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ENTREPRENEURIAL ECONOMICS Calculation and Interventionism (Part 1 t o 3 )

ENTREPRENEURIAL ECONOMICS Calculation and Interventionism (Part 1 t o 3 ). Prof. Dr. Stefan Kooths UE Berlin Winter term 2019/2020 www.kooths.de/bits-ci. Contact data. Prof. Dr. Stefan Kooths Head of Forecasting Center Kiel Institute for the World Economy Office Berlin

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ENTREPRENEURIAL ECONOMICS Calculation and Interventionism (Part 1 t o 3 )

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  1. ENTREPRENEURIAL ECONOMICSCalculation and Interventionism(Part 1 to 3) Prof. Dr. Stefan Kooths UE BerlinWinter term 2019/2020 www.kooths.de/bits-ci

  2. Contact data Prof. Dr. Stefan Kooths Head of Forecasting Center Kiel Institute for the World Economy Office Berlin In den Ministergärten 8 10117 Berlin 030/2067-9664 stefan.kooths@ue-germany.com www.kooths.de

  3. Outline • Introduction and Overview • National Accounting and the Macro Perspective • Economic Order and Policy Making • Price Controls and Taxes • Externalities and Collective Goods • Information Deficiencies • Redistribution and Social Policy • Bureaucracy

  4. Outline • Introduction and Overview • National Accounting and the Macro Perspective • Economic Order and Policy Making • Price Controls and Taxes • Externalities and Collective Goods • Information Deficiencies • Redistribution and Social Policy • Bureaucracy

  5. Curricular context • Stability of the market economy • Keynesianism and the ”Paradox of thrift” • (Austrian) Theory of business cycles (fluctuations, crises) • Stabilization policy and demand-side economics • Monetary policy revisited • Growth theory • Knowledge creation and human capital • Development (qualitative growth) • Supply-side economics

  6. Reading • Hayek, F. A. (Ed.): Collectivist Economic Planning. Ludwig von Mises Institute: Auburn/Alabama, [1935] 2009. • Hazlitt, H.: Economics in One Lesson. Ludwig von Mises Institute: Auburn/Alabama, [1946] 2008. • Mises, L. v.: • A Critique of Interventionism. Ludwig von Mises Institute: Auburn/Alabama, [1929] 2011. • Interventionism – An Economic Analysis. Foundation for Economic Education: New York, [1940] 1998. • Bureaucracy. Liberty Fund: Indianapolis/Indiana, [1944] 2007. • Human Action – A Treatise on Economics. The Scholar‘s Edition, Ludwig von Mises Institute: Auburn/Alabama, [1949] 2008. • Polanyi, M.: The Logic of Liberty – Reflections and Rejoinders. Routledge and Kegan Paul: London, 1951: Part II. • OECD: Understanding National Accounts. 2nd Edition, Paris, 2014. • Bénassy-Quéré, A., B. Coeré, P. Jacquet and J. Pisani-Ferry: Economic Policy – Theory and Practice. Oxford University Press: Oxford and New York, 2010.

  7. Outline • Introduction and Overview • National Accounting and the Macro Perspective • MeasuringEconomicActivity in the National Accounts • Estimating Potential Output • CoordinationistParadigm of Macroeconomics • Economic Order and Policy Making • Price Controls and Taxes • Externalities and Collective Goods • Information Deficiencies • Redistribution and Social Policy • Bureaucracy

  8. Subject of macroeconomics • Overall economic activity with respect to a specific area(region, country, world)

  9. Macroeconomic reasoning • Sectors and aggregates (= averages) • Reducing complexity, but aggregation losses • Pattern prediction: Abstracting from individual circumstancesBUT: Microeconomic foundations (aggregates  agents) • Integrity of the economic process! „Neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them as we can between individual phenomena, individual prices, etc.“ Friedrich A. v. Hayek (1899 – 1992)Prices and Production (1935)

  10. Micro/macro vs. partial/total analysis Considering interdependencies(Feedbacks) Partial models Total models Macroeconomictotal analysis Macro level Macroeconomic partial analysis Aggregation Microeconomictotal analysis Micro level Microeconomicpartial analysis

  11. Debate • Macro view and entrepreneurship

  12. National vs. domestic concept National concept Domesticconcept Economic activity using production factors owned by residents(either domestically or abroad) Domestic vs. foreign economic units: Only residency matters(nationality does not). Economic activity within country borders(irrespective of who owns the production factors, either residents or non-residents)

  13. Production and income generation: Value added Value added = production minus intermediate consumption • Production: Total output at market prices • Intermediate consumption: Produced goods used up (“consumed”) in the production process (secondary production factors) • Value added: Compensation (= income) of primary production factors • Land/natural resources (rent) • Labor (wages) • Capital (interest and rent) • Entrepreneurial activity (profits) OriginaryPF/income Primary PF/income

  14. The production boundary (= What counts as production and what does not?) Source: OECD (2014), p. 108

  15. Macroeconomic production and product account Use Source • Final domestic use • Consumption C(private and public) • Gross investment I(private and public) • Exports Ex • Domestic production(at market prices) XMP • Net taxes on products NTP(Taxes on products TP – subsidies on products) SP • Domestic production XBP(at basic prices) Intermediate consumption V Final use GDP GDP Imports Im GDP = Gross Domestic Product at market prices

  16. GDP: Production-side approach Domestic production at basic cost – Intermediate consumption = Gross value added + Taxes on products – Subsidies on products = Gross Domestic Product at market prices

  17. GDP: Expenditure-side approach Consumption* + Gross Investment* • Change in inventories • Gross fixed capital formation(machinery, buildings, software, R&D) + Exports* • Goods (commodities) • Services – Importe* • Goods (commodities) • Services = Gross Domestic Product at market prices Finaldomesticuse=Domestic absorption Net exports =Trade surplus *at market prices

  18. Source and use of goods and services in GermanyData for 2016 in bn. Euro; Source: Statistisches Bundesamt, Fachserie 18, Reihe 1.4 Use Source GDP3144 GDP3144

  19. Disclaimer 1: Source/use vs. supply/demand p Measuring economic activity (ex-post) • In general: Economic activity = market activity • Recording realized (market) results • Market results reflect the impact of both sides of the market • Each product is (I) produced by employing production factors and (II) used for some purpose. • (I) and (II) reflect the production-side and expenditure-side definitions of GDP, and nothing else! • Production-side ≠ Aggregate supply • Expenditure-side ≠ Aggregate demand Example: Increase of consumption expenditures by 2 percent • Wrong (or trivial): “Consumer demand has increased by 2 percent.” • Correct: “The turnover of consumer goods has increased by 2 percent.” S D x

  20. Pitfalls of hydraulic macro accounting:“Final aggregate demand”: No demand and not all of it is final Macroeconomic goods and services account(for period t) Source (not: supply) Use (not: demand) Intermediate consumption(production structure) Intermediate consumption(production structure) Gross Domestic Product(domestic value added) Final consumption(exclusive source of value) Domestic capital formation Exports Capital formation abroad Imports GDP + IM = C + I + Ex GDP = C + I + Ex - Im IC + GDP + IM = IC + C + I + Ex

  21. Reminder: Production as a time consuming, multi-stage process Late stages(lower-order goods) • Capital formation: intertemporal intermediate consumption Early stages(higher-order goods) Consumable output(first-order goods) Originary production factors(labor and natural resources) Production t-6 t-5 t-4 t-3 t-2 t-1 t Value imputation Q7 Q6 Q5 Q4 Q3 Q2 QC Capital stock as a structure

  22. Disclaimer 2: Expenditure-side components no “drivers” of GDP GDP = C + I + NX BIP = Cpr + Cgov + Ipr + Igov + Ex – Im BIP = Cpr + Ipr + G + Ex – Im • G = Cgov + Igov • NX = Ex – Im  GDP + Im = Cpr + Ipr + G + Ex (source of goods ≡ use of goods) • In principle, all products contain domestic and foreign value-added • C ≠ GDP (e.g. imports may vary) • Im ≠ – GDP (final use may) • Definitions do never allow for causality! by definition!▼

  23. Disclaimer 3: „The Broken Window Fallacy“ Frédéric Bastiat (1801 – 1850)Ce qu' on voit et cequ' on ne voit pas (1850) [http://bastiat.org/fr/cqovecqonvp.html]That Which is Seen, and That Which is not seen [http://bastiat.org/en/twisatwins.html] http://www.youtube.com/embed/QG4jhlPLVVs • Destruction does not create income!

  24. Fatal misconceptions • „Pyramid building, earthquakes, even wars may serve to increase wealth.“ • John M. Keynes • „Oh! What a lovely war!” (…) „It took an enormous public works program known as World War II to bring the economy out of the depression.“ • Paul Krugman • „Nothing is worse than a dictator with a wrong agenda having the right economic policy“ • Richard Koo on Nazi economic policy

  25. Wealth, well-being, happiness … = GDP? Quelle: Nature, 16 January 2014, Vol. 55, S. 283-285

  26. DEBATE • How do climate policies affect GDP?

  27. Gross Domestic Product (GDP) vs. Gross National Income (GNI)German data for 2016; Source: StatistischesBundesamt, Fachserie 18, Reihe 1.4 National concept Domesticconcept 3197 bn. Euro Income from abroad(188) GDP Domestic income to residents(3009) GNI Income to foreigners(135) 3144 bn. Euro

  28. Income distribution (1/2) Gross Domestic Product at market prices (GDP) + Received primary income fromRoW – Payed primary income toRoW = Gross National Income at market prices (GNI) – Depreciation = Net National Income at market prices – Taxes on production • Taxes on products • Other taxes on production + Subsidies • Subsidies on products • Other subsidies = Net National Income at factor cost Domestic concept National concept

  29. Income distribution (2/2) Net National Income at factor cost – Compensation of employees (cost of labor) • Social contributions payed by employers • Gross wages and salaries • Social contributions payed by employees • Taxes on wages and salaries • Net wages and salaries = Operating surplus (rent, interest, profits) Wage share = compensation of employees/NNI at factor cost

  30. General revision of German National Accounts (2019): Impact on wage share

  31. Price adjustments (deflating): Nominal- vs. real values • Micro level: Expenditure = QuantityPrice • Quantities and prices are observable • Computing expenditure • Macro level: Quantity = Expenditure/Price • Expenditures (= nominal value) are observable • Average prices (price indices) can be constructed • Computing quantities (= real values) • Example:„Nominal private consumption is up by 3 percent, equaling an increase of 2 percent in real terms.“ • Nominal increase (expenditures): 3 percent • Average increase of consumer prices: 1 percent • „Average “ increase of the quantity of all consumer goods: 2 percent Apples + oranges =fruits

  32. Outline • Introduction and Overview • National Accounting and the Macro Perspective • MeasuringEconomicActivity in the National Accounts • Estimating Potential Output • CoordinationistParadigm of Macroeconomics • Economic Order and Policy Making • Price Controls and Taxes • Information Deficiencies • Externalities and Collective Goods • Redistribution and Social Policy • Bureaucracy

  33. Macroeconomic production capacities: Potential output Actual output GDP Potential output Negativegap Positivegap Time

  34. Macroeconomic production function • Y = Y(L,K,A) • Labor (L) • Capital (K) • Technology (A) • Cobb-Douglas-Function: Y = TFPLK1- • TFP: Total Factor Productivity (residual) • Aggregate approach  unspecific with respect to production structure

  35. Potential labor force • Population • Economic active population (demographic age structure) • Participation rate • Structural (“natural”) unemployment rate (NAWRU) • Working time (per person) • Potential labor force(potential volume of total hours worked)

  36. Germany: Potential labor force (2001-2022)

  37. Germany: Potential output growth 2001-2022

  38. Case study Spain Positive contributionsto potential growth 2006-2008 outputgapnowcast/forecast: -0.9 to -1.3 %

  39. Invisible Spanish “ghost estates” Nolevelshift

  40. Estimates of the 2005 output gap in Spain Source: Erik Klär, Potential Economic Variables and Actual Economic Policies in Europe, Intereconomics, Vol. 48 (2013).

  41. Outline • Introduction and Overview • National Accounting and the Macro Perspective • MeasuringEconomicActivity in the National Accounts • Estimating Potential Output • CoordinationistParadigm of Macroeconomics • Economic Order and Policy Making • Price Controls and Taxes • Externalities and Collective Goods • Information Deficiencies • Redistribution and Social Policy • Bureaucracy

  42. Aggregation: Handle with care! x1,1, x2,1, x3,1, … xi,j …, xn,m Micro level Loss of structuralinformation Aggregating over n agents and m products X Macro level

  43. Micro level: The economic engine room • „There are macroeconomic questions,but only microeconomic answers.“(R. Garrison)

  44. Say’s law Jean-Baptiste Say (1767 – 1832)Traité d'économie politique (1803) • Purchasing power (demand) requires marketable (saleable) production • No general overproduction (= lack of aggregate demand), but structural mismatches • Caricature: “Supply creates its own demand.” (J. M. Keynes)

  45. Say’s law and National Accounting

  46. Macroeconomics and terminology • Risks of macroeconomic misperceptions • Aggregating/averaging the problems away(e.g. aggregate production function approach) • Losing touch with microeconomic principles(e.g. key role of price mechanism) • Over-interpreting national accounts concepts(e.g. identities tell nothing about causality or interdependency) • Ignoring production structures(netting out intermediate consumption) • Language (terminology) and reasoning (theory) • Words can be misleading • Wording matters

  47. Microfoundations for macroeconomics • One economic process • Micro level: Economic mechanisms and individual decisions • Macro level • Mismatches on micro level show up as „imbalances“ • Universal drivers (permeating into all micro markets) • Macroeconomics: Evidence for systematic misallocation of resources? • Universal (= pervasive) drivers • Money (medium of exchange) • Interest (price of time) • Capital (means for intertemporal coordination) • Labor (most universal production factor) • Constitutional framework (regulations, policy) • Systemic micro disruptions as macro symptoms

  48. A coordinationist macroeconomic paradigm • Key research and policy question:Evidence for hampered market coordination processes? • Coordination efficiency vs. macroeconomic management • Important role of intertemporal coordination (capital and interest) • Path-dependency of economic activity via capital allocation • Beyond the demand-side vs. supply-side controversy • Coordinationist macroeconomics is not a cheerleader for growth • Intermediary step to linking macroeconomics and well-being • Overcoming the production-biased view (production serves consumption, not vice versa) • Putting consumers/households back in the center • Value theory remains key pillar (whether preferences are exogenous or endogenous)

  49. Outline • Introduction and Overview • National Accounting and the Macro Perspective • Economic Order and Policy Making • Price Controls and Taxes • Externalities and Collective Goods • Information Deficiencies • Redistribution and Social Policy • Bureaucracy

  50. Role of governments and policy level • Enabling market processes(design of economic order)andchanging market outcomes(interfering with market processes) Constitutional level(abstract rules) Interventional level(concrete measures)

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