A thought on a Nick Rowe post

In this post, Nick Rowe proposes that macroeconomics went wrong when we stopped thinking about the trade cycle and started focusing on newly produced output.

There are some senses in which he's right. For example, we know we have reason to worry about the production of investment goods because they are particularly volatile. But of course, the volatility of investment goods is intimately tied to existing investment goods: the capital stock. Likewise, we know that wealth levels are very important to worry about because they too are closely tied to aggregate demand by both consumers and investors. And once again, wealth is a collection of new and old goods, and a lot of wealth is tied up in the trading and retrading of securities: not new production.

So old production is obviously very important, even for we who have gone off track. However, I hesitate to agree with Nick in fully embracing the idea that we even have gone off track. New production is important because new production is very closely related to employment in a way that trade in old goods isn't. For there to be employment there typically must be a buyer, a seller, a medium of exchange, and the exchange of some new production. If we only have a buyer, a seller, a medium of exchange, and the exchange of some old production it's very likely that we'll have little employment (perhaps a broker of some sort... and even he will be producing something new, namely brokerage services).

We care about employment. Why? Because that's how most of us get money. And why is getting money important? Because that's how we get very important goods and services (old or new) in the modern economy.

If you want economics to be a science of how markets and prices and exchanges work and how prices and quantity sold move and change, then Nick is probably right.

If you want economics to be a science of human economic activity, explaining the sorts of economic facts that we care about, there is very good reason for the discipline to have shifted its focus to new output. This is not to say that we can ignore "the trade cycle" as Nick describes it - trade in all goods. We can't ignore that. But if what you care about is employment and human behavior to satisfy human wants, there is very good reason to highlight the role of new output.

Nick is not a friend of Say's Law, but he thinks about the economy in the same way - as a web of exchanges. There's something to that way of looking at the economy. There's something to asking "when is this system balanced and what causes it to become unbalanced?" That's all fine. But even when a balance is struck beetween sales and purchases, there's no guarantee at all that it will be struck at a level that we consider good or healthy.