Sunday, March 02, 2003

Mark's Ism-A Fresh Look at Economics-I'm starting up a try at writing something resembling a macroeconomics textbook. Expect a few sections a week to come across the page-I'm planning to have a web page where all the sections come together. The comment section is there to fine-tune this bad-boy. Section 1.1- What are we looking to do? Most textbooks will look at macroeconomics in a descriptive matter, looking at how the economy operates on a grand scale, rather than look at what we want it to be. It might be helpful to look first at what we're trying to do. Without sounding too grandiose and idealistic, aren't we trying to make the world a better place? If we're acting in an altruistic manner, we'll like to see an economic system that maximizes the collective well-being of the society. Commonweal is the word occasionally used to describe that concept of collective well-being. Such a system will run into two conflicting facts in finding that economic sweet spot. The first is that in an altruistic system, we're supposed to help the needy. We have declining marginal utility of wealth; the 100,000th dollar isn't as valuable as the 10,000th dollar. This would indicate that a poorer person will get a bigger bang for the buck than a richer person and some transference of wealth would be good. Liberals will heartily agree with this assessment. Conservatives of a religious bent will recognize the scriptural mandate to help the poor. It's an open question whether taxation and government programs is the best way to do wealth transference, but a certain amount of wealth transference from the affluent to the less-affluent seems proper. However, that runs smack-dab into problem number two: human nature. We're greedy critters. If you take a Biblical world-view, it's called a sin nature, but you don't have to be a Bible-thumper to see that we prefer more to less. We might have declining marginal utility, but we still have positive marginal utility for each dollar. The more we're taxed, the less interested we are in working and investing. We're less interested in working, for our take-home pay has declined and the opportunity cost of leisure has gone down, resulting in less work. Higher taxes result in less investment; it reduces the after-tax returns on investments and makes spending the money now more attractive. The less interested we are in working and investing, the less stuff gets made, slowing the economy. Not only do taxes lower the taxpayer's utility, it will lower the utility of the whole economy that was counting on that taxpayer's work and investments. At some point, the utility gained by additional government programs is outweighed by the loss of utility by both the economy and the taxpayer, at which point the added program would reduce the commonweal. The trick would be to find that point, that level of government spending that maximizes the commonweal, that maximizes the collective joytron count. Coming Soon-Part 1.2- Quantum Economics and the Joytron.

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