Tuesday, January 25, 2011

A "War on Demand" or a War on Reason?

In a recent blog post, Paul Krugman is all atwitter over what he perceives to be a "widespread attack on demand-side economics." Not surprisingly, in his defense of Keynesianism, he manages to launch his own misguided attack on anyone who might think that "aggregate demand" is not an economic concept.

He writes:
...we’re seeing a much more widespread attack on demand-side economics. More than that, it’s becoming clear that many people don’t so much disagree with the idea that demand matters as find it abhorrent, incomprehensible, or both. I fairly often get comments to the effect that I can’t possibly believe what I’m saying about monetary or fiscal policy, that no sensible person could believe that printing money or engaging in deficit spending will increase output and employment — never mind that all I’m saying is what Econ 101 textbooks have been saying for the last 62 years.
First, the fact that something might appear in a textbook -- even for 62 years -- does not make it correct. It seems that Krugman is taking a chapter out of the "market test" view of economics that the Chicago School has used in an attempt to discredit the Austrian School.

Krugman, like Keynes, bases his viewpoint on a misstatement of Say's Law, in which he presents a caricature of what J.B. Say wrote in his Chapter XV of Book I in A Treatise on Political Economy. He writes:
First, Keynes was right: Say’s Law — the notion that income must be spent, and hence that supply creates its own demand — really is at the heart of the issue. Many, many people just can’t see how it’s possible for there to be an overall shortfall of demand.
Number one, what Krugman writes is NOT Say's Law, not even close. It is what Krugman and others of his intellectual generation WANT Say's Law to proclaim, yet as one who has read this chapter many times and who published a paper a year ago on it, I can say that what Krugman has written is nonsense.

The chapter in question dealt with the very issues Krugman raises, although it was done more than 130 years before The General Theory was written. In Krugman's caricature, he misinterprets Say's chapter as being written to claim that "aggregate demand" always is sufficient to purchase everything that is produced, as though it is impossible for there to be what Thomas Malthus and others claimed would be a "glut of commodities" that would exist because people would not spend their income.

Say did not deny that there could be a "glut" at times; in fact, he addresses that very issue, beginning with a situation in which there are unsold goods and the economy seems to be in the tank. (This should be a tipoff to the intellectual dishonesty of Krugman's position; Say addresses the very thing that Krugman claims that Say claimed was impossible.)

What Say did argue, and what I have argued in the paper I linked, was that there could be proportional imbalances in the economy, that there would be -- at least temporarily -- "too much" of something produced (Housing bubble, anyone?) and simultaneously, too little of something else.

However, what Say does not do is to lay out the causes of such problems. In his chapter, he only addresses the pre-Keynes/Krugman argument that the problem is due to a lack of "aggregate demand" (they did not use that term in 1803) brought about by a lack of money or a "general overproduction."

The issue Say covered was the source of demand itself: production of goods that could be traded for other goods. Keynes, and later Krugman, would argue that because people are paid in money for producing things, and because they have a tendency to save (and especially the wealthy, which is why Krugman believes that they should be taxed at higher rates -- so government will spend that money), that the market system itself has an internal contradiction that always leads to the problem of overproduction/underconsumption.

Say demolishes that argument in his Chapter XV, and I would invite readers to look at it for themselves, as opposed to taking Krugman's interpretation as gospel. However, Krugman is not satisfied at just attacking that point of view. No, he has to claim that anyone who thinks J.B. Say had a good point is doing so because of irrational moral scruples:
It’s becoming clear to me that a substantial number of writers on economics find the whole idea that the economy can suffer because people are too thrifty, insufficiently willing to spend, deeply repugnant. I’m the sort of person who finds the notion that sometimes virtue is vice and prudence folly interesting; but it’s clear that a number of people find that notion just plain evil. The world shouldn’t be like that — and therefore it isn’t.
And so he continues:
It’s kind of shocking if you think about it. Here we have a huge, hard-won intellectual achievement, one that accounts very well for the world we actually see, and yet it’s being thrown away because it doesn’t go along with ideological preconceptions. Once that sort of thing starts, where does it stop? The next thing you know, the theory of evolution will get the same treatment. Oh, wait.
In other words, this is not an argument about the efficacy of savings versus investment or even the perceived role of "aggregate demand." No, it is an argument between the Smart People (like Krugman) and the Yahoos who are so stupid that they might even believe in Creationism, which every writer at the NY Times knows is a notion that only Really Stupid and Immorally-Ignorant People will embrace.

In other words, in the end, this isn't even an argument about economic theory. No, it is not worthy even of argument. Krugman is saying that those people who disagree with his Keynesian views are so ignorant and so lacking of any regard at all that it would be better for the world if they were not alive. And they certainly deserve not even to be in the presence of Krugman at all, unless, of course, they agree to be treated as people once regarded children: people to be seen but not heard.

76 comments:

Anonymous said...

Krugman relies on flimsy trends to prove demand is below where it should be. How does he come to the level where demand should be? Not bottoms up, not theory, not data, not even economics. Lets draw a trend line and viola, we are below. No matter the fact that companies have not invested a dime in new capacity. And that massive capacity has been destroyed in housing and construction the world over. The delusion is strong, young Luke.

jgo said...

You've brought me back to wondering about the problem of mal-production. It seems that, over the last couple decades, there's been more and more over-priced garbage that I don't want on retail shelves... and less and less reasonably priced, high-quality goods that I do want on retail shelves.

It occurs with a wide range of types of products. The materials and workmanship have dropped, in part as firms cut corners to delay price increases in response to inflation.

Toys. I've got old photos of a relative riding in a little red wagon when she was a toddler at the beginning of WW2; decades later, I used that same LRW (quite hard, rolling and bouncing down the hill, overturning on gravel, and ramming into bushes, scraping the side of the house), and repainted it, black, silver/aluminum and back to red. Younger relatives also rode in that same LRW. A couple years ago, I saw someone present his children with a new LRW. It's already rusted through and useless, and there's no way to repair it. Of course, many toys are now molded plastic, or card-board, and they have plenty of those which they destroy and toss aside lightly.

Tools. Most tools I see on shelves are made from metal that won't keep an edge and won't take normal use. Power drills have bearings that wear out within 5 years instead of 5 decades. Battery-driven tools (including this computer), exhaust the battery's capacity for recharging within a year or two. Kitchen tools that used to last 30-60 years now follow one after the other to the dump.

Clothing. Pants and shirts of a type that used to last 10-30 years, now last 2-18 months with gentler treatment. (The old washing machines were tough on them, and we were tougher on them.) Shoes that used to last a decade now last little more than a year.

Radios, shavers...

Well, and then that leads back to hedonic, substitution and other considerations in the price indices, which the federal government seems to be applying in just the opposite of what would be reasonable.

Tel said...

If you believe in evolution, the logical conclusion is that government will eventually serve itself (i.e. maximise it's own power) rather than service the people. Thus, anyone who trusts government to self-supervise and keep itself to a reasonable size and reasonable powers cannot really be a believer in evolution.

LK said...

Are denying that aggregate demand is a meaningful concept?
The meaningful nature of the concepts of aggregate demand and aggregate supply are preconditions for Say’s law to even work, whether Say’s law is defined as Say’s Identity
or Say’s Equality.

“Number one, what Krugman writes is NOT Say's Law, not even close”

Complete rubbish. What Krugman writes is an accurate statement of Say’s Identity:

“the assertion that no one ever wants to hold money for any significant amount of time, so that, as a result, every offer (supply) of a quantity of goods automatically constitutes a demand for a bundle of some other items of equal market value.”
Baumol, W. J. 1977. “Say’s (at Least) Eight Laws, or What Say and James Mill May Really Have Meant,” Economica n.s. 44.174: 146.

“Say demolishes that argument in his Chapter XV, and I would invite readers to look at it for themselves”

Say’s discussion in A Treatise on Political Economy on his “loi des debouches” is unconvincing and ridiculous. Here are some gems from Say:

“When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands.Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products” (Say 1832: 134–135).

“Every producer asks for money in exchange for his products, only for the purpose of employing that money again immediately in the purchase of another product; for we do not consume money, and it is not sought after in ordinary cases to conceal it: thus, when a producer desires to exchange his product for money, he may be considered as already asking for the merchandise which he proposes to buy with this money. It is thus that the producers, though they have all of them the air of demanding money for their goods, do in reality demand merchandise for their merchandise” (Say 1816: 103–105).

So, in Say’s world, businesses don’t buy save money, don't buy financial assets at home or overseas, and don't hold money instead of investing it because of uncertain business expectations.

Bob Roddis said...

The entire concept of “demand” is nonsense. In each transaction, there are at least two people. One (or more of them) exchanges something they want less for something they want more. Each party “demands” something and “supplies” something. There is no “demand side”. The concept was cooked up to make people think in collectivist terms about individual subjective valuations. There is no such “thing” as “demand” and no such “thing” as “aggregate demand“.

Also, I fail to see how an alleged “demand shock” isn’t Austrian. People bought houses with diluted funny money thinking they were doing the smart thing because they thought the prices of houses would go up forever. They miscalculated and malinvested. They are now much poorer than they previously knew. Poor people have less “demand” than rich people. They need to spend less and save more. Heck, anybody who malinvests will ultimately face a “demand shock” — a lot less rich people around to buy the end product of their malinvestment. I fail to see how this helps the Keynesians or hurts the Austrians.

Krugman is getting desperate, but it’s a good thing that he’s making these distinctions between us, the good guys, and our various Keynesian-style opponents. After four decades of silly debates stuck at the definition stage, we now have proof from Krugman that we aren’t like Friedman and we aren’t like conservatives. We can still say with absolute confidence that neither Krugman nor his minions have the slightest familiarity with basic Austrian School concepts.

It seems to me that in the case of Facebook, Lady Gaga and Katy Perry, supply created its own demand. But the idea that EVERYTHING and ANYTHING produced for sale at all times will a priori create ”its own” demand for itself is absurd. This says nothing about Austrian School theory. Krugman and his minions simply cannot deal with Austrian theory and must create silly straw men. There’s really nothing else to say.

LK said...

Oxymoron of the year:

Statement 1:

"The entire concept of “demand” is nonsense.

Really?
Statement 2:

"In each transaction, there are at least two people. One (or more of them) exchanges something they want less for something they want more. Each party “demands” something and “supplies” something.

If the "entire concept of 'demand' is nonsense", then you can't meaningfully say that "each party
“demands” something".

And if the concept of "'demand' is nonsense", then Say's law is also nonsense, since demand is a fundamental concept for it to work.

Congratutions, Bob Roddis - either you flunk logic 101 or prove that Say's law is rubbish.

Bob Roddis said...

Typical straw man arguments. People can and do "demand" things. The word has meaning.

Keynesians use the term in two distinct ways which they then conflate in order to confuse.

I suppose one can employ the term "demand" simply as statistical concept to provide an approximate measure of the collective wealth of individuals or how much they are spending (although it's a confusing term). However, there's no "thing" floating out in the atmosphere called "demand" which has a separate and distinct existence from the wants, dreams and desires of individual people. The term is used by Keynesians to make people think that there is such a separate and distinct "thing" as COLLECTIVE DEMAND and to suggest that this "thing" is responsive in an auto-mechanical sort of way to funny money dilution which is described as morally neutral and scientific.

It's nothing but a scam and a hoax meant to confuse the weak-minded and provide an excuse to call in Uncle SWAT Team.

I have no interest in defending or attacking Say or his "law". I don't think it's relevant to Austrian theory.

Also, when are you going to demonstrate the slightest familiarity with basic Austrian concepts? Since you won't even bother with that, why don't you PROVE the separate and distinct existence of the "thing" you call "aggregate demand".

Anonymous said...

@tel: That was actually an interesting pattern I've noticed in certain youtube science video makers.

Full disclosure: I'm an atheist who accepts evolution, and a free-market libertarian. One thing that fascinates me is the parallels one can make between the free market and evolution itself.

That being said, quite a few people on youtube who've made series of videos debunking creationism and explaining the theory of evolution are liberals. There are a few, like ShaneDK, who apply their skepticism toward religion to government as well. However, that's neither here nor there. The ones who are liberal tend to make arguments similarly to those used by creationists against biologists. 'There's no way these complex organs and organ systems could've developed on their own, therefore god must have intervened.' 'There's no way an effective road system/healthcare system/education system can arise on its own, therefore the government must intervene.'

Anonymous said...

@tel: That was actually an interesting pattern I've noticed in certain youtube science video makers.

Full disclosure: I'm an atheist who accepts evolution, and a free-market libertarian. One thing that fascinates me is the parallels one can make between the free market and evolution itself.

That being said, quite a few people on youtube who've made series of videos debunking creationism and explaining the theory of evolution are liberals. There are a few, like ShaneDK, who apply their skepticism toward religion to government as well. However, that's neither here nor there. The ones who are liberal tend to make arguments similarly to those used by creationists against biologists. 'There's no way these complex organs and organ systems could've developed on their own, therefore god must have intervened.' 'There's no way an effective road system/healthcare system/education system can arise on its own, therefore the government must intervene.'

Anonymous said...

Sorry for the double post. Damn computer screwed up again.

Anonymous said...

The attack Krugman is talking about is an attack against reason.

What happens if one producer decides to produce a little bit more?

In most cases, it is forced to spend more -either more raw materials, more workers or more capital goods.

If it spends more, some people get some extra money. If those people spend this extra money, there is a mismatch between demand and supply in some markets which may lead to an increase in production.

This process is not Keynesian as long as the Earth moving around the Sun is not Newtonian, it is a fact. The same process is present also in Austrian real-business cycle and in all theories about real-business cycle.

You can change the primer move -private, public, consumers-, you can change assumptions -on wage and price flexibility, on disaggregation of capital, on the role of the money and credit market.

But it is still "disequilibrium analysis".

The problem is that, if you disagree on the disequlibrium logic of a simplest multiplier -I mean on the logic, on the consequences we can disagree forever- you are dumb and you are not even an Austrian economist.

Moreover, if you don't understand the importance of the demand side for a market economy, you have even a lot of problem in understanding Microeconomics.

But ok, Krugman must be wrong. This is an attitute which can only lead you nowhere.

And Stalin sentenced people to death for having said: "it is the demand that produces supply".

Krugman in Siberia?

Bala said...

" Are denying that aggregate demand is a meaningful concept? "

Yes. So?

" The meaningful nature of the concepts of aggregate demand and aggregate supply are preconditions for Say’s law to even work, whether Say’s law is defined as Say’s Identity
or Say’s Equality. "

Nonsense.

Anonymous said...

"Yes. So? Non sense."

Funny. It looks like an husband caught cheating by his wife.

The question was really good though. Maybe too good.

Nobody is saying that aggregate demand exists "out there", but is a "meaningful concept".

Meaningful concepts are what we need in order to investigate a complex and dynamic environment.

This would be not controversial if you were opting for logical positivism, but I suspect epistemology is too far away from "yes, so, non sense".

"yes, so, non sense": are you against the mere act of thinking?

Bala said...

" The question was really good though. Maybe too good. "

No. The question us as stupid as stupid can get. It was as boneheaded as boneheaded can get. The anti-concept aggregate demand has been shown to be nonsense many times before. Only idiotic Keynesians persist in using it. What else can you expect from those whose intellect hasn't progressed beyond the stage of a 2-year old but such puerile stuff as aggregate demand?

" Meaningful concepts are what we need in order to investigate a complex and dynamic environment. "

You and LK are yet to explain why "aggregate demand" is a meaningful concept. Once that is done, you need to demonstrate why that "meaningful concept" has any relevance at all to the study of Economics.

" This would be not controversial if you were opting for logical positivism, but I suspect epistemology is too far away from "yes, so, non sense". "

A supporter of Keynesian gobbledygook talking of epistemology? What a riot!! Mine is the epistemology of Reason. What's your's, Keynesian?

" are you against the mere act of thinking? "

No. I am against LK's act of puking all over me with his aggregate demand nonsense.

Anonymous said...

People wanting more of one good: demand.

People wanting more of some goods: aggregate demand.

1 + 1 =2

The Earth is moving.

These sentences have nothing to do with Keynes apart from the fact that Keynes was a human being and human beings tend to think. With few exceptions, as the spewing coming from your violent and dangerous mind confirms.

Next time, I would be better if you answer with one of those words used for verification: hsgsliay.

Bala said...

" People wanting more of one good: demand. "

This is demand????? OK! I know now that I am talking to someone who does not know the first thing about economics. Thanks for making it so obvious.

Could you now explain the economic significance of this wonderful, mind-blowing, all-revealing definition?

Just to make you happy, upchamil.... Not that it makes any difference, considering your intellectual level. LK was much better. He knew something.

LK said...

Demand: a relation between the price of a commodity and the quantity demanded at that price, ceteris paribus (all other things being equal).

This is what you learn in economics 101, in your first year university textbook, where you learn about demand schedules, downward-sloping demand curves and so on.

Are we now faced with Austrians who deny even that definition and concept?

If so, you should break the sad news to Murray Rothbard, who was apparently such an idiot that devoted 30 pages to explaining the very same concepts I have just mentioned above in Man, Economy, and State: A Treatise on Economic Principles (Ludwig von Mises Institute, Auburn, Ala.,
2004 [1962]), pp. 106–136.

E.g.,
“The amount offered for sale at each price is called the supply; the amount demanded for purchase at each price is called the demand.” pp. 114-115.

“Therefore, the demand curve must always be vertical or rightward-sloping as the price decreases, while the supply curve must always be vertical or leftward-sloping as the price decreases. The curves will intersect at the equilibrium price, where supply and demand are equal.” p. 120

“Similarly, the tabulation of demand is the demand schedule, and its graphical representation the demand curve, for each product and market” p. 121

Thomas Sowell (Sowell, T. 1994. Classical Economics Reconsidered, Princeton University Press, Princeton, N.J. pp. 39–41) makes it perfectly clear aggregate demand as a concept is presupposed by Say’s law.

“(3) Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector …

(4) In real terms, supply equals demand ex ante [= “before the event”], since each individual produces only because of, and to the extent of, his demand for other goods. (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post.)


Theerfore no concept aggregate demand then no Say's law.

LK was much better. He knew something.

!!!!
Keep up the good work, bala.

Anonymous said...

You are not even able to understand what I wrote.

I try again, but it may be useless.

The concept of aggregate demand is meaningful as the concept of demand.

If you think demand is a meaningful concept, aggregate demand is also meaningful.

Instead of one good, you look at more goods and you then use disequilibrium analysis in order to understand what happens when there is a mismatch between demand and supply in more markets simoultaneously to these markets and then to all markets. It is a consequence of microeconomic theory.

I really don't know who told you that Keynes invented the concept of aggregate demand, but you aptly represent the darkness of reason Krugman is talking about.

Being accused of low intellectual level by one who refuses to use "concepts" in order to investigate reality: yes, so, what, uh, dindelin?

Even monkeys use concepts to cope with the environment.

Bala said...

LK,

Let's assume for the moment that you know how to draw a demand schedule. Please explain how one is to draw an aggregate demand schedule. The one point I am unable to wrap my head around is that when you try to draw an aggregate demand schedule and you talk of the quantity demanded at a particular price, of what good are we identifying the quantity and the price? I am sure you have an answer, but I would like to see it.

Thanks.

Bala said...

"You are not even able to understand what I wrote."

It's never easy to understand gibberish.

"The concept of aggregate demand is meaningful as the concept of demand."

ROFLMAO. When I talk of the demand for a good, I am in a position to talk of the quantity demanded of THAT GOOD at THAT PRICE. When talking of aggregate demand, please tell me of which good you are identifying the quantity and price. 100 televisions + 3000 bushels of wheat + 70000 litres of coke = ?....

Please explain O enlightened one. I am waiting with bated breath.

Anonymous said...

To Keynes:

This is exactly the problem. This new generation of self-appointed Austrian economists cannot even understand the parts of von Mises, Hayek et al. which are devoted to economic analysis.

They read only the ideological parts and believe they understand all they have to know about economics.

It is sad.

One more point: if they really apply Austrian real business cycle to the current crisis, they would look to the greatest source of interferences with the pricing process at the global level: a Communist country manipulating exchange rates (should also fit with the ideology!).

They accuse the Fed instead, but forget that an Austrian economist and close friend of Ayn Rand -Greenspan- decided that the best policy would be to realize the interest rate that markets want. If only Greenspan -and the current generation of Austrian pseudo-economists- had understood von Mises!

As a matter of fact. there is only one thing worse than having no Central bank, a Central bank with an Austrian economist as Chairman!

Bala said...

I forgot to mention. I am still rolling on the floor laughing my fat you know what off over your definition of demand. Thanks.

foneti

Bala said...

"They accuse the Fed instead, but forget that an Austrian economist and close friend of Ayn Rand -Greenspan"

Alan Greenspan an Austrian economist????? You really are the master of laughs. Are you a stand-up comedian by profession? It's tough to be this good, that too consistently so.

obimp

Anonymous said...

Bala,

try to undertand the difference between a concept and reality.

When desired demand for most goods rise, you can use a concept like aggregate demand to describe what it is going on.

Moreover, the aim is not to understand how many, let's stay, spoons have been produced, but why production as a whole moves back and forth.

Try to imagine a situation in which there are 10 different markets. When 9 markets experiences an increase in demand which translates in an increase in production in all those markets, what happens to the tenth market?

This is exactly why the concept of aggregate demand is meaningful: to descrive a dynamic economy where every market is interconnected.

Sure, you loose something in accuracy: all spoons are different, but we called them spoons and you drive a demand curve for spoons which are, however, different from one another because even in microeconomics we must assume undifferentiated products or we tend to think in terms of aggregates like raw materials, necessary goods, and so on. Are those demand curve useless?

By the way, you can use the concept of aggregate demand without drawing an aggregate demand curve. As an economist, I tend not to use demand curves too much because they tend to be misleading.

Hope we stop insulting each other.

Anonymous said...

"Alan Greenspan an Austrian economist????? You really are the master of laughs"

Hope your laughs are about the "economist" part. But, as a matter of fact, Greenspan was a devotee of Ayn Rand and this explains quite a lot about the mess we are in.

Bala said...

"try to undertand the difference between a concept and reality."

That's a good one. So concepts do not have to have any connection to reality. Brilliant.

"When desired demand for most goods rise, you can use a concept like aggregate demand to describe what it is going on. "

Firstly, that you "can" does not mean that what you "can" makes any sense. Except in the loose sense of saying "demand for a number of goods has moved up or down", aggregate demand makes no sense.

Further, my point was to address your claim (patently false) that the "concept" aggregate demand is as meaningful as the concept "demand". I can understand why the concept "demand" is meaningful because I can see what aspect of reality it stands for. I cannot understand why the concept "aggregate demand" is meaningful because I can see no aspect of reality it represents except a vague lumping together of things that cannot be added together.

"Try to imagine a situation in which there are 10 different markets. When 9 markets experiences an increase in demand which translates in an increase in production in all those markets, what happens to the tenth market?"

There you go claiming that demand drives production. Does it strikes you that production starts ages before a thing is actually demanded? Does it strike you that most production is not for current but future demand? Does it strike you that there can be no demand without prior production?

" Sure, you loose something in accuracy: "

It's not about what you lose in "accuracy" but what you loose in being "meaningful". Aggregate demand represents NOTHING in reality. It is a mythical concept that carries meaning only for someone who is prepared to mistake voodoo for economics.

"By the way, you can use the concept of aggregate demand without drawing an aggregate demand curve.'

Oh please!! When I asked you to draw up an aggregate demand schedule, I didn't mean an aggregate demand curve. Just tell me how you will draw up a table. Tell me what aspects of reality the aggregate demand schedule will represent.

"Hope we stop insulting each other."

I didn't start it, but I am not one to cringe and run away when insults
are thrown at me. I prefer to give it back with interest.

However, for this time, I shall desist.

Bala said...

'But, as a matter of fact, Greenspan was a devotee of Ayn Rand"

I too am a "devotee" of Ayn Rand. However, if I accept the post of Chairman, Federal Reserve, it means that I am forsaking ALL the principles I would have espoused till that date. Alan Greenspan was NOT a follower of Ayn Rand when he accepted the post he was offered. What he did in that post had NOTHING to do with anything that Ayn Rand had to say or Austrian economics.

That was what the laughs were about, not the economist part.

"this explains quite a lot about the mess we are in"

It explains NOTHING unless yoou want to change the meaning of the concept "explain' and reduce it to something as ridiculous as your concept (or should I say anti-concept) "aggregate demand"

LK said...

Aggregate demand = total spending or total amount of goods and services demanded in the economy during a given time period.

AD = C + I + G + (E-I)

C = consumption
I = investment
G = government spending
E-I = exports minus imports

Bala said...

Adding C and I to call it aggregate demand is nonsense. That's why all of Keynesian economics is nonsense as well.

Bala said...

Consumption and Investment are not additive components of total income but trade-offs on a given income. When will you Keynesians ever realise it?

Bala said...

Adding C and I is just a cheap and silly Keynesian trick to try to evade the law of scarcity.

LK said...

I cannot understand why the concept "aggregate demand" is meaningful because I can see no aspect of reality it represents except a vague lumping together of things that cannot be added together.

Then there is no Say's law either.

"There you go claiming that demand drives production."

If there was no demand, then production would quickly collapse.

What drives businesses to engage in production except the expectation of demand from consumers who will buy their commodities to give them a profit?
A profit is impossible without demand.

LK said...

Adding C and I to call it aggregate demand is nonsense

Rubbish, I is demand for capital goods.

Bala said...

"What drives businesses to engage in production except the expectation of demand from consumers who will buy their commodities to give them a profit?"

The expectation that B too would PRODUCE something that A would want in exchange for what A PRODUCES and finally consume it. You Keynesians will never understand this. Demand without production is total nonsense.

Bala said...

"Rubbish, I is demand for capital goods."

Nonsense. I is spending on investment. It is a different use of current income away from consumption. To lump it with consumption and treat them as a lump is lunacy and only Keynesians who wish to evade the law of scarcity will engage in it.

Bala said...

Another way of understanding this is that I is consumption spending of many later periods as the capital goods are used over their lifetime to yield consumption goods. It is stupid to add consumption across different periods. It is as meaningless as can be.

Bala said...

"If there was no demand, then production would quickly collapse."

Repeat after me.

Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.
Production first, demand next.

LK said...

This is same idiocy that would lead to a collapse of Say's law as a meaningful concept - as I said above.

Here's the leading apologist for Say's law:

"Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spent by the capitalists and/or the workers in the investment goods sector"

Thomas Sowell (Sowell, T. 1994. Classical Economics Reconsidered, Princeton University Press, Princeton, N.J. pp. 39–41.

But then perhaps you know more about Say's law than Sowell?
Care to name any books or arctiles you published on it?

Care to cite even one Austrian or economist who agrees that Say's law works without aggregate demand being a meaningful concept?

Bala said...

"Care to cite even one Austrian or economist who agrees that Say's law works without aggregate demand being a meaningful concept?"

Care to define aggregate demand in a non-contradictory manner?

Nice appeal to authority....

LK said...

Production first, demand next.

That consumption requires previous production is a perfectly obviously fact.

There can be still be unmet demand without production, but not consumption.

Bala said...

"There can be still be unmet demand without production, but not consumption."

In that case what is unmet is not demand but wishes not backed by prior production.

LK said...

Nice appeal to authority

An appeal to authority is not always a logical fallacy.

"On the other hand, arguments from authority are an important part of informal logic. Since we cannot have expert knowledge of many subjects, we often rely on the judgments of those who do. There is no fallacy involved in simply arguing that the assertion made by an authority is true. The fallacy only arises when it is claimed or implied that the authority is infallible in principle and can hence be exempted from criticism."

http://en.wikipedia.org/wiki/Argument_from_authority

Since I don't claim that Sowell is "infallible in principle and can hence be exempted from criticism" - and indeed I DON'T even accept his argument for Say's law, only his views on the meaningful concepts that are required to make it work - there is no logical fallacy in refering to his widely held definition of Say's law, and challenging you provide a source who states that Say's works in the absense of a meaningful concept of aggregate demand.

There is no such source - because your denial of aggregate demand as meaningful logically destroys Say's law as a meaningful concept.

Bala said...

"because your denial of aggregate demand as meaningful logically destroys Say's law as a meaningful concept."

Oh my!!! Will you please give a non-contradictory definition of the concept "aggregate demand"? I do understand that it can refer to a lump that means nothing that can be studied, but do you have a definition beyond that? Your C+I+... is utter hogwash. Give me something better or .....

LK said...

AD = C + I + G + (E-I)

C = consumption
I = investment
G = government spending
E-I = exports minus imports

C, I, G, (E-I), and are all consumption of commodities (goods or services).

Each type of spending can be the element of a meaningful set, the set of types of spending in an economy.

The value of all the various commodities purchased is measured in money units.

After considering the types of spending as elements of a set, we use a simple mathematic function called addition to add the various totals of the money value of commodities bought to get a sum.

The belief that somehow this proces is invalid, because there is some difference between consumer goods spending and capital goods spending, as measured by money, is as stupid as claiming that that you cannot aggregate the number of sheep born on a farm in one year and the number of cows born in that year as well.

Cows and sheep have obvious differences, but they are still part of the same meaningful set called "farm animals".

You can count the number of cows and sheep and add them meaningfully, just as you can count the value of spending in I, C etc with money units as cardinal numbers, and aggregate the money value of I, C etc.

Bala said...

Once again, this is a meaningless definition because adding C and I is meaningless.

Give a meaningful one please.....

Bala said...

"You can count the number of cows and sheep and add them meaningfully,"

Oh wow!!! 2 cows + 3 sheep = ???

Bala said...

Similarly,

100 televisions + 3000 bushels of wheat + 70000 litres of coke + 20 trucks + 1 lathe = ????

LK said...

this is a meaningless definition because adding C and I is meaningless.

It isn't. If it were, Say's law would not work.

Oh wow!!! 2 cows + 3 sheep = ???

$ 20 billion in consumption + $30 billion in investment in capital goods = ???
Idiot.

Bala said...

"The belief that somehow this proces is invalid, because there is some difference between consumer goods spending and capital goods spending,"

The purpose of consumption goods spending is consumption. The purpose of investment goods spending is production of other goods that are consumed down the line but not by the producer. How you add them beats me.

Bala said...

"$ 20 billion in consumption + $30 billion in investment in capital goods = ???"

You retarded monkey.... I asked you what 2 cows + 3 sheep equals and you come up with this utterly idiotic equation? Let me still answer even though you refuse to...

$20 billion in consumption + $30 billion in investment spending = $20 billion worth consumption goods consumed + $30 billion worth capital goods added to the production structure. Get out of the idiotic Keynesian circular flow and see capital neither as a lump nor as money. Capital is not money, you dunderheaded coconut.

LK said...

100 televisions + 3000 bushels of wheat + 70000 litres of coke + 20 trucks + 1 lathe = ????

It is a number, that is the sum of the money value of all those goods.

Again, you are aggregating money units expressed as numbers.

If you wanted to be extremely accurate it would a real number with a decimal, since people pay dollars and cents for commodities, but normally it is an rounded up figure in a dollar amount, a cardinal number.

Bala said...

"It is a number, that is the sum of the money value of all those goods."

You retarded monkey!! It is not a number but a collection of numbers that cannot be added in the brain-dead way you are adding them. 3 of them are consumption goods and 2 are production goods. The latter are additions to the production structure while the former are CONSUMED. Do you get it you deaf adder?

LK said...

The purpose of consumption goods spending is consumption. The purpose of investment goods spending is production of other goods that are consumed down the line but not by the producer.

Yeah, of course.
And the production throughout the economy is divided into consumer goods and capital goods.

Just because the use of them is different does not mean that the they cannot be regarded as meaningful elements in the set of different types of spending in the econony - C, I, G, E-I - from total factor payments.

Bala said...

When I spend Rs. 1500 on a shirt and Rs. 4500 on a pair of shoes, I am buying just that combination, not an aggregated mass of "things" worth Rs. 6000. It does take a retarded monkey that considers itself a true-blue Keynesian to add them.

Bala said...

"Just because the use of them is different does not mean that the they cannot be regarded as meaningful elements in the set of different types of spending in the econony - C, I, G, E-I - from total factor payments."

It means that one is consumption and the other is NOT consumption but a postponement of consumption to a future period. Does your well-rotted Keynesian brain get that?

Bala said...

Put another way, just because two things are measured in the same units, they cannot be added. Your height and my height may both be measured in metres, but they are not additive, you dimwitted porpoise.

p.s. Once again, you started it.

LK said...

The latter are additions to the production structure while the former are CONSUMED.

And you are denying that capital godos are not consumed?

Shall we go straight to the Austrian economist Friedrich Von Wieser?:

“The periods of time, over which capital goods are consumed in the course of this productive service, differ greatly”

Just as the periods of time over which consumer goods are consumed??

Bala said...

"And you are denying that capital godos are not consumed?"

You retarded monkey!! I am saying consumption goods are consumed in a given period while investment goods are consumed over many periods. Adding the consumption spending and investment spending of a period does not give any meaningful idea of that same period because only a portion of the investment good spending is consumed in that period. The rest is an addition to the capital structure.

LK said...

The belief that the value of purchased consumer goods and purchsed capital goods cannot be meaningfully added is nonsense.

If that were so, then a firm producing both consumer goods and capital goods could never calculate the value of its sales throughout the year!

Again, your claim is pure and complete garbage.

Bala said...

"If that were so, then a firm producing both consumer goods and capital goods could never calculate the value of its sales throughout the year!"

You retarded monkey!! Financial accounting and economics are different areas of study. It takes a Keynesian trying to prop up a failed argument to try to mix them up.

Bala said...

"The belief that the value of purchased consumer goods and purchsed capital goods cannot be meaningfully added is nonsense."

You noodlebrain!! They can be added from a financial accounting perspective but not from an economic perspective.

LK said...

I am saying consumption goods are consumed in a given period while investment goods are consumed over many periods.

And durable consumption goods can be consumed over different time periods as well!!

Bala said...

"The belief that the value of purchased consumer goods and purchsed capital goods cannot be meaningfully added is nonsense."

If I were to buy paper and consume it in a period, I show it as an expense on my P&L statement. If I buy a machine that lasts 10 years, I show it as an asset on my balance sheet. If I buy it at the beginning of the year, I consider 10% of the value as an expense for the current year and 90% as an asset. Get that you bird-brain?

Bala said...

"And durable consumption goods can be consumed over different time periods as well!!"

And durable consumption goods are an addition to the capital structure, you dunce. Remember our discussion of housing?

LK said...

If I buy a machine that lasts 10 years, I show it as an asset on my balance sheet.

Capital goods can be both commodities and assets.

None of this refutes the aggregation of the money value of total purchases in I and C, when the things bought are considered as commodities.

LK said...

Again, if the value of purchased consumer goods and purchased capital goods cannot be meaningfully added, then you cannot even calculate the value of a nation's exports, which consist of (1) consumer goods and (2) capital goods exported.

Your argument is worthless.

Bala said...

"None of this refutes the aggregation of the money value of total purchases in I and C, when the things bought are considered as commodities."

It says that only idiots and Keynesians will add them. Others who know how to think will treat them as different numbers that cannot be added together.

Bala said...

"Again, if the value of purchased consumer goods and purchased capital goods cannot be meaningfully added, then you cannot even calculate the value of a nation's exports, which consist of (1) consumer goods and (2) capital goods exported."

Once again.... total confusion between financial accounting and economics. But then how is an economic historian to know the difference?

LK said...

Once again.... total confusion between financial accounting and economics. But then how is an economic historian to know the difference?

The difference is perfectly clear, idiot.

And GDP and the trade balance are national accounts.

If financial accounts are legitimate, so are national accounts.

Bala said...

Oh!! I am not saying that either financial accounts or national accounts are not legitimate. I am just saying that they have no place in economic theory. I am just saying that the treatment of the same set of numbers can be very different in economics as against financial and national income accounting. What can be meaningfully added in the latter may not sometimes be meaningfully added in the former. This is one such case. Get that, economic historian?

LK said...

Utter oxymoron:

1:
I am not saying that either financial accounts or national accounts are not legitimate.

2:
I am just saying that they have no place in economic theory.

Since the national accounts provide basic methods for measuring economic activity in a nation, the infomation they provide is fundamental in much of economic theory.

Bala said...

"Utter oxymoron:"

And you are an utter moron.

"Since the national accounts provide basic methods for measuring economic activity in a nation, the infomation they provide is fundamental in much of economic theory."

Fundamental in the voodoo that you call Keynesian economics. Those who cannot see the difference between consumption and investment and insist on adding them together based on their monetary value cannot claim the title "economist" for themselves. They are just voodoo artists.

And claiming legitimacy by arguing by numbers ("much of economic theory") does not make you nonsense any more meaningful.

Bala said...

I meant "your nonsense" in the last line.

LK said...

Fundamental in the voodoo that you call Keynesian economics.

Actually, all these concepts are fundamental in Say's law, supply-side economics, monetarism, New Classical economics, New Keynesian economics etc. Even Austrian economics doesn't escape from the need for them, since Austrians adhere to Say's law.

Perhaps you will now proclaim that everyone else is wrong, and that you are right - maybe you are so brilliant that you are the only person on earth who understands economics!

Those who cannot see the difference between consumption and investment and insist on adding them together based on their monetary value cannot claim the title "economist" for themselves.

The difference is perfectly clear - and the aggregation of values meaningful, just as the meaningful nature of aggregate demand is the precondition for Say's law to work - an issue that you ignore again and again, because it completely refutes your rubbish.

I repeat: provide one Austrian economist or any economist at all who denies the meaningful nature of aggregate demand and then tries to argue that Say's law works.

Anonymous said...

"Except in the loose sense of saying "demand for a number of goods has moved up or down", aggregate demand makes no sense"

This is exactly the sense economists use aggregate demand. And they MUST use a loose concept to describe and understand business cycle and long-term economic growth.

"I can understand why the concept "demand" is meaningful because I can see what aspect of reality it stands for"

Which reality? Goods from different firms are different things.

"a vague lumping together of things that cannot be added together"

This is also valid for most markets' demand curves!


"There you go claiming that demand drives production"

Here again, there you go without reading what I wrote. I am not telling how to apply disequilibrium analysis, but what disequilibrium analysis is.

The soource of change is unimportant, the process is waht we need to investigate.

It's not voodoo, it is not Kensian, it's economics.

And you are making a disservice to all real Austrian economists of the present and the past.

But, ok for a Bala, there is a Lord Keynes. You need a good cop and a bad cop in order to manipulate the masses.

This blog is an intellectual misery, a desert of ideology and violence.

Bye, bye.

Bala said...

"I repeat: provide one Austrian economist or any economist at all who denies the meaningful nature of aggregate demand and then tries to argue that Say's law works."

Please provide one Austrian economist who agrees that aggregate demand defined as AD = C + I + G + X - M is meaningful.