Pt. 3 – Micro vs. Macro Economics – Which is More Useful?

At the end of my spring semester in graduate school, I needed to go to summer school to take a 3 hour elective course and to pass my comprehensive Oral Exam.  The prof who had taught the required Econ course – macro-economics and forecasting – was teaching a course in the summer on Micro-economics.  Because of my assistant-ship, I had gotten to know most of the graduate faculty and this was one of my favorite profs. In conversation with him one day I asked him about his course in the summer.  He said before I decided on his class that he thought I should know that he didn’t think micro-economics to be useful.  The important branch of economics was macro, but if I wanted to take micro anyway, he would be glad to have me.  I took his micro course and in the 45 years since then, I have used what I learned in the Micro class much more than macro-economics.  It has been useful in planning jobs for a major multi-industry corporation, as well as being useful managing the investments in my retirement savings program.

But I think I understand why he thought what he did, and over the years, I doubt that he has changed his mind.  Macro-economics became a subject after Keynes published his theories in the late 1930’s.  Before that, a lot of economists were teaching economic theory without much chance of being able to practice what they were teaching or getting much public recognition.  By the 1960’s the government was starting to become an active player in the free market economy based largely on Keynes’ theories.  Economists were being hired by the Federal Government to give advice and counsel to presidents.  Even those outside government circles were being interview and asked their opinion on the direction of the economy by local news media.  Being sought out and asked their opinion; being part of the political process and asked by media for their opinions is pretty heady stuff.  While their macro-economics opinions counted, they rarely got asked comparable questions about micro-economics. For University Profs, macro-economics is “where it’s at”.

For those of us going to work for corporations, the critical factors are micro-economic variables.  The factors of supply. demand and price are what determine companies success or failure.  Micro-economic theory goes back to Adam Smith in the 1700’s.  So it is older, more settled, and probably more a part of our nature.   A company where I worked in corporate planning had one macro-economist and none with a title of micro – economist.  But instead we had  several “industry” economists.  These folks opinions were sought much more often than those of the Macro-economist.  The industry experts were knowledgeable product supply and demand, as well as the cost and productivity factors were for industry companies.  All micro-economic factors.  Those teaching economics at the University level could not be expected to know the specifics of a multitude of industries.  But those working in the private sector, are expected to be experts on the industries their companies are involved in.

So which is more useful?  It depends.  If you are part of a university faculty, macro probably is.  If you work for a corporation, micro is.  In truth, I believe that neither stands alone.  They are irretrievably inter-connected.  The macro-economy is the sum of all the micro-economy entities and industries.  I think it’s hard to deal with one without understanding the other.  For example, the 2001-2002 recession was brought on by the stock market crash, which was in turn driven by two industries – IT & Electric Utilities.  Companies in these two industries drove the mania for different reasons.  If one had understood the history and the supply/demand & price factors in each of these, then what happened would not have been a surprise.  But what happened in these two fed the panic which drove the stock market crash.  So the effects can move up from industries to the economy in general.  It also can move down from government actions.  So it is important for the government to know something about were the individuals and company’s are before they start doing something.  Doing the same things will not always get the same results.

This week, Noah Smith, a professor of finance at Stony Brook University authored an opinion piece on the editorial page of our Tulsa paper.  His objective seemed to be to attack congressional conservatives who are pushing for a tax decrease.  But his rational seemed to argue against any government intervention.  He said macro-economists need models to predict results, and that… “modern macroeconomics is chock full of such models.  There are as many of them as there are grains of sand on the beach.  You can have your pick, since macroeconomic data is typically too weak and uninformative to rule in favor of one or the other.”  And that, …“if you can pick your model and pick your parameters, there are few if any limits on the results you can get.  And that means that if you’re politically biased, you can always show that your least favorite policy is wrecking the economy – or that your favorite policy will work miracles.”  There is probably some truth to that, but if you believe all that, do you really want anyone in Washington – liberal or conservative – trying to use spending or taxes to manipulate the economy?

In an editorial piece in the Wall Street Journal the next day by Michael Heise, chief economist at Allianz SE in Munich, had this to say.  In Europe, there are policy advocates who …“argue that policy makers can pump up demand by releasing more and cheaper money into the economy through accommodative monetary policy and expansionary fiscal policy financed at ultra low borrowing costs.”  (Sound familiar?)  He goes on to say,  “Recent experience suggests that’s not true.  Plunging interest rates in recent years have done little to make firms invest or households to consume more.”  One of the problems he thinks is uncertainty.  He says “Uncertainty plays a major role for consumers and corporate spending alike.”   He goes on to say with an aging population trying to save for retirement and government fiscal policies, with high debt, already look unsustainable.  He goes on to conclude that “The eurozone has already received plenty of fiscal and monetary stimulus.  Now is the time to address the foundations for future growth, from flexible labor markets and well targeted social security systems , to competitive services and a regulatory climate favorable to investment.”  I would only add that I don’t think Mr. Heise has not used an economic model to come up with these things.  Mostly it sounds like common sence. An effort to understand where individuals and companies are, and how they are likely to react to macroeconomic policies.  He is thinking more like a good doctor who realizes that the current treatment program is not leading to a cure, and so he must question the diagnosis and look for a different treatment program.

Macro-economists should probably put less faith in models based on historical data that happened in a different environment than we may currently be experiencing.  An understanding of micro-economics would probably help in determining which policies might work in today’s environment.  And we need to remember that one of the problems with a democracy is that politicians are more apt to  prescribe things that make us feel better in the short run – like aspirin – rather than more painful treatment programs that may solve problems in the long run.  But that’s a discussion for another time.


About tjc13

BE - Chem Engineering, Vanderbilt Univ, MBA, University of Tulsa - Worked for an energy and chemical company for many years and then started a management consulting business working for both for-profit and not-for-profit organizations.
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