Two great posts are up by Paul Krugman and Nick Rowe on the problem people have accepting that we have a demand problem.
Krugman starts, and marvels that the very idea that we could have an effective demand problem is so repugnant to people. The post is mostly just expressions of dismay, but he mentions a few interesting things. First, the baby-sitting co-op experience. This is a fascinating little episode and if you're not familiar with it you should click through the link. It's a microcosmic example of a monetary disequilibrium, demand side depression. George Mason University does lots of experimental tests of microeconomic phenomenon and the market process. I wish they'd do macroeconomic experiments like this one - perhaps with free bankers and a central banker? The other interesting point that Krugman raises is that the Monetarist advocates of a monetary disequilibrium theory are really - in the eyes of the intellectual vandals jettisoning demand-side thinking - just as bad as Keynes. I think this is basically right. One thing that he does not seem to be aware of is that by the same token there are monetary-disequilibrium Austrians out there too that offer an important in-road that simply isn't available in the RBC or New Classical side of the demand-skeptic camp.
Nick Rowe follows up by highlighting "short-side thinking". What position would you rather be in right now - in the market to buy a product, or in the market to sell a product? In the market to buy a product, clearly. Rowe points out that there's obviously a limit to this. At some point, the tables turn and you start to get pressure on prices. Nick points out that because of the obviousness of "short-side thinking", what's really amazing is that anyone doubts the primacy of the demand side.
But there are good reasons to doubt - and the doubt has to do with the distinction between the long run and the short run. In the long run, secular growth is determined by the supply side: by capital accumulation and technological progress. But in the short run demand is largely the concern. I'll also refer people to a post from November by Peter Dorman that does a great job laying the microfoundations for these demand-side problems. He also references a prominent critic of socialist calculation, Janos Kornai. That's right - the logic of one of the most famous critics of socialism also leads to the expectation that market economies will be plagued by effective demand problems.
Off to Romania
1 hour ago