Category Monetary policy
“But where will the demand come from?” In praise of older Keynesians
It gets asked in every recession. Recovery requires an increase in demand. "But where will the demand come from?" When I was young and foolish I would answer "housing". Which was actually a fairly good guess in the past. But when I got older and more devious I would refuse to answer. "If an armchair […]
The Pro-Usury Party meets the Neo-Wicksellians
Most macroeconomists believe that the real interest rate is what equilibrates AD and AS. If the real interest rate is too high, AD will be too low, and lower than AS, so there's excess supply of output. And the fall in AD will cause an equivalent fall in output. That's the orthodox Neo-Wicksellian position. I […]
What equilibrates AD and AS?
Arnold Kling says it's W/P. "4. When it comes to aggregate supply and demand, the regulating mechanism is what is called the real wage rate, which means the wage rate adjusted for the general level of prices (or the cost of living). When prices go up, the real wage rate falls, and vice-versa. When the […]
Three ZMPs and two Co-ordination failures
"ZMP" stands for "Zero Marginal Product". It should really stand for "Zero Value Marginal Product". Can an additional worker produce no additional goods of any value? Is that why they are unemployed? Yes, but. There are three types of ZMP. Two of them are based on two different types of coordination failure. The disagreement between […]
Partial vs General equilibrium lumps of labour
Does an increase in productivity cause labour demand to increase or decrease? The answer to that question, and how we go about answering it, depends on whether we are talking about one small sector of the economy (partial equilibrium), or the economy as a whole (general equilibrium). (I was doing general equilibrium in my previous […]
Stand up against the penny
At this year's American Economics Association humour session, stand-up economist Yoram Bauman launched a new campaign: to end the penny – a subject discussed on this blog before. Bauman has a novel suggestion on how to eliminate the penny: promote it. Make each penny worth five cents. Allow people to trade in 20 pennies for […]
The Lender of Last Resort
What Paul Krugman is saying about Ireland and the Eurozone is not wrong. But he keeps missing the most important point. And it's bugging me.
Unobtainium and Walras’ Law
Suppose people want to spend 30% of their income on unobtainium. But the supply is zero, because unobtainium is unobtainable. So there's an excess demand for unobtanium equal to 30% of GDP. What does that imply, all you students of economics?
Milton Friedman’s Thermostat
If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no […]
Pictures of Ireland?
In countries like Ireland, there is currently an abnormally large Gap between nominal interest rates and the expected growth rate of nominal GDP. That Gap creates a nasty positive feedback loop, through two channels: The Risk Channel. It's hard to pay down debt when the debt is compounding a lot faster than the growth in […]
Worthwhile Canadian Initiative 
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