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Wed Feb 21 07:49:37 2007 |
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Barkley, my argument regarding the great depression is that it is unwise
to neglect the causes of the inflation, unemployment and slow growth.
Even if AD-AS analysis was correct and complete, which we agree it is
not, teaching it leads to bias against studying the real causes of these
problems. It is better to teach what we have learned about the causes of
financial collapses.
I would suggest that there is practically no danger today of a major
financial collapse today. This is mainly because central bankers have
finally learned, through trial and error under a regime of flexible
exchange rates, about the effects of allowing the quantity of money to
be tinkered with. So we need not be concerned with this cause of
inflation, unemployment and slow growth. Therefore, there is no need to
use the AD-AS framework to describe the great depression and there is
the danger of bias.
The same general principle about teaching AD-AS applies to stagflation,
albeit the causes that AD-AS analysis leads one to ignore in this case
are different. The cause of stagflation was a complex of forces that
made the U.S. economy less competitive in the global economy. A nation
that follows policies that reduce the international competitiveness of
its human capital is likely to face one or more of the macroeconomic
problems. To use the AD-AS framework to describe stagflation leads to a
bias against studying the real causes of the problems and toward a
belief that economists and government can solve the problems, regardless
of their cause.
It seems to me that today's students should be taught about the high
degree of international economic integration, freely flexible exchange
rates, and the steady decrease in relative importance of the U.S. (and
corresponding steady increase in the importance of other nations) in the
global economy. Teaching AD-AS detracts from this.
Pat Gunning
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