In a comment on his recent Occult Mysteries of the Heterodox, Noah Smith linked to JW Mason's couple year old crit of something in Steve Keen's work.
One of Mason's complaints is that Keen mis-applies the concept of aggregate demand. I thought I knew what aggregate demand was, so this brought my mental process to a sudden halt.
Mason considers a detail from Keen's view, compliments its clarity, and says "With all this, I am in perfect agreement." After that comes the problem. "But then he tries to formalize these ideas," Mason says:
Keen repeatedly says that “aggregate demand is income plus change in debt.” There are many variations on this through his writing, he evidently regards it as a central contribution. But what does it mean? To a non-economist, it appears to be a challenge to another, presumably orthodox, view that aggregate demand is equal to income. But if you are an economist you know that there is no such view, whether neoclassical, Keynesian or radical.
There is no such view, Mason says. That's what stopped me.
Mason:
The term “aggregate demand” is shorthand for the argument that causality runs from aggregate expenditure to aggregate income, whereas pre-Keynesian orthodoxy held that causality ran strictly from income to expenditure. (It’s worth noting that in this debate Krugman is solidly with Keen — and me — on the Keynesian side.) But there isn’t any separate variable called “aggregate demand”; AD is just another name for aggregate expenditure insofar as it determines output.
So that sums up Mason's view of that detail, and I think I understand what he said.
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Now I've got Lars P. Syll, who says:
The basic explanation for unemployment is insufficient aggregate demand
and there it is. There is causality in Syll's statement: Insufficient aggregate demand causes unemployment.
That's what Mason was talking about. Sometimes I just need to see these things.
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Now I can go back to Mason's old post and wonder whether including "change in debt" in aggregate demand somehow throws a monkey wrench into the "insufficient aggregate demand" argument. I can't see it from here.
4 comments:
Art, you said, ...change in debt" in aggregate demand somehow throws a monkey wrench into the "insufficient aggregate demand" argument. I can't see it from here.
I guess it would depend on if the change in debt is positive (less debt), vs. negative, (more debt.) No? It would seem plausible to assume that if debt levels are lower, it would tend to increase aggregate demand. More discretionary income not being used for debt service would have a better chance of an increase in consumer spending, vs. the alternative of more debt service payment required for increases in debt levels. I'm talking about private debt here, not public debt. Thoughts?
Hi nanute. Yes, I think it is right to say "if debt levels are lower, it would tend to increase aggregate demand." That's what I'm thinking when I argue for lower debt levels.
But comparing two economies -- one with a low level of debt and one with a high level of debt -- is a much simpler discussion than looking at one economy while it changes from a high level to a low level. So I tend to be cautious, often.
In particular, the change from a high level to a low level requires either a reduction of new borrowing or an increase in debt service payments, either of which is liable to cause a drop in consumer spending, not an increase. I think there are ways around this problem, but no one else seems to see them.
In response to JW Mason's objection
"Keen repeatedly says that “aggregate demand is income plus change in debt.” There are many variations on this through his writing, he evidently regards it as a central contribution. But what does it mean?"
In Are We Facing a Global “Lost Decade?" Steve Keen writes:
"a slowdown in the rate of growth of credit will cause a reduction in aggregate demand and income, and therefore lower growth in our demand-led economies."
I don't see how this can be denied. And it seems to me that disputing the meaning of "aggregate demand" as Mason does is really quite irrelevant. And then Noah links to that shit and a meme is born. And forty years from now it'll be embedded it mainstream thought. And forty years after that. no one will understand why there is suddenly another financial crisis. "Suddenly", because no one was paying attention to debt.
What Keen is talking about is: what debt does to the economy. What Mason is talking about is a distraction. Anyway, I've been keeping an eye open. Everybody uses the term "aggregate demand" as Keen uses it, to mean total demand. Nobody uses it only as shorthand for an argument about causality.
"... in our demand-led economies."
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