What’s wrong with economics — 2 (Aggregates)

Mathematics can help economists describe the patterns they see in economic statistics such as total investment, consumption, growth, inflation, and unemployment. They formulate equations to show the correlations between these total (or ‘aggregate’) measures.

But while such equations can reveal the general patterns in economic life, we can never put precise numbers on the parameters in those equations. So we can never know or predict precisely how these measures will behave in future.

Economic aggregates are not real things that affect and influence each other. They are statistical measures, like totals of averages, of real things. It is those real things that affect each other. No buyer or seller decides to buy or sell because of the ‘price level’. They buy or sell according to their opinion on individual prices. We can put a number on the volume of purchases versus the number of sales, for example, but it is the individual purchases and sales that have an effect on things, not our statistics. 

Nor are the things that the aggregates summarise homogeneous. We may talk of ‘total capital expenditure’, say, but what is important is how and on what the expenditure is made. The economic effect depends on what capital goods that are assembled, and how well they work productively together to produce things that consumers want (rather than what private investors think they want or investing governments think they should have).

And all the millions of economic actors whose activities the aggregates summarise are different, and they change their minds for many reasons that we can never know. So any parameters that economists put into their equations today may not hold tomorrow. 

The relativities between the real things that are summarised by the statistics change as well. We can measure the price of a basket of traded goods and come up with a price index, a measure of the ‘price level’. But economic outcomes will be different depending on which prices within that total are rising and which are falling; and will depend also on how people react to those rises and falls. So the statistic merely conceals what is of real interest. 

Therefore, while might regard their aggregates as objective signals that inform public policy, the results of that are uncertain because we can never know precisely what individual decisions and actions lie behind those statistics. Indeed, public policy made on the basis of these aggregates may itself cause individuals to make different decisions, including decisions that undermine the policy. Economists may argue that stability requires taxes to be increased, but that may simply induce the most productive and mobile individuals to leave the country or move their production elsewhere.

Of course, economists want their discipline and their prescriptions to be scientific. But if, in trying to be so, they focus only on the things they can measure — economic aggregates — they will miss everything that is truly important.

Eamonn Butler