Economics: Microeconomics Vs Macroeconomics

MICROECONOMICS VS MACROECONOMICS

In the 1930s Great Depression, classical economics (today called 'microeconomics') failed because of a basic truth about the economic system: the whole is greater than the sum of the parts. In 1936, John Maynard Keynes wrote 'The General Theory Of Employment, Interest And Money' and invented a new way of looking at the economy (called 'macroeconomics') based on this basic truth. Macroeconomics was correct because it filled an important gap in economics: the gap between the whole and the sum of the parts. This point is important. That is, the purpose of macroeconomics is ONLY to fill this gap - ie, to explain those aspects of the (aggregate) economy that microeconomics cannot explain. The purpose of macroeconomics is NOT to explain ALL aspects of the (aggregate) economy - ie, macroeconomics is not a magic wand / silver bullet. The economy is fundamentally a bottom-up (not top-down) system - so microeconomics DOES explain most of the aspects of the economy.

This is a fundamental point in economics. It is the most fundamental point about the relationship between microeconomics and macroeconomics. But unfortunately no textbook says this clearly. Micro textbooks don't say this because they think that micro is anyway the 'real economics' - and assume that everybody also thinks like this. Macro textbooks don't say this because they do not want to highlight macro's deficiency. So there is a gap of silence between the two - which creates a gap in students' understanding. But understanding this point is essential to understanding economics.

Basic economics courses (BSc's first two years and MSc's first year) are structured like this:

1. Microeconomics - 50%

2. Macroeconomics - 50%

So everybody thinks:

Economics = 50% Microeconomics + 50% Macroeconomics

(See Figure 1)

Advanced economics courses (MSc's second year) consist of subjects like Trade Economics, Labour Economics, Industrial Economics, etc. But all these subjects are nothing but applied microeconomics. And the 'Microeconomics' subjects in the basic economics courses are actually microeconomic theory. So Figure 1 is wrong. And the correct equation of economics is:

Economics = 25% Microeconomic Theory + 25% Macroeconomics + 50% Applied Microeconomics

(See Figure 2)

So we must carry out two changes in our economics courses:

1. Rename the basic 'Microeconomics' subjects as 'Microeconomic Theory'

2. Explicitly identify the other subjects as 'Applied Microeconomics'

Then students will correctly understand the real structure of economics.

Introvert, Extrovert, Generalist, Specialist

[I got this idea from FundraisingCoach.com]

Which is the best profession for us? The two most important factors are:

A. Our orientation towards people

B. Our orientation towards subjects

A. Our orientation towards people

There are two types of people based on this factor:

1. Introverts get their energy from themselves

2. Extroverts get their energy from other people

B. Our orientation towards subjects

There are two types of people based on this factor:

1. Generalists are interested in many subjects

2. Specialists are interested in only one subject

So considering these two factors together, there are totally 2 x 2 = 4 types of people:

1. Extrovert-Generalist

2. Introvert-Specialist

3. Extrovert-Specialist

4. Introvert-Generalist

The best professions for these people are:

1. Extrovert-Generalist - These people have a basic knowledge of many subjects and are good at working with people. So they make good managers.

2. Introvert-Specialist - These people have an in-depth knowledge of one subject and are good at working alone. So they make good researchers.

3. Extrovert-Specialist - These people have an in-depth knowledge of one subject and are good at working with people. So they make good experts.

4. Introvert-Generalist - These people do not have enough knowledge in any subject and are not good at working with people. So they are unemployable.

The rough percentages of these types of people are:

1. Extrovert-Generalist - 95%

2. Introvert-Specialist - 2%

3. Extrovert-Specialist - 2%

4. Introvert-Generalist - 1%

Guru - The Giver Of Knowledge

GURU - THE GIVER OF KNOWLEDGE

Today is Guru Poornima - the day we worship our Gurus.

Who is a Guru? A teacher (shikshak) only gives information - but a Guru gives us knowledge. If we think knowledge is the same as information, we will never understand the meaning of Guru. Our ancestors understood the meaning of knowledge and its power - and hence the importance of Guru. So they built an education system (Guru Kula system) based on this understanding. That is why India was the greatest civilisation in the world for 4000 years.

The counter-part of Guru is shishya (disciple). A student (vidyarthi) only receives information; but a shishya discovers knowledge - with the blessings of his/her Guru. The requirement for a Guru is knowledge. Similarly the requirement for a shishya is faith - in his/her Guru. If our Guru tells us to walk through fire, we must do so. Not by thinking that we will get burnt - then it is not faith; it is slavery. Faith means knowing that we will be able to walk through the fire without getting burnt - because we have our Guru's blessings.

Today everybody says: "Now there are only teachers/shikshaks - and very few Gurus". True. But the other side of the coin is: Today there are only students - and very few shishyas. If we want to produce Gurus, first we must become shishyas. If we want Ramakrishna Paramahamsa, first we become Narendranath Datta. Only then we can become a nation of Swami Vivekanandas.

The 21st century is the knowledge century. So let us understand the meaning of knowledge and its power - and the importance of Guru. And let us remember the timeless wisdom of our ancestors:

guru brahma guru vishNu

guru devo maheshwara

guru sAkshAt parabrahma

tasmai shree gurave namah

 - Skanda Purana

'The Changing World Order' - Ray Dalio (Review/Summary)

Review/Summary:

Ray Dalio is the 70th richest man in the world (worth $20 billion) and the founder of Bridgewater Associates - the biggest hedge fund in the world.

In his latest book 'The Changing World Order' (currently the #1 economics bestseller in America) he gives a model to explain the rise and fall of superpowers. According to him, there have been 3 superpowers (Holland, Britain, America) and now the 4th one (China) is rising. He says the rise and fall of superpowers is driven/caused by two major cycles: the economic cycle and the political cycle. He further divides the political cycle into two cycles: the internal political cycle and the external political cycle. And among these 3 cycles, the most important is the economic cycle. Dalio says the economic cycle is driven/caused by the debt/credit cycle. In fact, the book's cover has a diagram of the debt/credit theory of economic cycles. But this is a fringe theory in economics. So Dalio's model is based on a fringe theory - which puts a big question mark on his entire model. Interestingly, the book has been praised by many heavyweights like Bill Gates and Henry Kissinger - but by only one economist: Lawrence Summers. And coincidentally, Lawrence Summers is also the only major economist who supports the debt/credit theory of economic cycles.

Other criticisms:

# In a good detective novel, all the loose ends go on getting tied up and cleared away as we reach the end of the book. Dalio's book is the opposite - cracks start appearing in his model and go on adding up. So at the end, we have to take his model with a pinch of salt.

# Dalio's basic approach is to build a numerical model that takes the numeric values of various indicators and uses them to make predictions about the world. This is a very interesting exercise but the world is too complex a system to be modelled like this. What gets left out is much more (both in quality and quantity) than what can be captured in such a model.

# Dalio's model basically says that a country collapses as a superpower when its debt becomes too high. To prove his argument, he bombards us with a ton of graphs of very specialised economic indicators for the 4 superpowers - but the most important graphs are missing: the debt-to-GDP ratios.

# Throughout the book, Dalio keeps saying that America is declining because its debt is high and China is rising because its debt is low. But America's total debt (government + corporate + household) is 240% of its GDP and China's total debt is 250% of its GDP. At the end of the book, he says that he has constructed his own index to measure a country's debt burden. He should have revealed this in the beginning - when he describes his debt/credit theory of economic cycles.

# Dalio wrongly uses many basic economics terms. Example: 'Devaluation' means a country reducing the value of its currency against other currencies. But he uses the word to mean a currency losing its value against gold. This is nothing but an increase in the price of gold - which anyway happens due to inflation. So he keeps saying 'devaluation' when it is actually inflation.

# Dalio talks about the 'real economy' and the 'financial economy' - as if they are two systems, equal in size and importance. This is wrong - the financial system is nothing but a sub-system of the economic system.

# People who have studied economics can read this book to test their understanding of the subject. People who have not studied economics are better off reading a good economics textbook instead.

# The book has no index or bibliography.

However Dalio does get a couple of points right:

# Importance of education - Dalio identifies 8 factors that make a country a superpower: 1) Education 2) Technology 3) Competitiveness 4) Military 5) Trade 6) GDP 7) Financial centre 8) Reserve currency. These are in chronological cause-effect order: ie, 1 leads to 2, 2 leads to 3, and so on. That is - he (correctly) identifies education as the most fundamental factor that makes a country strong. This is especially relevant for India because our education system (especially our primary education system) is very weak.

# Importance of fiscal discipline - During normal times, a country can have a high debt/deficit and nothing will happen. But normal times do not last forever - sooner or later, a shock will come. In the last two years alone, the world has had two major shocks: Covid-19 and the Ukraine War. And when a shock comes, countries with a low debt/deficit survive but countries with a high debt/deficit collapse. Hence fiscal discipline (ie, a country spending less than what it earns) is of paramount importance.

I Am Nupur Sharma

Today a friend warned me about my Facebook post saying #IsupportNupurSharma. Let us look at this whole situation:

1. Hinduism respects all religions. This is the most fundamental feature of Hinduism.

2. The practical consequence of the above point is: For Hindus, not offending others is more important than telling the truth. That is - Hindus do not tell the truth if it will offend others.

# Feature #1 is great. Feature #2 is bad - but it is also a fundamental characteristic of Hindus.

# Nupur Sharma only stated a fact. In fact, she just quoted from Islam's own scripture. But in doing so, she violated rule/feature #2 of Hindus. But she did so when she lost her temper because Islamic fundamentalists were continuously abusing Lord Shiva in that debate.

# She later apologised unconditionally for what she said. Her party also punished her by firing her from her job and suspending her from the party.

# So the matter must have ended there. But next Islamic fundamentalists started threatening to rape and kill her - and liberals were tacitly supporting these threats.

# A Hindu called Kanhaiya Lal posted in support of her - and two Islamic fundamentalists killed him.

# A Supreme Court Judge says Nupur Sharma is responsible for Kanhaiya Lal's murder.

What does all this mean? Cannot we live and speak freely in our own country? Should we live in fear that somebody will kill us just because we stated a fact - or supported someone who stated a fact? If so, then what is the point of being alive?

So I no longer 'support' Nupur Sharma - now I am Nupur Sharma.

#IamNupurSharma