Arnold Kling  

Russ Roberts on Aggregate Demand

Me on Stossel... Footnote of the Day...

He writes,

When an economy is not healthy, there is less exchange. There is less buying and selling of goods and services and labor. To describe that unhealthiness as less aggregate demand is just to put the problem into different words.

That is, of course, my view. A lot of people think they understand aggregate demand. But journalists have a very different understanding than what is in a freshman textbook. And the freshman textbook differs from the intermediate textbook, where you explicitly talk about what makes the aggregate demand curve slope down and the aggregate supply curve slope up. While the intermediate textbook differs from the graduate textbook, where the intermediate AS and AD curves disappear and everything gets turned into Euler equations in order to satisfy rational expectations.

And then you get what Krulong describe as aggregate demand something which at times sounds to me like newspaper macroeconomics and at other times sounds like intermediate macroeconomics. In any case, they are really certain about it.

Related: Tim Kane talks about the importance of long-term growth.

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CATEGORIES: Macroeconomics

COMMENTS (5 to date)
JP Koning writes:

Whenever I read you writing about aggregate demand, you remind me of William Hutt arguing against Yeager, Leijonhufvud, and Clower in A Rehabiliation of Say's Law. Not sure if you have read Hutt, and if you have, whether you'd agree with my analogy.

Arnold Kling writes:

I had not read Hutt, but I looked at his book, and I do not agree with it. On p. 44, he makes it seem that the only source of unemployment is mis-pricing. I think it's much more complicated. I think I would be with Clower and Leijonhufvud, not against them.

JP Koning writes:

I'll give it one shot.

Leijonhufvud and Yeager argue (according to Hutt) that all recessions are monetary, and that in barter there are no recessions.

You argue contra to them that

to take the view that there would be full employment in a barter economy is to fall into an intellectual trap. That trap is set in part by thinking in terms of a representative agent and in part by putting too much emphasis on money as a store of value.


So barter solves nothing in the PSST model. In my view, the PSST model stays away from a number of intellectual traps, of which money vs. barter is just one.


There is a fundamental methodological error in macroeconomics that leads to saying that if there is no excess demand for money then there can be no excess supply of goods... Under the fundamental methodological error, the only way to break Say's Law (supply creates its own demand) is for people to want to hold on to money as a store of value.

I read Hutt as saying some of the same things that you are. Hutt disagrees with the money vs barter dichotomy and dislikes the store of value story, the latter of which he calls the "alleged hiatus".

Leijonhufvud's stress on the medium of exchange seems to reinforce his assumption that, under hypothetical barter, the problems created by the power to withhold productive capacity would be non-existent. There seems to be no reason, however, why barter should release incentives for the asking of market clearing values. Unless we assume perfect value flexibility in an imaginary barter economy of assumed equal complexity, all the phenomena encountered under imperfect price flexibility will have to be assumed to influence adversely the incentives to co-ordinated activity. Under such assumptions, there will be no mitigation of the remoteness between a worker in one industry and a worker in another, or between entrepreneurs in one industry and those in others.


I suggest, however, that it is not mainly through "the money illusion," and the facts that "bargains are made in money" and "incomes universally reckoned in money" that the difficulties to be overcome originate, as Cannan suggested. The hiatus arises owing to that remoteness of wage-earner and wage-earner, and of entrepreneur and entrepreneur, which is an inevitable consequence of the highly efficient but highly complex system of division of labor that Money and the pricing system make possible. Except in this sense, the use of money has nothing whatsoever to do with the problem.

Anyways, that's the best I can do. Cheers.

Arnold Kling writes:

You are absolutely correct that I think that the notion that in a barter economy you must have full employment is a delusion.

However, I think that the notion that all you need are price adjustments is also an illusion. I would describe the unemployed worker not as "witholding production" but instead as trying to figure out his comparative advantage in a new environment.

JP Koning writes:

I find Hutt's "pseudo-idleness" to be similar to yours on recalculation. But for Hutt, pseudo-idleness was not the type of idleness that could lead to chronic unemployment... withheld capacity was the type of idleness he blamed. Anyways, I hope you don't think me misguided it if I continue to classify you near to, though not identical with, Hutt in my mental map.

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