Are Macroeconomic Problems
Overhyped?
Hyperinflation and depression interested economists because they are extreme cases of common problems. In the United States, for example, the annual rates of unemployment ranged from 3.0% to 6.8% in the 1950s, from 3.5% to 6.7% in the 1960s, and from 4.8% to 8.3% in the 1970s. Similarly, the rate of inflation has sometimes been uncomfortably high. During the 1950s prices (as measured by the Consumer Price Index) rose by 23%, during the 1960s they increased by 31%, and during the 1970s they more than doubled, rising by 112%. Though these numbers are all small compared to what happened in the Great Inflation and the Great Depression, and also compared to what has happened in other countries in the past 50 years, they indicate the persistence of problems in economic performance of Western nations.
Though news media emphasize macroeconomic problems, a strong case can be made that problems involving economic growth and development are far more important. Indeed, economics began when Adam Smith set out to explain how a nation becomes wealthy, or in today's terms, how it develops economically.
There are several reasons the issues of development may not attract the attention they deserve both in economics courses and in the headlines. Most economists and reporters live in industrialized nations where development problems are no longer serious. Another reason may be that the analytical tools of economics have problems dealing with issues of development because individual creativity is a key ingredient in development. Someone must see opportunities and decide how to take advantage of them. Creativity is by its nature almost impossible to incorporate in theories. Theories try to explain regularities, but the essence of creativity is that it produces something new, an irregularity.
One the other hand, the twentieth century has had some interesting experiments concerning the conditions that generate or support economic development. There have been sharp contrasts between economic conditions in South Korea and North Korea, between East Germany and West Germany, between mainland China and Taiwan or Hong Kong. Though one may attribute these differences to a variety of factors, one factor that explains a great deal of the disparity is the structures of incentives that governments establish.
The nations in which government has prohibited, penalized, or severely curtailed business entrepreneurship (a form of creativity) have generally had much poorer results than nations that have not discouraged entrepreneurship. When business entrepreneurship is eliminated, citizens are unable to substantially improve their lot through economic activity, and either must be content with their station in life or turn to other avenues for improvement, such as the military, politics, or religion. Sometimes nations discourage business entrepreneurship under the banner of socialism, but often they do so as a way of protecting existing businessmen and others of wealth. One could argue that the suffering worldwide caused by government incentives that discourage economic development far exceed those which inflation and recessionary unemployment cause.
However, economic development is more than a problem of discovering some ideal set of government incentives. The situations listed in the previous paragraph show how different incentives affect those with a similar culture. In other countries we see that different cultural groups fare very differently when they face similar incentives coming from government policy. For example, in the United States people of Chinese and Japanese ancestry have outperformed those of European ancestry despite considerable obstacles placed in their way. Economics lacks tools to examine cultural differences and distinctions. The role that culture plays in economic development has been a barrier to good economic theories of that development.
Copyright Robert Schenk