Wednesday, 7 March 2012

REFRESHING MACRO-ECONOMICS, PART 1

Introduction

This will be more of an on-going series. Plenty of people have expressed their dissatisfaction with the current state of our economic knowledge, especially with regards to macro-economics: Paul Omerod wrote a book or two on the subject and this crisis led to countless criticisms from The Economist to Paul Krugman.

Via 'Money Illusion', Scott Sumner's blog (on the side), I became aware of a new 'school' of thought - the Market Monetarists (the first theory to be born through the blogosphere, says Wikipedia). In a way, his and fellow Market Monetarists relative success push me to try. Sure, I am not an accredited academic in Economic sciences but then macro-economics knowledge is so limited, so primitive in many ways that I do believe amateurs could still make meaningful contributions.

I do not pretend to be Keynes reborn or have the penetrating vision of Adam Smith or even the furious passion and intellectual reach of Karl Marx. But, in this series, I hope to highlight a couple of important points and, even if I cannot model macro-economy mathematically myself, at least point to some general rule of thumbs, both for the politic/public discourse and for professionals to build upon. I suspect that, at first, most people will find some of the points either obvious or not meaningfully different from one school or thought or the other. But I hope that the combination of all the factors will lead to something interesting.


1 - THE PRIMACY OF AGGREGATED DEMAND (AD).

As discussed in other posts/articles, following the stagflation of the 70s/early 80s, supply side economics came to the fore. Wikipedia summarizes its foundation rather well: "Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices".


And, to be fair, those aspects and other drivers of supply, are worth thinking about. There is nothing intrinsincally wrong with wanting to fight "burdensome" regulation or indeed with wanting low tax rates for producers and investors. And we have all experienced some variations of Say's law or, as James Mill puts it: "the production of commodities creates, and is the one and universal cause which creates a market for the commodities produced". Every new product that has created an entire industry (or at least an entire new product category) in the history of capitalism can be said to demonstrate or prove that statement. 

However, I think that the last 30 years, following the experience of the XIXth century, show that Keynes was fundamentally correct when he said "demand creates its own supply". Or even more to the point "solvent demand creates its own supply"...