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This (the Keynesian Cross model, in which Y adjusts so that desired S = exogenous I) *used* to be the 1st lesson in Macro. It was *my* 1st lesson in Macro. But *should* it be? https://twitter.com/JoMicheII/status/1343901416428097542
For most of human history, Investment (especially net Investment) was negligible.
And there was no fiscal policy targeting "full employment".
So if this model was right, how come 90% unemployment wasn't as common as 10% unemployment?
(Teenaged me wondered about that.)
And there was no fiscal policy targeting "full employment".
So if this model was right, how come 90% unemployment wasn't as common as 10% unemployment?
(Teenaged me wondered about that.)
And old retired me still wonders about that same question, for *any* Macro model.
Is the macroeconomy self-equilibrating?
No.
But it looks a helluva lot more self-equilibrating than our models say it should be.
Old post: https://worthwhile.typepad.com/worthwhile_canadian_initi/2009/09/pre-darwinian-macroeconomics.html
Is the macroeconomy self-equilibrating?
No.
But it looks a helluva lot more self-equilibrating than our models say it should be.
Old post: https://worthwhile.typepad.com/worthwhile_canadian_initi/2009/09/pre-darwinian-macroeconomics.html
We can't even *ask* that fundamental Macro question (about self-equilibration) with the Keynesian Cross model.
It just *assumes* the answer must be "No".
It just *assumes* the answer must be "No".
We can and should at least *ask* that fundamental Macro question using the AD-AS framework.
"Do Micro self-equilibrating D & S curves add up to Macro self-equilibrating AD & AS curves??"
Face the fallacy of composition head-on.
Don't duck teaching it.
"Do Micro self-equilibrating D & S curves add up to Macro self-equilibrating AD & AS curves??"
Face the fallacy of composition head-on.
Don't duck teaching it.
Does the AD curve slope down?
If so, why?
Does it depend on the monetary/fiscal regime?
Does price flexibility help or hinder equilibration?
Does AS slope up?
If so, why?
etc.
If so, why?
Does it depend on the monetary/fiscal regime?
Does price flexibility help or hinder equilibration?
Does AS slope up?
If so, why?
etc.
We buy goods and sell goods for money.
And that "P" on the vertical axis of AD/AS is the price of goods in money.
Does that matter for the self-equilibration question?
I think it does.
But I can't see money anywhere in the Keynesian Cross.
(Are people saving *money*, or what?)
And that "P" on the vertical axis of AD/AS is the price of goods in money.
Does that matter for the self-equilibration question?
I think it does.
But I can't see money anywhere in the Keynesian Cross.
(Are people saving *money*, or what?)
But I still have a fond spot for the Old Keynesian Cross model.
It tells us something important:
The "Multiplier" is a positive feedback mechanism.
A small shock can cause a big recession.
Helps us make sense of the world.
But there's negative feedback too.
end.
It tells us something important:
The "Multiplier" is a positive feedback mechanism.
A small shock can cause a big recession.
Helps us make sense of the world.
But there's negative feedback too.
end.
Addendum:
I think: there is no Paradox of Thrift.
But there is a Paradox of Hoarding.
Only excess desired Saving *in the form of Money* (Medium of Exchange) causes Y to fall.
Money (MoE) is the *only* asset I can Save by not buying *anything*.
I think: there is no Paradox of Thrift.
But there is a Paradox of Hoarding.
Only excess desired Saving *in the form of Money* (Medium of Exchange) causes Y to fall.
Money (MoE) is the *only* asset I can Save by not buying *anything*.
Addendum2 (a bit off-topic):
There is massive inertia in teaching Intro Macro.
Both because of individual adjustment costs (profs & calendars etc.)
*And* because of "network effects" which Multiply (hah!) those individual adjustment costs (hard to change just one course) 1/2
There is massive inertia in teaching Intro Macro.
Both because of individual adjustment costs (profs & calendars etc.)
*And* because of "network effects" which Multiply (hah!) those individual adjustment costs (hard to change just one course) 1/2
