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.
READER COMMENTS
JP Koning
Oct 30 2011 at 3:13pm
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
Oct 30 2011 at 6:28pm
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
Oct 30 2011 at 7:57pm
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
and
and
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”.
and
Anyways, that’s the best I can do. Cheers.
Arnold Kling
Oct 31 2011 at 7:40am
JP,
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
Oct 31 2011 at 11:40am
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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