Businessmen and macroeconomics

Matt Yglesias is mildly upset over a report that Obama is turning to Warren Buffet and Alan Mulally for economic advice. It’s not clear how much to make of the report. But it’s always good to remember that businessmen – even great businessmen – don’t necessarily know much about how to make the macroeconomy work.

How can that be? Don’t they know all about creating jobs? No, they don’t. They know all about expanding individual businesses – often, indeed usually, at the expense of other individual businesses. That’s an important and very lucrative skill, but it has very little to with the problem of expanding a whole economy, whose main customer is… itself.

Realistically, even very large corporations don’t have to worry very much about, for example, the extent to which laying off workers will reduce demand for the company’s product. They don’t have to worry about the extent to which cutting wages will reduce purchasing power and the ability to repay debt. They are, to use economics jargon, living very much in a world of partial equilibrium, never having to confront the feedback effects that are at the heart of the kind of problems an economy as a whole faces.

Long ago I plowed through many issues of Fortune from the 1930s, hoping to get some sense of what businessmen thought the problem was. All I found was incoherence. Sorry, but captains of industry don’t have some common-sense wisdom about what makes recessions and recoveries happen. And as Yglesias says, none of them have any experience with a liquidity-trap economy. If they know anything useful, it’s mainly because they studied, well, economics.

And as I keep trying to point out, basic macroeconomics has performed very well in this crisis, even though nobody wants to believe it.


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Businessmen and macroeconomics