md) can [influence](influence.md) governments to make [bad decisions](mgmt-badsystems.md): - Governments can give benefits to large companies while harming smaller companies without those connections ("crony capitalism"). - Large companies can influence [rules](people-rules.md) to carve out markets for themselves and squash competition ("regulatory capture"). APPLICATION: Economic growth is only partly connected to [well-being](people-goodlife.md). It *can* give more things people need, but true [meaning](meaning.md) comes through [wealth-building](creations.md) *far* more than having it. Any attempt to [measure](math.md) well-being in a society or between [cultures](people-culture.md) is impossible because we can't put numbers on satisfaction about *anything*, and it's a relative concept. Companies can solidify their [control](power.md) of a market with a simple procedure: 1. Someone dies consuming a product. 2. The largest company that creates the product sends many lobbyists to the government demanding they do something. 3. The government passes [laws](people-rules.md) for mandatory safeguards that only a large company can afford. Frequently, governments will set price controls on various domains, which can create perverse incentives: - Rent controls can prevent prices for rent going up above a certain legally defined amount instead of letting the price fluctuate from market demand. Without the rent controls staying *extremely* lax, landlords eventually won't be able to pay for basic maintenance on the rental properties. - Minimum wage laws set a minimum price. However, it prevents inexperienced people who want the work experience to work for employers who wouldn't hire them for a higher wage. Over time, it also raises the cost of living in areas that implement it due to a diminished scarcity of money in the region. APPLICATION: A good welfare system will completely sidestep money. To avoid destroying [meaning](meaning.md) for the individuals (and therefore making a welfare state), that system should provide for *only* [basic needs](people-boundaries-why.md) (i.e., food, water, shelter), which empower people in their discomfort to strive for something better. This also won't last long in a [free society](politics-systems.md), since [the underclass](people-classes.md) will always want to vote for whatever gets them more free stuff. ## Trade The domains of trade come from the fact that each nation has the means to [specialize](jobs-specialization.md) in certain goods and services. If everyone had the unrestrained freedom to trade with each other, everyone would collectively benefit. However, a nation's leadership [doesn't always want completely free trade](mgmt-badsystems.md). By placing tariffs and laws that make trade more difficult, they can protect themselves from losing [power](power.md). For that reason, the [discussions](people-conversation.md) and [optics](people-image-why.md) about free trade are always more prominent than actual [legislation](people-rules.md) that promotes it. Even when a group is collectively producing more than exporting, they may operate at a trade surplus because of the relative market value of that product. This can get confusing when a rich nation is somehow making more of a product than they need from other countries, but the supplier countries *still* influence the market price. Over time, as long as people continue to trade, savvy [traders](money-investing.md) will edge out less savvy ones. In a [culturally](people-culture.md) well-ordered system, the gap between the [wealthiest and poorest](people-classes.md) will grow more dramatically from trading skills than in a poorly ordered one. Irrespective, enough time with *any* social system guarantees a partially [unfair](morality-justice.md) redistribution of wealth, whether by [war](people-conflicts-war-why.md) or [bureaucratic incompetence](mgmt-badsystems.md). A country can import more than they're exporting. When that happens, they're sending more of *their* money out and are operating at a "trade deficit". On the other hand, a country can *acquire* more money by exporting more than they're importing and run a "trade surplus". A trade surplus is a nation's means of gaining more economic power long-term by owning the means of getting people to [do things](results.md) later. These discrepancies can make it difficult to measure. To that end, economists try to use a universal standard. For a while, they used the Big Mac Index, which measured the cost for a Big Mac at a McDonald's restaurant (since the sandwich was all across the world). This worked because most of the ingredients had to be locally sourced. There is also a unique positive feedback loop present within all free (i.e., capitalist) societies. First, the government puts restrictions. In response, the people circumvent it in some way (black market, regulatory games, alternative products, etc.). The government adds more controls, which create more circumvention. This persists until either a government has exhausted all their resources to control everyone or the people politically resist the changes. ## Supply chains In a large-scale social system, it takes a long time for things to get from one point to another. This creates what's called a "supply chain". A seasonal item that's in higher demand when the weather changes, for example, might get manufactured halfway across the world half a year beforehand. The existence of a supply chain means people can somewhat [predict future market events](mind-imagination.md) and make [investments](money-investing.md) on those expectations. For that reason, investors often make market decisions for *future* events like a pending product windfall or a looming shortage. In any [disaster](hardship-disaster-1_short.md), the risks to civilization's collapse don't come from any individual people or group being incapacitated, but the supply chain at large. ## Market cycles Every market goes through an ebb and flow, and can be described under the domain of "market corrections". - A "bull" market moves upward, while a "bear" market moves downward. - If a market moves downward for several quarters, it's a "recession". - A prolonged recession becomes a "depression". Sadly, the lowest-priced portions of markets are always affected the worst when recessions happen. - At first, people stop buying luxury items, so boutique products take the first hit because demand plummets. - However, staple goods are always necessary (e.g., food), so broad recessions will make the supply drop while demand is almost guaranteed to stay the same. - Except for self-sufficiency (e.g., [homesteading](home-homestead.md)), most economies destroy [the poorest classes](people-classes.md) first when [times are tough](money-economics-downturn.md). However, while a market can't be permanently augmented, it *can* be engineered for the timing of the collapse to change. - Lowering taxes causes more spending, which prolongs a market collapse. - Raising taxes causes a market collapse earlier. - Raising a government debt can speed up a market collapse. - Extra laws going into effect cause a market to slow down. - Removing laws cause markets to improve. Most of this is common sense. The timing is also predictable if you know who has the government power. - A market collapse can [redirect attention](people-image-distortion.md) off a scandal. - The quality of the economy can directly affect [an election](politics-systems.md), steering toward the incumbent if it's good and away if it's bad. Endless distortions and doping to an economy start doing strange things to it. - "Normal" market dynamics start breaking down when the public pays attention and develops any sort of opinion over it (e.g., people start saving more, people are less likely to [change jobs](jobs-1_why.md)). ## Market corrections Most economists argue incessantly about the degree that markets correct themselves ("the invisible hand"). Since markets are so vastly complicated, it's currently impossible to [understand](understanding.md) them entirely. This means the general spectrum of opinion on the ideal way to approach markets ranges from complete "centralized planning" to completely permitting "emergent order". Most of this opinion distills to how economists believe people make [decisions](mind-decisions.md) and how easily [power](power.md) can shift. Centralized planning (aka "redistributionists") is when people are given [control](power.md) of various aspects of society. The prevailing [belief](understanding-certainty.md) is that [experts](jobs-specialization.md) should manage everything. However, most real-life central planners are politicians and bureaucrats. Emergent order (aka "growthist" or "supply side economics") is when each person is given freedom to manage themselves. The prevailing belief is that self-interested individuals will [pursue](purpose.md) their self-interest if they're given freedom to benefit from it. From the outside, emergent order appears as a chaotic swarm of unrelated individuals doing unrelated things. But it's an organized type of chaos that somehow works, even though it's difficult to [measure](math.md). Many [leaders](groups-large.md) believe individuals can't correctly decide their long-term best interests, but those leaders are as prone to human error as their subjects. The world is far too complicated and chaotic for professionals to manage everything. Complete emergent order would be complete anarchy, though, because no central leadership structure would enforce any large-scale [rules](people-rules.md). At the farthest end of supply side economics is laissez-faire ("allow to do"), which implies that government intervention should be *completely* absent from private organizations' affairs. This can frequently create [monopolies](politics-monopolies.md) and [bad systems](mgmt-badsystems.md), though it's a *highly* contentious question about whether monopolies persist indefinitely or decay quickly. Centralized planning taken to its farthest becomes fascism or [communism](politics-leftism.md). So far, it's always failed spectacularly because people don't like to be controlled. Most free countries mix supply side and redistributionism together. A tax system, for example, is centralized planning responding to emergent order, at least until it becomes [social engineering](rules-methods.md). [History](stories-storytellers.md) has shown that overly rigid government involvement will cause chaos and disorder when people are pushed far enough. To avoid a [coup or war](people-conflicts-war-why.md), people need at least some freedom to make [decisions](mind-decisions.md), even if they're bad. Economic theory uses the example of a mythical "crusonia plant", which produces increasingly more of itself over time. The plant would increase its collective value over time, and therefore better than the effort of creating individual plants. However, this increased value only extends as far as core [needs](purpose.md) dictate, and additional plant production beyond that point would *decrease* the individual value of each plant. Whether it's [anthropology](people-culture.md) or [technology](technology.md), this is a major oversight in most [forecasting](mind-imagination.md) models. ## More information Central banking simulator: - [Sim CB](https://benoitessiambre.com/macro.html)