Monthly Archives: September 2011

Rationality in Economics

The Keynesians led vocally today by New York Times columnist Paul Krugman argue that the failure of President Obama’s stimulus to produce sharp increases in Gross Domestic Product was the result of too little government spending rather than too much. They rely on Keynes’ mechanical approach to macroeconomics: the famous P = C + I + G + X formula. According to the formula, the lack of growth in P despite the dramatic increase in G must be the result of too much retrenchment on the part of C (the Consumer) and I (net Investment, or business activity).

The Keynesians think of us the way Charles Shultz drew Charlie Brown and Lucy with the football: always running up for another kick even though she pulls it away. We laugh at pathetic Charlie because we know human beings learn from the past, albeit imperfectly. In contrast to the Keynesians, the idea of rational expectations put forward by Robert Lucas of the University of Chicago offers an explanation for the failure of this round of Keynesian stimulus: we have seen it before and we know there must be increases in taxes to pay for all this spending. Unlike Charlie Brown, we are not running forward to kick the football because we know Lucy will pull it away before we get a chance to swing our foot at it.

The Chicago School is famously the home of Milton Friedman, who offered the theoretical framework we call Monetarism. Friedman suggested that the main role for macroeconomics should be to maintain a steady rate of monetary growth. In this approach, he struck a middle ground between the Keynesians and the Austrians. Like the Keynesians, he accepted the framework of aggregates and equations that undergird the concept of macroeconomics. Like the Austrians, he accepted the limits of collectivist policymaking. The principal benefit of a steady state of monetary growth is that it offers a stable and predictable environment for business planning and investment. It presumes rational economic actors will in the main make rational economic decisions with the happy result that capital gets rationally rationed. It presumes intelligence where Keynes was left relying on “animal spirits.”

The Chicagoans’ monetary growth targeting ran into problems as the definition of “money” proved more dynamic than they anticipated, and we had a flood of “money” that was really credit somehow accorded the legal protections extended previously only to money. The money/credit supply increased under Monetarism, albeit surreptitiously, with the result expected by the Austrian business cycle theory: too much money distorted the investment/saving equilibrium such that a wave of malinvestment led to a boom and the inevitable bust.

Today’s economic rationalists operate with skepticism about government policymakers, and the rising price of commodities that cannot be explained by increased demand from emerging nations is the canary in the coal mine of monetary growth. Rational economic actors know we cannot create money from nothing but so long. While they wait for the other shoe to drop, the global economy stagnates. Lucy waits with the football in place, but Charlie Brown is willing to wait longer.

Thoroughly Modern Job

What would Job look like if he were moved from his ancient times to our modern time? Would he not be a successful businessman, the kind of man who serves on the finance council at his church or synagogue? The successful businessman with three healthy, well-adjusted children and a beautiful wife with kind eyes and a warm smile? Modern Job saved while he built his business, he moved into the distinguished neighborhoods. He had nice cars but never bought the red convertible in middle age. There was never a breath of scandal about him. Job would be the man in the pictures in the neighborhood newspaper covering local fundraisers for charity. Job reaped the rewards of living the good life that comes from hard work and moral rectitude.

How hard it was for Job, and is for us today, to accept God’s providence. Our modern Job would look on his earthly record and conclude he had done everything the right way. He would not be wrong, would he? Indeed, he had done it all the way God asked. Almost all, that is. God asked him to live that prudent and sober life full of joy in the knowledge of God’s dominion and provision. What trapped ancient Job traps modern Job: the sense that the fruits were the result of man’s labors. In truth, everything Job had was gifted to him by God to be enjoyed by Job and shared with God’s other children in full and public display of their ultimate source. Job believed he earned his own material well-being. Worse, he believed he established his own righteousness. Even when all his material wealth — and then his family and health — were lost, Job gripped tightly to his sense that he was righteous by his own merit.

Job’s peace is our peace. When we come to accept that everything is because it is God’s will, we take the first steps toward seeing the world clearly. When we come to accept that every situation is an opportunity to serve God irrespective of how we came to be in that situation, we take the first steps toward closely following God. When we come to see that lasting joy and peace are the gifts we receive from abiding in Him, we take the first steps toward loving him with all our hearts. We can take these steps each and every day. Day by day, we can see Him more clearly, follow Him more nearly, love Him more dearly. We can do this rich or poor, healthy or sick, surrounded by family or all alone.