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On a somewhat related note, Stephen Williamson has a post up complaining about Paul Krugman's earlier post on demand. This was an especially weird point by him:
"Of course, Krugman is thinking about a Keynesian Cross model, which is not what modern macroeconomists (of any stripe) work with. If you buy into the Keynesian Cross, what recession would not be a shortfall in aggregate demand?"
I commented: "This is silly. Why can't you have a supply shock in a Keynesian cross model? It's just income, expenditures, quantity consumed, and quantity invested. There's no aggregate demand in it to speak of. Let's say there was an oil supply shock, reducing oil consumption. How would that show up in the Keynesian cross? Wouldn't it look EXACTLY like an oil demand shock?
The Keynesian cross isn't an illustration of demand driven recessions - it's an illustration of the concept of the multiplier.
And why do you even think Krugman has that in mind here?"
The Keynesian cross is kind of like the AD-AS curves... there's not that much to it. It can't tell you that much on its own. You have to bring a story to it to make it useful. Its use is in illustrating the multiplier, period. It's also something of an accounting identity: E=I. That's the identity that drives the Keynesian cross. Because it's an identity, we can plug it in to other models that otherwise wouldn't be fully identified. But mostly it's a cheap little drawing to drive the concept of the multiplier home. It says absolutely nothing about demand unless you bring a demand story to it.
These sorts of things make me want to be a humble undergraduate macro professor. It's so easy to misuse these tools and these identities. You misuse the Keynesian cross and you get crude Keynesianism. You misuse the equation of exchange and you get crude Austrianism (or crude Bimetallism!). There's too much crudeness in the world already. Economics doesn't have to add to it.
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Finally, I've been reading a lot of an early American Keynesian named Calvin Hoover for a project I'm working on. This is something he wrote about full employment in 1940:
"Human beings will make these decisions and some of them will be crucial. It is impossible that they could all be co-ordinated by some central intelligence. If it were possible for omniscience and omnipotence to do so, no doubt we would indeed have the optimum utilization of resources. Fortunately, we can get along not too badly upon something much less perfect. When the concatenation of administrative decisions does not produce full employment it is always possible by means of government intervention in the form of relief and employment creation projects to bridge over a crisis without social disaster... The problem of deciding what the irreducible minimum of regulation and control by government agencies must be throughout the economic complex becomes likewise more nearly capable of solution once we abandon the concept of a deceptively simple economy. We are never going to have a final solution to this problem, since the decision every year would be different from that of the year before. We can only depend on a sort of evolutionary groping towards a solution. But I have considerable confidence in that process of evolutinoary groping if we can exorcise the poltergeist which manifests itself either in the form of the conviction that we must set up totalitarian planning or in the form of the belief that if we remove all governmental control a nineteenth century economy will once more materialize." - Calvin B. Hoover (1940), "Economic Planning and the Problem of Full Employment" AER 30(1).
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