I CONTINUE TO BE MYSTIFIED BY WHY ROBERT LEESON FINDS THE AGGREGATE 
DEMAND CURVE
ILLEGITIMATE.  IN STANDARD TEXTBOOK PRESENTATIONS, THE AGGREGATE DEMAND 
CURVE IS
SIMPLY THE TRANSLATION OF THE IS/LM MODEL INTO P-Y SPACE.  FORGET THE 
GRAPHICAL
CURVES FOR THE MOMENT.  IF I SOLVE THE IS/LM EQUATIONS TO ELIMINATE INTEREST
RATES, I AM LEFT WITH A REDUCED FORM IN P AND Y -- AN AGGREGATE DEMAND
EQUATION.  THE AD CURVE IS JUST THE GRAPH OF THAT EQUATION.

Robert Leeson <[log in to unmask]> writes: "[That in contrast to the AD
curve] Every p-q combination along a[n] [ordinary microeconomic demand curve]
has (a) a respectable theoretical underpining (utility maximisation)."

IF THIS MEANS THAT WE CAN GENERICALLY DERIVE SUCH DEMAND CURVES FROM UTILITY
MAXIMIZATION PROBLEMS, THEN SURE.  BUT THAT IS REALLY ANOTHER ISSUE.  WE COULD
CONSTRUCT DEMAND CURVES HYPOTHETICALLY (OR EVEN EMPIRICALLY) OFFERING AGENTS
PRICE SCHEDULES AND ASKING THEM HOW MUCH THEY WOULD DEMAND.  ONE MIGHT IMAGINE
THAT THEY ARE MAXIMIZING UTILITY BEHIND THEIR CHOICES OR, TO PUT IT
DIFFERENTLY, ONE MIGHT CONJECTURE A THEORY OF THEIR BEHAVIOR THAT RESTS ON
UTILITY MAXIMIZATION, AND THAT THEORY MIGHT -- DEPENDING ON YOUR 
METHODOLOGICAL
VIEWS -- GIVE YOU SOME COMFORT OR REASSURANCE ABOUT THE ROBUSTNESS OF YOUR
DEMAND CURVE, BUT THERE IS NONETHELESS NO DIRECT APPEAL TO UTILITY 
MAXIMIZATION
IN CONSTRUCTING DEMAND CURVES IN THIS MANNER.  AND OF COURSE, HISTORICALLY,
DEMAND CURVES THEMSELVES PREDATE THE UTILITY MAXIMIZATION CONSTRUCTION.

ON A SIMILAR BASIS THE AGGREGATE DEMAND CURVE CAN BE GIVEN "RESPECTABLE
THEORETICAL UNDERPINNINGS."  THE AD CURVE IS A REDUCED FORM OF THE IS/LM
EQUATIONS.  THESE ARE IN TURN REDUCED FORMS OF MORE BASIC EQUATIONS:  
IS OF THE
CONSUMPTION AND INVESTMENT FUNCTIONS; LM OF THE MONEY SUPPLY AND MONEY DEMAND
FUNCTIONS.  AND EACH OF THESE FUNCTIONS HAS BEEN GIVEN UNDERPINNINGS IN
STANDARD MICROECONOMIC OPTIMIZATION PROBLEMS.  AGGREGATION, OF COURSE, RAISES
ITS OWN DIFFICULT ISSUES.  HICKS WAS WELL AWARE OF THIS WHEN HE CREATED THE
IS/LM MODEL.  BUT SADLY, THE ADVOCATES OF REPRESENTATIVE-AGENT 
MICROFOUNDATIONS
SEEM TO HAVE FORGOTTEN THIS POINT.

Robert Leeson goes on:  "and (b) corresponds to an observable or at least
plausible set of relative prices.  It is worthwhile asking what the demand for
good y would be if the price of good y doubled (or was cut in half), ceteris
paribus.  We are not generally interested in implausible values of p.

"But what is the theoretical underpinning for the thought experiment of 
keeping
M constant and doubling (or cutting in half) P?  Are these potentially
observable or feasible outcomes?"

IT IS A PROPERTY OF ANY MODEL IN WHICH THERE ARE ENDOGENOUS AND EXOGENOUS
VARIABLES THAT WE DO NOT BELIEVE THAT THE ENDOGENOUS VARIABLES (EITHER THE
PRICE OF AN INDIVIDUAL GOOD (p) OR THE GENERAL PRICE LEVEL (P) CAN BE CHANGED
WITHOUT CHANGING THE EXOGENOUS VARIABLES.  STILL, TO UNDERSTAND THE INNER
WORKINGS OF THE MODEL, WE ASK CONTRARY-TO-FACT HYPOTHETICAL QUESTIONS.
TYPICALLY, THE CURVES THAT WE PLOT ARE THE ANSWERS TO THOSE QUESTIONS.  
THIS IS
JUST AS TRUE FOR MICROECONOMIC SUPPLY AND DEMAND, WHERE WE PLOT THE DEMAND
CURVE, WITHOUT ASKING HOW IT HAPPENS THAT THE PRICE CHANGES.  THIS MAY IMPLY
THAT THAT THERE ARE SOME POINTS ON OUR CURVE THAT NO COMBINATION OF
EXOGENOUS-VARIABLE SETTINGS COULD EVER GET US TO.  BUT SO WHAT?  SUCH POINTS
WILL NOT BE MISLEADING, BECAUSE THEY WILL NEVER BE SELECTED AS PART OF THE
MODEL'S SOLUTION.  THIS IS NO DIFFERENT WITH THE AGGREGATE DEMAND CURVE.

Robert Leeson continues:

"Also, if P was arbitrarily cut in half or doubled (M held constant), 
what would
happen to AS?"

IN GENERAL, NOTHING.  THE POINT OF SEPARATING SUPPLY AND DEMAND FOR
MICROECONOMIC OR MACROECONOMIC CASES IS TO TO ISOLATE THE FACTORS THAT MATTER
FOR ENDOGENOUS VARIABLES INTO DISTINCT SETS.  SOMETIMES, AS FRIEDMAN 
POINTS OUT
IN HIS FAMOUS METHODOLOGY ESSAY, THIS IS AN EFFECTIVE STRATEGY (E.G., 
THE MARKET
FOR APPLES), AND SOMETIMES  IT MIGHT NOT BE (E.G., MARKETS FOR SOME FINANCIAL
ASSETS).  BUT THE MODELS ARE CONSTRUCTED ON THE BASIS OF ASSUMING THAT SUCH
ISOLATION IS EFFECTIVE IN A PARTICULAR CASES.

Kevin Hoover