Eureka! The Missing Link Between Micro and Macro Revealed!

“When asked for a short reading list to introduce economics, I respond by recommending two volumes by Mark Skousen: ‘Economic Logic’ and ‘The Making of Modern Economics.’ They provide a superb one-two punch.” — Prof. Steve H. Hanke, The Johns Hopkins University

Steve Hanke is considered the #3 most influential economist (behind Paul Krugman and Nate Silver) by Focus Economics.

Well deserved! Steve considers my two textbooks, “Economic Logic” and “The Making of Modern Economics,” as the best in the country. He added, “Economic principles, problems and puzzles are clearly and comprehensively dealt with. Importantly, Skousen knows his history of economic thought and informs readers about the blood, sweat and tears that have gone into producing modern economics.”  Thanks, Steve. (To order them as a discount, go to www.skousenbooks.com.)

Today, I’d like to talk about “Economic Logic.”

There has been a long-standing gulf between the performance of the whole economy, what we call big-picture macroeconomics, and the behavior of individual consumers and producers, what we call little-picture microeconomics.

Macroeconomics is all about aggregating the economy, looking at interest rates, the money supply and gross domestic product (GDP).

Microeconomics focuses on prices, supply and demand and profit and loss of the individual firm.

For over a century, economists have sought a way to link the two models of economics without success.

Eureka Moment!

After years struggling with this issue, I’ve come up with a solution by analyzing economics from a business perspective.

I published this business solution in the new edition of “Economic Logic.”

This is a first — no other economics textbook displays these two models.

I’m hopeful that within the next generation, both diagrams will become popular ways to display micro and macroeconomics.

Students who have used my “Economic Logic” like my solution because it’s consistent with everyday experience in the business world.

I came up with the solution by focusing on the ultimate purpose of business — not to just make money, but to convert unfinished products into usable goods and services.

Almost all resources are unusable in their raw commodity stage — iron ore, cowhide, trees and sand have little use, but transform them into steel, leather, wood and concrete and you can create a hammer, coat, a house and a highway.

The purpose of business is to make that transition happen from unusable, unfinished products into usable, finished goods and services.

That’s what Adam Smith meant when he focused on “The Wealth of Nations.” Wealth is the value of finished goods and services, and the resources used in that process.

Leonard Read, the first president of the Foundation for Economic Education (FEE), makes this point in his famous essay “I, Pencil.” A pencil starts out as raw commodities — wood, metal and rubber… that is gradually transformed into a usable pencil through various stages of production.

A pair of shoes comes from cow leather… iron ore is transformed into steel and eventually a hammer.

A cup of coffee comes from coffee beans that are roasted and packaged and then shipped to the Starbucks, where the espresso machine converts it into a drinkable cup of coffee.

Here is my breakthrough diagram of the micro model, using the example of the production of a single product, a cup of coffee at Starbucks.

Micro Model of the Economy: Starbucks Coffee Example

Source: “Economic Logic”, 6th edition, figure 14.2, p. 333. I thank John Taylor (Stanford University) for providing this example.

As you can see from the above diagram, coffee starts out as coffee beans in the first raw commodity stage… which are then roasted and packaged by the coffee manufacturer in the second stage… then distributed by the wholesaler in the third stage… and finally, converted into a cup of coffee by the Starbucks espresso machine and sold to the final user, the consumer.

Notice that value is added at each stage of production, and that the cost of the cup of coffee ($5) is equal to the value added at each stage ($1.00 + $1.00 + $1.50 + $1.50 = $5).

Every good and service in an economy goes through these four general stages of production — paper, clothing, food, cars and trucks, iPhones and even services like accounting or legal briefs. Thus, the above  four-stage micro model is universal.

Four-Stage Macro Model of the Economy

Now let’s look at the macro model of the economy:

Source: “Economic Logic”, 6th edition, figure 14.3, p. 334.

We can see from the macro diagram above that it is similar to the micro model. There are four general stages — stage #1 measures total spending at the resource level; stage #2 in the production and manufacturing; stage #3 is distribution/wholesaling; stage #4 is final output/ finished products and services bought by the final user.

Notice that gross domestic product is stage #4 only, measuring spending of final goods and services only. It leaves out the supply chain.

Here is where I introduce gross output (GO), which is equal to GDP plus the value of the supply chain (stages #1, #2 and #3).

Thus, I’m able to integrate this stages-of-production model into the standard economics textbooks, including both GO and GDP. See chapters 14 and 15 of “Economic Logic.”

‘Economic Logic’ Is Real-World Economics

What’s great about these two models of economics is that they reflect a business perspective on how the economy works. As the late Sir John Hicks (Nobel Laureate from Oxford University) states, “It is the typical businessman’s viewpoint, nowadays the accountant’s viewpoint, in the old days the merchant’s viewpoint.”

Unlike most textbook writers, I have decades of real-world experience running a business. Most textbook writers learned their economics from the blackboard, not the corporate board.

I made the decision to get real-world experience after working for the Central Intelligence Agency (CIA) in 1974. I became the managing editor of an investment newsletter, which led me to start my own publishing and mail order firm, Skousen Publishing Company, write my own newsletter, Forecasts & Strategies, and manage my own investment accounts, and finally produce FreedomFest, “the world’s largest gathering of free minds,” as a for-profit conference held every year in Las Vegas and other cities.

I’ve also been a consultant to major firms, including IBM, Hutchinson Technology and Church & Dwight.

Over the years, I’ve had to make payroll, hire and fire workers and learn the basics of profit and loss.

During my adult career, I’ve had great experiences outside academia, in government (CIA), running a non-profit organization (Foundation for Economic Education, the oldest free-market think tank) and successfully managing and owning for-profit companies.

I’ve also lectured throughout the world, having traveled to all 50 states and 78 countries. This kind of experience pays off when it comes to teaching and writing about economics, finance and business.

My Experiences Have Made a Difference

With that background, I returned to the academic world as an “adjunct” professor and have taught economics, business and finance at major colleges and universities in Florida (Rollins College), New York (Columbia Business School, Columbia University, Barnard College, Mercy College) and California (Chapman University).

Then, in 2022, I was appointed the first Doti-Spogli Endowed Chair of Free Enterprise at Chapman University. Adjunct does good!

After learning the ropes of the business world and high finance, I decided to write my own “Economic Logic” textbook.

Three Ways My Economics Book Is Different

Based on my “real world” experience, my textbook is very different from other academic works in three significant ways:

First, instead of the traditional approach of starting with supply and demand diagrams (which can’t be drawn in real life!), I began with the profit-and-loss (P&L) income statement. I’m the only economics writer to do so.

The P&L statement does so much more than supply and demand curves to demonstrate the dynamics of the economy — why new and improved goods and services are constantly being created, why some companies flourish and others go out of business, etc.

In fact, using the P&L statement, I show that there is NO equilibrium in the economy — the quantity, quality and variety of goods and services are constantly changing.

That’s not to say supply and demand diagrams aren’t useful. They are, and I introduce them in chapter six.

Second, as shown above, I reject the standard “circular flow” diagram in favor of the “structure of production” model using a general “four-stage” model of the economy, which is more realistic of how the economy actually works. (See the two models above.)

Third, I introduce gross output, the new “top line” in national income accounting, and fully integrate it with GDP as the “bottom line.” Students, especially business students, love my new approach.

How to Order ‘Economic Logic’ at a Super Discount

“Economic Logic” is THE guide to sound economics, all in one book. It’s ideal for students and adults alike and is used in introductory courses in colleges around the country. It is now in its new 6th edition published by Capital Press/Regnery.

It is a 738-page guidebook on all aspects of sound free-market economics. It is dedicated to Milton Friedman and Friedrich Hayek. Read the book and see why.

For all the details, including chapter headings, see https://mskousen.com/economic-logic/.

The price on Amazon is $82 plus shipping, but if you order through www.skousenbooks.com, you pay only $44. I autograph each book and mail it at no extra charge anywhere in the 50 states.

What Economists Are Saying

“Eureka! Skousen has done the impossible. Students love it! I will never use another textbook again.” — Harry Veryser, University of Detroit-Mercy

“Mark Skousen is the only economist I can understand.” — Dr. Lawrence Hayek

“An excellent balance of theory and the real world that no other text has achieved.” — Charles Baird, California State University, East Bay

“Better than any book out there! Skousen presents real business economics in a clear, provocative and logical fashion.” — Ian Mackechnie, University of Wales

“Perfect for any economics student — designed to maximize learning while minimizing monotony. Simple, direct and comprehensive.” — K. Au, Homeschool instructor

“My college econ classes, filled with perplexing theories like the paradox of thrift, GDP and Keynesian fiscal policy, were completely refuted by this excellent free-market textbook. Students, if your professors don’t use this text, get it for yourself so you can really understand the concepts of sound economics.” — Amazon review

‘Super Early Bird’ Discount Ends on August 1

A reminder. The location of next year’s big FreedomFest created quite a sensation: Palm Springs Convention Center in California, famous as a haven for Hollywood writers, actors and retirees. The dates are June (not July!) 11-14, 2025. Our host hotel will be the beautiful Renaissance Hotel.

We are offering the super “early bird” special — only $347 per person to the first 300 who register, or until Aug. 1. (200 have already signed up, so take advantage now.) Register here: Begin Registration: FreedomFest Palm Springs 2025 (swoogo.com)

Plus, we offer a special bonus. If you sign up this month, you will receive a free ticket to EconoSummit in Las Vegas Nov. 9-10, the first investment conference after the elections (a $400 value). Sign up for FreedomFest, and we will send more details.