by Mario Rizzo
The principal component-idea of macroeconomics – aggregate demand and aggregate supply – trades on the analogy with the Marshallian individual market demand and supply analysis. For many students this makes the idea of macro-aggregation seem quite uncontroversial, almost “natural.”
My “complaint” will not be about aggregation in general. We are always aggregating and disaggregating when the occasion warrants it. My problem is with a particular form of aggregation. Is it useful? Has it led us to an analysis of the right questions? Does it obscure important interrelations?
Consider, for example, my post below on Say’s Law of Markets. One reason many economists are today unable to understand the claim that “general gluts” are impossible is because their first instinct is to think in macroeconomic terms.
Imagine a world without macroeconomics in the Keynesian sense. What is aggregate supply? There are no producers of goods-in-general. There are just producers of specific goods aimed at specific customers. (Of course, some guy can run around adding this up in terms of market prices or whatever.) There are no demanders-in-general. There are just demanders of specific goods to be purchased from specific producers.
And when the Keynesian speaks of aggregate demand falling short of what would generate full employment, this does not mean that every market is characterized by deficient demand. (I am abstracting from what “full employment” might coherently mean.)
So the humble pre-Keynesian economist looks around and sees many specific markets out of equilibrium. The first thing that occurs to such an economist is: Why are there so many errors? Normally, so many producers do not make large errors in deciding what to produce and what to sell. Normally, large numbers of workers do not find themselves making mistakes about where the demand for their services lies.
Normally, the production decisions of particular firms are more or less coordinated with the buying decisions of other agents – both at a point in time and across time.
The pre-Keynesian economist is thus naturally driven to find the breakdown in the normal coordination mechanism. This was in fact described by terms like disproportionality or maladjustment of production.
Consider how a pre-Keynesian, Frank W. Taussig, analyzed a depression in the 1927 edition of his Principles of Economics (vol. ii, 60-61).
“Some of the phenomena connected with crises, and especially the course of events during a period of depression, have been ascribed to overproduction. During times of depression, it would seem, more is produced than can be readily sold or than can be sold at a profit: is there not general overproduction?
These phenomena, however, result from the breakdown of the machinery of exchange. They are not due to permanent or deep-seated difficulties of finding an extensible or profitable market. They are due to the fact that confidence has been shaken, credit disturbed, the usual course of production and sale subjected to shock…. They are little related to those supposed limitations of demand and those possibilities of permanent overinvestment, which are urged by the persons who maintain that there is danger of general overproduction…. These things correct themselves in time. The mechanism of exchange is restored to its normal working, and the maladjustment in production is set right.”
Obviously, the last point about things setting themselves right in time brings up additional issues. But the remedy for depressions is not my point. My point is that the pre-Keynesian “macroeconomic” thinking, relying as it did on Say’s Law, points to an entirely different set of causes of depression: disproportionality in the production structure relative to the preferences of economic agents.
Thus, the Mises-Hayek theory of depressions – while it has its own unique features – is thoroughly in the classical tradition of business-cycle analysis. It finds the cause of depressions in the disproportionality (discoordination) between the preferences of consumer-savers and investors.
For further enlightenment I recommend Steven Kates, Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way, Chapter 5 (Edward Elgar, 1998). The above quotation from Taussig is taken from Kates’s book.