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It’s too easily ignored that macroeconomics is a myth, a false notion presuming that what we call an “economy” is a living, breathing, tangible blob. In reality, an economy is just individuals. Meaning all economics is microeconomics. This is seemingly lost on Treasury secretary Janet Yellen.

At a recent speech given at the Frankfurt School of Finance and Management, Yellen asserted that “if we do not respond strategically and in a united way” to “China’s industrial policy,” the “viability of businesses in both our countries and around the world could be at risk.” Explained more simply, Yellen believes low-priced goods and services from China are an existential threat to businesses not just in the developed world, but also in China. No, quite the opposite.

Regarding China, its own businesses could hardly be harmed for succeeding in lowering prices. That’s like saying Walmart would be worth quite a bit more today if it had pursued everyday high prices. In reality, investors reward the businesses most successful at bringing prices down. Beyond that, consider the individual.

Individuals produce in order to get. Which means that if the Chinese are mass producing various market goods for lower prices, individuals around the world benefit. In a big way. They get more. Broken down to the individual, falling prices are always and everywhere a microeconomic plus, which means they’re a plus for what some call the "macro" economy. 

Importantly, what’s good for individuals is by extension good for the individuals who collectively work for businesses. Falling prices make the fulfillment of other wants possible, which is another way of saying that high prices for goods and services cannibalize other businesses. Consumers have reduced funds, and thus are limited in terms of the business locales they can patronize. Conversely, if Chinese businesses are aggressively bringing down prices for American and global consumers, those same consumers have more money to spend elsewhere.

Looked at through the prism of microeconomics, it’s all about tradeoffs. When prices are falling we once again have dollars to spend that we didn’t previously have, or we have dollars to save. Keynesians like Yellen, Ben Bernanke, and realistically 99% of all economists view saving or a lack of consumption as a problem, hence their aversion to falling prices. They’re confused. What we don’t spend because we’re saving doesn’t disappear under mattresses as much as the spending power shifts to others who either have consumptive desires of their own, or entrepreneurial ones.  

In short, no act of saving due to parsimony or lower prices ever subtracts from demand. Quite the opposite. But consider those who have capital needs. If the cost of all manner of goods is coming down, our ability to save is going up. And when we’re able to save, entrepreneurs and businesses in need of capital have greater odds of accessing savings. Stated very simply, falling prices are the friend of new and existing businesses, along with progress in general, precisely because the falling prices make it easier for individuals to save, and in saving, expanding the availability of capital.  

All of which brings us back to first, Adam Smith-style principals. Productivity grows as the number of hands – and machines – participating in the production increases. Said a little bit differently, the division of labor is the greatest friend of the worker (and by extension, businesses) that the world has ever known. Labor division isn’t about job loss, rather it’s a euphemism for specialization. And when we’re working in specialized fashion, we’re working more productively at rising wages that reflect the productivity.

Looked at through China, it was our biggest enemy when its people were not producing. By not producing, they were holding individuals down the world over simply because they weren’t participating in production. Secretary Yellen indicates that too much Chinese production is the problem now, which is an impossibility. There can never be too much production. It’s a reminder that Yellen’s views of “economy” are the real threat to us all, not China.

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book, released on April 16, 2024 and co-authored with Jack Ryan, is Bringing Adam Smith Into the American Home: A Case Against Homeownership


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