Sunday, February 10, 2013

Wow, I am really trying to put off writing this afternoon... one last good link

From Peter Dorman on how hard it can be to think macroeconomically.

Part of the problem is, people talk about this thing they call "hoarding" which cuts them off from thinking about this as a spectrum. Instead of talking about "hoarding", as many underconsumptionists would, Keynes talked about demand for liquidity. You could still give money to financial intermediaries - you didn't have to put it in the cupboard - and keep funds relatively more liquid than they would be otherwise. On this spectrum of liquidity, the most liquid is stuffing your mattress. The least liquid is actually building a plant. But there is a spectrum in between.

Liquidity preference influences the interest rate , which also impacts the demand for funds. This is the real problem. A decline in the supply of liquidity also reduces the demand for liquidity through its effect on the interest rate: and that means a fall in output.

Dorman concludes in this way:
"I’m sympathetic with Cowen’s struggle: I see the same difficulties in my economics classes every year. Students can usually see only one or two linkages at a time; it is really hard to see the whole thing as one simultaneous entity. It doesn’t come easy even for professional economists, since writing a set of equations is one thing, but visualizing them on an intuitive level as an integrated system is another.

The fact is, there are a lot more Tyler Cowen’s in this world than Paul Krugman’s, which is one reason why it is so difficult to get a sensible discussion of macroeconomic policy."

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