Monday, June 28, 2010

Brad DeLong Thinks Macroeconomics Is Easy

. Monday, June 28, 2010

I'm looking forward to reading DeLong's long-in-the-works Slouching Towards Utopia whenever it ends up coming out:

Is macroeconomics hard in this sense? I confess that I do not think so. I think that macro is pretty easy...

What, exactly, the excess demand was in financial markets became a subject of dispute, with different economists placing the cause of the "general glut" that was excess supply of newly-produced goods and of labor at the door of different parts of the financial system. We have:

1. Fisher-Friedman: monetarism: a depression is the result of an excess demand for money--for those liquid assets generally accepted as means of payment that people hold in their portfolios to grease their market transactions. You fix a depression by having the central bank boost the money stock. Eliminating the excess demand for money also brings the goods and labor markets into balance and out of excess supply.

2. Wicksell-Keynes (Keynes of the Treatise on Money, that is): a depression happens when there is an excess demand for bonds--for ways of moving purchasing power from the present into the future. The workings of the banking system lead the market rate of interest to be above the natural rate of interest which balances the supply of funds saved and the demand for funds to finance business investment. You fix a depression by either reducing the market rate of interest (via expansionary monetary policy) or raising the natural rate of interest (via expansionary fiscal policy) in order to bring them back into equality. Then, with no more excess demand for bonds, the goods and labor markets will also be back in balance and out of excess supply.

3. Bagehot-Minsky-Kindleberger: a depression happens because of a panic and a flight to quality, as everybody tries to sell their risky assets and cuts back on their spending in order to try to shift their portfolio in the direction of safe, high-quality assets--which, of course, everybody cannot all do at the same time. The excess demand is an excess demand for high-quality AAA assets in particular, not of money (although outside money and some inside money are AAA assets) and not of bonds (some of which are AAA assets, but not all). You fix a depression by restoring market confidence and so shrinking demand for AAA assets and by increasing the supply of AAA assets. Eliminating the excess demand for high-quality assets is eliminated will bring the goods and labor markets out of excess supply and back into balance.

From the perspective of this Malthus-Say-Mill framework Keynes's General Theory is a not entirely consistent mixture of (1), (2), and (3)...

[I]t is not rocket science. It is, however, cutting-edge economics--beyond the cutting edge, in fact--for 1829.


The whole thing is word reading. Keep in mind that this discussion ends before it begins. It's not just interesting what governments could do in a perfect world with no constraints, but what governments can do (and do do) in the real world with lots of constraints. Someone else will have to write that book. Still, interesting stuff.

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Brad DeLong Thinks Macroeconomics Is Easy
 
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