An Introduction to Demand Management, Long-Run Growth and Global Economic Governance
Chapter 1: Introduction: It is the Only One We Have
This is definitely not a mainstream macroeconomics textbook. Earth Economics studies the economy of our planet from the perspective of an autarkic system (a ‘closed economy’). Macroeconomics is essentially national in orientation as it deals with national policies (admittedly often in an international context). Eartheconomics focuses on the global level. It does so by ignoring the constituent national and regional parts of the planet economy and thus we will focus on policy making that increases global rather than national welfare. Indeed, eartheconomics is a subject on its own. Economists analyse world issues by aggregating nations into regions and regions into even larger entities. Starting at a low level of aggregation (the nation state), they expect to arrive at the top (the world economy), but it is more probable that they actually lose sight of the whole. Figure 1.1 illustrates the error of aggregation by means of the total of the current accounts of all nations. The current account measures the external financial flows (international payments and receipts) of a country and since a payment of one country is always a receipt for another country, the sum of those flows should be zero. Figure 1.1 shows that this logical condition is not met in the major analytical database of the International Monetary Fund. It is clear that before 2005 the national data collectively must have overestimated the payments of countries (as the total of all national current accounts is negative) or, what amounts to the same, underestimated receipts. Since 2005 the total of all current accounts is positive and the national current accounts therefore must on average overestimate the net receipts (that is: receipts minus payments) of the countries of the world. Figure 1.1 therefore clearly shows that the underlying national and regional data in the IMF’s flagship publication, the World Economic Outlook must be wrong on average and that the direction of error differs between the pre-crisis period and the period of the Great Recession. By implication the analyses built on these data must be biased.