Sunday, September 11, 2011

Nobody doesn't like Sara Lee


When the words are wrong, they interfere with the meaning they want to convey.

I have an old post where I berate Karlsson for failing to understand the meaning of "aggregate demand". I wrote:

According to Karlsson, "there can never be deficient aggregate demand" because "we always have unfulfilled desires, and thus always want more."

This is nonsense.

Aggregate demand is total demand. But economists -- apart from Karlsson, evidently -- do not include in aggregate demand everything that anyone could possibly think they might want...

Aggregate demand is not measured by what we want, but by what we actually buy.


In recent remarks, Jazzbumpa turned up a good 4-page PDF on money and prices. From the Jazz link:

The price level observed in the economy is that which leads the quantity of money supplied to equal the quantity of money demanded.

Sounds good, right? Price is found at the intersection of supply and demand. Common knowledge. So then, applied to money, we have:

Money demand is widely thought to increase roughly proportionally with the price level and with real income. That is, if prices go up by 10 percent, or if real income increases by 10 percent, empirical evidence suggests people want to hold 10 percent more money.

Sure. If prices increase 3.14159 times and my income goes up by the same factor, then I probably will increase my "money demand" in proportion. Sure.

But that has nothing to do with wanting to hold money. Want. Friedman used the same word. It is the wrong word.

There is no limit to the amount of money I "want" to hold. No limit. Nobody doesn't want to have more money.


Talk about the amount of money people hold, if you want. Don't talk about the amount of money people want to hold.

1 comment:

Jazzbumpa said...

If prices increase 3.14159 times and my income goes up by the same factor, then my consumption of pi will be unaffected.

The price level observed in the economy is that which leads the quantity of money supplied to equal the quantity of money demanded.

This troubles me. Beckworth talks this way about demand for money, I think. Krugman talks about liquidity preference, and I think the difference goes deeper than vocabulary.

Money demand (assuming it can change) is a factor of interest rates and other (perceived) opportunity costs. Thus, interest rates determine prices. I'm pretty sure I don't take that as gospel.

If that's the case than there should be lots of demand for mortgages now, driving home prices up, since interest rates are historically low. Oddly, though, that does not seem to be happening.

Beckworth et al. seem not (or refuse) to recognize that at the ZIRB the economy is in a different realm, and cause and effect relationships are different as well.

By my reckoning, there have been at least four distinct realms in the post WWII period: the inflationary golden age including the 60's and maybe the 50's; the stagflationary 70's; the low growth-low inflation 80's and 90's; and the stagnation since.

Different circumstances demand different policy choices. Austrians don't offer them, Rethugs have a deliberate crash and burn agenda. Keynesians recognize the nature of current reality, can explain how we got here, and offer practical solutions. Politics is an absolute road block, though.

WASF,
JzB