Sunday, August 14, 2011

The Parable of the Mill: Introduction

Macroeconomics is counterintuitive for many people, or simply puzzling.  An economic depression, for example, presents a classic conundrum.
  • Factories are idle and workers are unemployed.
  • Factory owners won't hire people because they don't think they'll be able to sell enough product to make it worth paying wages.
  • The owners' fears are probably justified, because a lot of people are unemployed, and even the folks who still have jobs are more nervous than usual and less inclined to spend.
  • A couple years earlier, owners were hiring, and workers were spending, and everything looked great.
And if you've thought about macroeconomics at all, you can probably think of your own puzzle to add to my example above.

This situation isn't surprising.  We experience the economy as individuals, but the economy itself needs to be understood as a system.  We're used to thinking about the economy in terms of money, when what ultimately matters is the physical reality of what gets made, what gets done, by whom and for whom.

Sometimes economic models are framed essentially in barter terms: I'll give you this, you give me that.  This is helpful in taking the focus off of money and putting it on the physical reality, but it has its own pitfalls.  When we think of barter, we tend to imagine swapping two things that already exist.  But what makes economics interesting--and tricky--is that the system you're studying is constantly changing, and some of the most important exchanges we make are when we swap goods and services now for promises of what we think will be available in the future.  That is, some of our exchanges take the form of credit.  And just to add a layer of subtlety, the use of credit helps shape the very future about which we're making promises.

To understand it, we'd like to have a model that is:
  • A system of multiple, interacting parts, rather than a single actor;
  • Simple enough to get our heads around;
  • Grounded in physical reality;
  • Able to incorporate money, but also understandable without it;
  • Able to incorporate credit, with or without money.
If you want a fuller background for these criteria, continue reading below the jump.  If this brief explanation satisfies you, at least for now, go right ahead and enter Mill Village.