So the 1970's hit and something strange happens. We have an oil embargo which actually materially effects the supply/demand equilibrium. It does so in a negative way. Where as previously supply/demand has always been increasing with demand/money trying to catch up. In the latter structure we have what is called a normal Phillips curve. Inflation goes up as unemployment goes down. But the phillips curve isn't actually a curve. Its only a curve for one dynamic state of the economy. Its actually a function. The stagflation broke the models that were being used because the models that were being used weren't able to look inbetween different states (those methods hadn't been developed yet, not sure if they even have yet)
So conservatives had this attack that said that the phillips curve had broken down and so keynesianism/liberalism was bunk which played well to people who didn't understand the full situation. But it only really broke the mathematical limits of the numerical models. It did not break the theoretical structure(as anyone who has read the General Theory rather than cribbing from Hicks should know, as Keynes spends roughly the entire book talking about dynamics)
What actually happened was Paul Volcker, a Carter appointment(though Carters prior appointment wasn't good), saved the nation from Reagan. He was so good that Reagan was basically forced to reappoint him in 1983 despite some very public fights over money policy.
So conservatives had this attack that said that the phillips curve had broken down and so keynesianism/liberalism was bunk which played well to people who didn't understand the full situation. But it only really broke the mathematical limits of the numerical models.
Interesting. I'll have to look into this in more detail.
It did not break the theoretical structure(as anyone who has read the General Theory rather than cribbing from Hicks should know, as Keynes spends roughly the entire book talking about dynamics)
Quick question: were the people employing the numbers-modeling the economy with the numerical models-"cribbing Hicks"?
Kind of. Hicks wrote the most popular interpretation of Keynes. And he wrote it in a way that easily model-able. The vast majority of post war, pre lucas, practical and theoretical macroeconomics followed from Hicks. Without Hicks it would be more or less impossible to do numerical analysis and study of macroeconomics in the Keynesian structure. The other way would be to develop a new dynamics from whole cloth. Not something that is particularly easy*
That isn't a bad thing, I am guessing that most of the people doing that work in the 50's and 60s understood that that they were working with an abstraction. You a
At that point the people who were doing the work were either
A) People in the fight
or
B) Taught by people in the fight.
And by "in the fight" i mean the fight for the Keynesian macroeconomic worldview over the classical worldview. Which Keynes won. Hard.
*dynamics is hard because the only good solutions we have are local solutions(To solve a dynamic system you linearize the system around its equilibriums). You also need path functions for demand/supply. Which would mean that you either need microfoundations (which are another subject entirely) and/or you have to prognosticate. As a rule economists love to do that, but not in actual economic models. After getting off of a long fight to NOT use microfoundations because they produced wrong results when viewed in the static models no one was eager to get right back into it to try to see if they could get Dynamics looking like Keynes showed they should.
Additionally the math of dynamics was not as advanced as it is now. One of the things I have been studying is exhaustible resources. (which are a simple dynamic system compared to macro) and the solutions from the 30's to 50's are really ugly simply because some of the shortcuts had not been figured out.
That's pretty rich, dude. I wasn't expecting a treatment of the Keynesian model, but I can understand why. I actually try to read Krugman's discussions on the contention over the validity/value of the model, and his frustrations for being on the minority side of that debate, as I also see other economists and pundits talk of Krugman as if he were a sort of 'early earth creationist'. But it's kind of opaque to me. Maybe some others, such as Rowsdowerism, can get into it with you.
It might amuse you to know, I took a couple of economics courses, and so I tried to follow you here, as I do Krugman, and I was immediately thrown with the idea that Supply was labor. I always took it that supply-side economics was about giving more money to the producers, as in those Reagan tax cuts, that too much wealth was being directed to the workers and the poor, which was only deadening the economy, as well as driving that inflation in the 70s. We supposedly needed to put more money back in the hands of the producers and job creators, so that they could get back into inventing and making stuff.
As to the Republican story I was talking about, I was thinking more of the fundamental notion of the size of government: that no society can thrive when you have so much wealth and power in the hands of the government, as had been shifting there since the New Deal - it's stultifying and corrupting. Although I don't buy the story, I can see its seductive appeal, especially for Americans. My main thrust at their story is that Republicans, for all their rhetoric, do not seem genuinely interested in shrinking government as much as in redirecting it, such as into the War on Drugs and the military and perhaps corporate welfare.
supply is the labor market. So its the equilibrium between labor and capital.
So a bit of a divergence here to talk about something called a "corner solution" since if i can just call it that it makes a lot more sense. Suppose we have a hypothetical buyer who is deciding how much of two goods to buy. Call them X, and Y. He will do so based on his preferences for each one such that the ratio of the marginal utilities for each will be equal to the ratio of the prices. In simpler terms, if you change the price of good X he will buy it marginally more until he gets more benefit from buying good Y. But this assumes that the solution doesn't have the consumer buying zero of good X or Y. If its the case that the consumers prefers X to Y so much that at the current prices he never buys good Y then changing the price of X or why may not have an effect on how much he buys.
And the same thing happens with a seller of goods.
The reason supply side doesn't work is two fold. One is that labor suppliers (I.E. laborers) are pretty much in a corner solution. They always want to work and they always want to work for 8 hours a day, 40 hours a week. Raising wages doesn't really get them to work more. You cannot incent them to work harder/more whatever.
The other is that capital is more or less saturated. That is, you can't add more factories to take advantage of people who would be working that aren't. Those factories have been built already and are working to the capacity that demand allows.
You might think of it like a 4x game like Civ 5. At the start of the game you increase your hammers in three ways. You can build buildings which give more hammers, you can build improvements which give more hammers, or you transfer people to more productive enterprises. But at some point in the middle of the game your population is large enough that you're using every piece of improved land you have. Building improvements doesn't do anything anymore, there is no one to use them. Transferring people to more productive enterprises doesn't do anything anymore, they're already as productive as they can be. Building buildings is dependent on your research state. Which while we know what increases it in Civ 5, we don't have a clue what increases it in the real world*.
So the GOP has two main "supply side policies". One is lowering taxes which is supposed to cause people to invest in infrastructure which makes more people more productive and so leads to hiring. But infrastructure is more or saturated, one Janitor doesn't need two mops and one building doesn't need two janitors and one car plant doesn't need two buildings (and so on and so forth).
The second is lower wages (by reducing worker protections) which is supposed to cause businesses to hire more because labor is now (effectively**) cheaper except that everyone who is going to work is working already so no one joins the workforce. Note that this also fundamentally misunderstands the current labor/capital power dynamic. If we wanted to increase the amount of workers willing to work you would have to raise wages(which lowering taxes should do IF the people who had their taxes lowered still received the same services from the government and we were talking about actual laborers because we fucking know the GOP isn't going to cut their taxes)
*Well, ok that isn't true we do. Its just that no one wants to pay for massive state sponsored research projects anymore because the people voting for this stuff think that lowering taxes is magic. Yes I am explicitly saying that Civ 5 has a better grasp of economic concepts than Republican lawmakers.
**Exactly what constitutes a labor cost is another subject.
So the 1970's hit and something strange happens. We have an oil embargo which actually materially effects the supply/demand equilibrium. It does so in a negative way. Where as previously supply/demand has always been increasing with demand/money trying to catch up. In the latter structure we have what is called a normal Phillips curve. Inflation goes up as unemployment goes down. But the phillips curve isn't actually a curve. Its only a curve for one dynamic state of the economy. Its actually a function. The stagflation broke the models that were being used because the models that were being used weren't able to look inbetween different states (those methods hadn't been developed yet, not sure if they even have yet)
So conservatives had this attack that said that the phillips curve had broken down and so keynesianism/liberalism was bunk which played well to people who didn't understand the full situation. But it only really broke the mathematical limits of the numerical models. It did not break the theoretical structure(as anyone who has read the General Theory rather than cribbing from Hicks should know, as Keynes spends roughly the entire book talking about dynamics)
What actually happened was Paul Volcker, a Carter appointment(though Carters prior appointment wasn't good), saved the nation from Reagan. He was so good that Reagan was basically forced to reappoint him in 1983 despite some very public fights over money policy.
Reply
Interesting. I'll have to look into this in more detail.
It did not break the theoretical structure(as anyone who has read the General Theory rather than cribbing from Hicks should know, as Keynes spends roughly the entire book talking about dynamics)
Quick question: were the people employing the numbers-modeling the economy with the numerical models-"cribbing Hicks"?
Reply
That isn't a bad thing, I am guessing that most of the people doing that work in the 50's and 60s understood that that they were working with an abstraction. You a
At that point the people who were doing the work were either
A) People in the fight
or
B) Taught by people in the fight.
And by "in the fight" i mean the fight for the Keynesian macroeconomic worldview over the classical worldview. Which Keynes won. Hard.
*dynamics is hard because the only good solutions we have are local solutions(To solve a dynamic system you linearize the system around its equilibriums). You also need path functions for demand/supply. Which would mean that you either need microfoundations (which are another subject entirely) and/or you have to prognosticate. As a rule economists love to do that, but not in actual economic models. After getting off of a long fight to NOT use microfoundations because they produced wrong results when viewed in the static models no one was eager to get right back into it to try to see if they could get Dynamics looking like Keynes showed they should.
Additionally the math of dynamics was not as advanced as it is now. One of the things I have been studying is exhaustible resources. (which are a simple dynamic system compared to macro) and the solutions from the 30's to 50's are really ugly simply because some of the shortcuts had not been figured out.
Reply
It might amuse you to know, I took a couple of economics courses, and so I tried to follow you here, as I do Krugman, and I was immediately thrown with the idea that Supply was labor. I always took it that supply-side economics was about giving more money to the producers, as in those Reagan tax cuts, that too much wealth was being directed to the workers and the poor, which was only deadening the economy, as well as driving that inflation in the 70s. We supposedly needed to put more money back in the hands of the producers and job creators, so that they could get back into inventing and making stuff.
As to the Republican story I was talking about, I was thinking more of the fundamental notion of the size of government: that no society can thrive when you have so much wealth and power in the hands of the government, as had been shifting there since the New Deal - it's stultifying and corrupting. Although I don't buy the story, I can see its seductive appeal, especially for Americans. My main thrust at their story is that Republicans, for all their rhetoric, do not seem genuinely interested in shrinking government as much as in redirecting it, such as into the War on Drugs and the military and perhaps corporate welfare.
Reply
So a bit of a divergence here to talk about something called a "corner solution" since if i can just call it that it makes a lot more sense. Suppose we have a hypothetical buyer who is deciding how much of two goods to buy. Call them X, and Y. He will do so based on his preferences for each one such that the ratio of the marginal utilities for each will be equal to the ratio of the prices. In simpler terms, if you change the price of good X he will buy it marginally more until he gets more benefit from buying good Y. But this assumes that the solution doesn't have the consumer buying zero of good X or Y. If its the case that the consumers prefers X to Y so much that at the current prices he never buys good Y then changing the price of X or why may not have an effect on how much he buys.
And the same thing happens with a seller of goods.
The reason supply side doesn't work is two fold. One is that labor suppliers (I.E. laborers) are pretty much in a corner solution. They always want to work and they always want to work for 8 hours a day, 40 hours a week. Raising wages doesn't really get them to work more. You cannot incent them to work harder/more whatever.
The other is that capital is more or less saturated. That is, you can't add more factories to take advantage of people who would be working that aren't. Those factories have been built already and are working to the capacity that demand allows.
You might think of it like a 4x game like Civ 5. At the start of the game you increase your hammers in three ways. You can build buildings which give more hammers, you can build improvements which give more hammers, or you transfer people to more productive enterprises. But at some point in the middle of the game your population is large enough that you're using every piece of improved land you have. Building improvements doesn't do anything anymore, there is no one to use them. Transferring people to more productive enterprises doesn't do anything anymore, they're already as productive as they can be. Building buildings is dependent on your research state. Which while we know what increases it in Civ 5, we don't have a clue what increases it in the real world*.
So the GOP has two main "supply side policies". One is lowering taxes which is supposed to cause people to invest in infrastructure which makes more people more productive and so leads to hiring. But infrastructure is more or saturated, one Janitor doesn't need two mops and one building doesn't need two janitors and one car plant doesn't need two buildings (and so on and so forth).
The second is lower wages (by reducing worker protections) which is supposed to cause businesses to hire more because labor is now (effectively**) cheaper except that everyone who is going to work is working already so no one joins the workforce. Note that this also fundamentally misunderstands the current labor/capital power dynamic. If we wanted to increase the amount of workers willing to work you would have to raise wages(which lowering taxes should do IF the people who had their taxes lowered still received the same services from the government and we were talking about actual laborers because we fucking know the GOP isn't going to cut their taxes)
*Well, ok that isn't true we do. Its just that no one wants to pay for massive state sponsored research projects anymore because the people voting for this stuff think that lowering taxes is magic. Yes I am explicitly saying that Civ 5 has a better grasp of economic concepts than Republican lawmakers.
**Exactly what constitutes a labor cost is another subject.
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