28 Apr 2014

RBC Bask

Business cycle 8 Comments

I am very surprised I can’t find a good example of this, and yet I can’t…. I have read at least two popular Keynesian bloggers (of the fame of Karl Smith and Matt Yglesias, I’m not talking about You-Know-Who) critique the standard Real Business Cycle account of recessions along these lines:

“OK, let’s assume for the sake of argument that the housing bubble years were characterized by mass illusion, and that everybody thought he was richer than he really was. Then in 2008 reality sunk in, and everybody realized with horror that he consumed way too much (saved way too little) during the last 5 years. OK great, so then the optimal response to this new information would be to enjoy LESS leisure and work MORE. So how the heck does this kind of story explain why millions of workers are sitting on their couches?”

Does the above ring any bells? I tried emailing Karl about it, but haven’t heard back.

8 Responses to “RBC Bask”

  1. Andrew' says:

    What are you asking? I don’t want to assume you jest. And yet I don’t want to try a a serious answer attempt and be a heel.

    • Michael Tew says:

      This is perhaps a relevant quote from the article:

      “On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.”

    • Bob Murphy says:

      That’s not the specific article I had in mind, but that’s pretty good, thanks Michael Tew.

  2. Major_Freedom says:

    (Hope the following isn’t zapped, took me a while to think out)

    I think all demand side theories of recession/depression are really at the same time real side theories. Demand is not independent from supply.

    Every time the argument is made that unemployment wouldn’t rise if only the demand for labor of the specific type and location that currently exists did not fall, is, at the same time, an argument that unemployment wouldn’t rise if only the types and locations of labor were different than they are, such that the demand for those specific types and locations of labor would not fall, and hence demand for labor as such would not fall. The fall in demand for labor of the current types and locations is the flip side of the coin to demand for labor, in that the specific types and locations of labor offered is uncoordinated and disjointed. This problem can only be solved by a particular change in the types and locations of labor.

    Same thing with supply of goods and services:

    Every time the argument is made that idle resources wouldn’t rise if only the demand for goods and services of the specific type and location that currently exists did not fall, is, at the same time, an argument that idle resources wouldn’t rise if only the specific types and locations of goods and services offered were different than they are, such that the demand for those specific types and locations of goods and services would not fall, and hence demand for goods and services as such would not fall. The fall in the demand for goods and services of the current types and locations is the flip side of the coin to demand for goods, in that the specific types and locations of goods and services offered is uncoordinated and disjointed. This problem can only be solved by a particular change in the types and locations of goods and services.

    This theory is superior to the demand side theory because it is more reasonable. If ona deserrted island there were too many trees cut down, and not enough tools used to make houses, and these errors were realized, then of course demand as such will fall, and, if we assume, as the Keynesian demand siders do that past historical prices for those specific goods were somehow reversed using purely nominal influences, then yes, output as such and employment as such would not have fallen. But that does not prove that lack of demand is the problem. It is still supply that is the problem. If the supply problem is fixed, then that is the same thing as saying the there is no demand problem, because if things are produced in their correct proportions, then they will be desired and exchanged because the thirst for additional wealth in human life is practically infinite.

    • guest says:

      And while printing money to goose demand for tree-cutting would increase the output of cut-trees, it wouldn’t result in wealth because the purpose of the cut-trees is to serve as a component of houses, the object of the consumer’s offer to trade.

      The increased output of cut-trees would necessarily result in idle resources.

  3. Tel says:

    http://caseymulligan.blogspot.com.au/2008/12/economics-lesson-from-university-of.html

    Second, the recent supply reduction may be more short-lived than the demand reductions of past severe recessions. In particular, as people adjust to the reality of depleted retirement accounts and vanished home equity, many of them will decide to make up for some of the shortfall by working more and retiring later.

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