Comment by unholiness | Hacker News Reader

Comment by unholiness | Hacker News Reader

Macroeconomics novice here.

From what I can tell, these two economic theories rely on competing assumptions. Keynesian economics is the theory that results from assuming the size[0] of an economy will closely follow the amount of aggregate demand. Neoclassical economics is the theory that results from assuming the size of an economy will closely follow the amount of aggregate supply.

In microeconomics there is no such duality. Rather, there is an understanding that supply and demand are each elastic with respect to one another. We measure this and reason amount markets while thinking about two explicit quantities: the elasticity of demand and the elasticity of supply. The two numbers (and the ratio between them) will tell you a lot about the effects that various conditions will have on a market.

My question is: Is there a corresponding concept of e.g. "the elasticity of aggregate demand" in macroeconomic theory?

If so, could articles like this be made more objective by providing concrete measurements of this figure on some time scale, rather than subjectively stating things like "Keynesian economics is hot again"?

If not, what prevents or complicates the existence of such a quantity?

[0] Please correct me if I am misusing this or any other economic terms and concepts

>> the size of an economy will closely follow the amount of aggregate supply

I find this hard to understand.

Consider your local McDonalds franchise. According to this theory, if the franchisee makes more Big Macs (i.e., increases supply) the economy will grow. We know that's not true. More customers aren't going to walk in the door just because the franchisee made more Big Macs. Given that he wasn't turning away any customers to begin with, the franchisee can't make more Big Macs until more customers start walking in the door. Stated another way, supply does not drive demand, it is demand that drives supply.

This 'neoclassical economics' is balderdash that has been used to give tax cuts to the wealthy, under the guise that such tax cuts will increase supply which will then grow the economy. It won't. It is demand that drives supply. If we must use tax cuts to drive economic growth then give those tax cuts to the middle class, and raise minimum wages, because the middle class will then use the extra money to buy more Big Macs.

If you increase the supply of fast food you increase competition which lowers prices so people will consume more. The economy is obviously driven by a balance between supply and demand, with prices being the mediator.

>> If you increase the supply of fast food you increase competition which lowers prices

That presupposes that restaurateur was making fat profits. If he isn't, then increasing supply in the absence of higher demand will only result in the restaurant going out of business. But increasing demand will grow the economy even when the restaurateur is making thin profits.

By the same logic, changing demand presupposes an inefficient market. Changing demand in the absence of higher supply will only result in demand not being met.

Going back to the fast food example, if there is higher demand the restaurateur can get bank loans to hire more employees and produce more Big Macs. Entrepreneurs are always looking for demand and then fulfilling that demand in order to generate profit and wealth. The reverse is not true. Consumers aren't going to be interested in your mud-pies just because you increased the supply of mud-pies.

If there is higher supply of a good then the price goes down and the amount of the good sold goes up. This is entirely symmetric to higher demand leading to higher prices which results in more supply.

People will not buy mud pies unless the price is so outrageously low that they can use the mud for their garden. The opposite equivalent of a mud pie is a product that nobody will produce except at an outrageously high price.

More supply means lower prices and with the saved money you can buy something else.

"increasing demand" doesn't even make sense, is the problem.

The world already has infinite demand. As in people already want to own an infinite amount of things.

I would love to own a thousand mansions. If someone were to mind control me and make it so that I doubly want more mansions, that doesn't effect at all whether those mansions exist.

People "wanting" things doesn't make them exist, because society already wants an infinite amount of things!

Suppy is the act of creating things of value. Demand is just the method of DISTRIBUTING those things of value. But at the end of the day, what matters is creation.

Your restraunt example doesn't work, because imagine if I had a magic machine that could instantly create hamburgers for free. I could easily find people in the world who currently "demand" this food, for me to give it away to.

THAT is what it means to "increase supply". Creating things more efficiently for less resources is the exact same thing as having a magic machine that creates things for free.

Or in other words, if you haven't created more things using less resources, then you haven't actually increased supply.

Demand is just the method of distributing those finite amount of goods.

What people usually mean by demand in this context is effective demand, which means people offering money in exchange for goods. That can be increased quite easily, and it makes perfect sense, because people/businesses will produce more goods (which is the definition of increased supply) to chase the offered money.

Your musings about infinite demand and magic production technologies are not entirely uninteresting, but they miss a huge universe of much more interesting and immediately applicable ideas.

Oh man, its the 70's again.

Or should I say 50's.

As long as it isn’t 1932 or 2008, I’m good.

It wasn't economic bliss for 80 years there.

Well Keynesian economics is balderdash that is used to give stealthily give subsidy to the wealthy under the guise of "encouraging growth" and "maintaining stability". Just who do you think benefits when the middle class is thrusted onto an economic treadmill that can only be survived by investing in big corporations run by the already rich?

If we must use lowering interest rates to drive economic growth, then give those low interest rates to the middle and lower class, not the big banks.

QE, in particular, consists of buying second hand government bonds with printed money. The holders of government bonds are not a representative selection of the populace, to put it mildly. I have nothing against anti-cyclical measures (aka Keynesianism) but the implementation is ridiculous.

Giving low interest rates to the middle class just inflates the housing market, which is bad for everyone, even the middle class.

Without wading into the larger debate, is it possible that low stable interest rates are expected in a successful society?

In a chaotic world where the government and property rights might not exist in five years, the time-value of money is high, because the enjoyment of that money in the future is uncertain. A house might only be worth five times the annual rent, because some warlord could steal it in five years. And a bond might pay 20% for similar reasons.

The interest rate, cap rate, or P/E ratio I'm willing to tolerate for an asset is closely related to my level of confidence in future economic stability (combined with my willingness to wait a long time to recoup my investment).

What if a low natural rate of interest is just a sign of a more advanced economy where people are thinking long-term? This lines up, I think, with the fact that super low yield bonds and 100 year mortgages are common in Europe.

Why should the owners of capital automatically double their money in just ten years? Maybe we have enough capital to go around already. It seems like the owners of capital are willing to invest with much lower returns these days because there is nothing else to do.

I'm just musing about what it means. I've considered buying a house to live in with a price-to-rent ratio of 25 years. This is a lot higher than the US average, but maybe that's not a bad thing? Even if the value stops increasing, I'm patient, and I have nothing better to do with the money other than rent a nicer place. This is a mix of FOMO (if I don't buy now, I won't be able to afford later) and anti-FOMO (if the price goes down in a correction, I could buy an even nicer house, but this one is nice enough already).

QE isn't an implementation of Keynesianism; it's evidence of the absence of Keynesianism in policy-making in the primary place where Keynesianism is focussed, which is fiscal policy.

Keynesian economics was the driving force behind the period of lowest inequality in the 20th century. The drive from the 1980's toward privatisation, towards supply-side incentives (e.g. lowering wage costs, taxes on profit, etc) are what have driven the current inequality to a large degree.

Lowering interest rates to middle and lower classes builds bubbles and disincentives savings, etc.

Cheap money, both QE and low top end taxes, increases the money supply, and it does absolutely increase demand: stocks, bonds, and real estate. The top 20% own 92% of the stocks. It is a lower risk for wealthy people to pay cheap top end taxes and stuff what remains into stocks or real estate, than it is to open a business or expand an existing business. It's a state sponsored hoarding policy that heavily favors wealthy people.

That it doesn't trickle down to the working class is by design. It's not a mistake. They're not stupid. This is the entire point of privatization of social security. It just dumps more cash into the stock market, driving up prices, benefiting the early investors more than it benefits the new investors.

>Consider your local McDonalds franchise

No. Macroeconomics and microeconomics are different fields for a reason. Doing this doesn't work.

No. That's not how microeconomics and supply/demand curves works.

"increasing suppy" does not mean "producing more goods". Increasing supply means producing more goods AND lowering prices so much that those goods are then sold.

And then consumers look at the price and will decide to buy more.

That's how supply and demand curves work.

>> lowering prices so much that those goods are then sold

If you lower prices so much then you may have to sell at a loss, and this is the reason smart businesses won't increase supply unless they know demand exists. Demand has to exist first. Consumers aren't going to buy your mud-pies no matter how much you lower prices.

Hey so, your argument rests on the assumption that the ultra-micro applies to the macro, which you've just taken as a given, and which is likely false. Even if it were given, there are further problems in there.

So that's not great, but on top of that, you seem to be solely using your bad argument to inject a strong opinion about a basically unrelated matter. The parent asked about methods of measuring how different analyses of macroeconimics lean toward working off of one theory or another, and whether there are hybrids, and it appears you are just advocating that one theory is clearly right and that you know how to fix the economy.

I even agree roughly with what you're advocating, but please, we should try not to do that. Your argument is bad, so you're kind of auto-wrong here, but much worse: you are not even wrong at the person you appear to be talking to. You're just tossing wrong into the wind here, and it makes your (our) position look bad, and cheapens the discussion, which has now become just pitched disagreements.

I say this overtly hostile thing not to harm you 'petilon, because I bet you're great, and I think we're on the same team, but both because we should do the best we can to argue well, and this is the real thing I care about: we should make sure that when talking we aren't just spouting partisan parrotship, but are seriously reading and responding to what others have actually said.

The parent asked a pretty cool question -- I hope it doesn't get lost forever under the weight of the us vs. them debate that is now dominating the thread after your comment unfortunately hijacked it.

>If not, what prevents or complicates the existence of such a quantity?

I'm not an expert either but this type of thing is incredibly hard to measure not only because of the constantly changing external forces from changing governments, technological progress, "animal spirits" etc., these things alone would make it nearly impossible, but there is also the role of money creation and very imperfectly run central banks around the world destabilizing things even much more. Think of it like trying to measure demand elasticity of bitcoins, it seems to be changing by the minute.

Anyways, this whole discussion seems like a straw man to me. How can they pit keynesianism against neoclassicism and gloss over monetarism and the importance of money and central banks? Few serious economists will defend neoclassicism as a main causal factor of recessions at this point. Comparing descendant theories of Keynesianism with descendants of monetarism would be more appropriate.

I'd say Keynesianism can be summed up by his famous statement, "In the long run we are all dead." It's the acknowledgement that simplistic macroeconomic models may describe asymptotic behavior, but while the dynamic system is slowly trending to those ends, many people can suffer.

Thus, in the meantime, it'd be good to have some market intervention. Intervention in moderation, for moderation.

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