Barkley Rosser wrote:

You say that stagflation was caused by a "complex of forces that made
the US economy
less competitive in the global economy."  Excuse me, but stagflation in
the mid-1970s was
a global phenomenon that hit pretty much all market capitalist,
oil-importing economies,
not just the US.  Looking at it as a shock to the AS curve for any of
those economies
remains a mighty powerful way of explaining what happened, even if one
thinks that the
sustained inflations that followed were due to overly expansionary
monetary policy or
something else.  There is a very good reason why it was the 1970s oil
price shocks that
led Baumol and Blinder and other textbook writers to introduce the AS/AD
analysis, for
better or for worse.



Barkley, your defense of AD-AS as a teaching tool is very perplexing to
me. I am reluctant to "excuse" your criticism of my argument that the 
U.S. "stagflation" problems were due to the complex forces that made the
U.S. economy less competitive. I disagree that stagflation DUE TO AN OIL
PRICE INCREASE "was a global phenomenon," although I agree that many
nations had high inflation, high unemployment and slow growth during the
mid to late 1970s. In any case, since I was concerned with the U.S.
economy, I fail to see the relevance. Are you claiming that because
other countries, particularly England and European countries, had
macro characteristics similar to those of the U.S. during the period 
that my hypothesis is wrong?

Two articles may be useful here. The first, which I have cited numerous
times is Mundell's. Mundell writes that England and Europe responded to
the rise in oil prices by raising their money supplies, just as the U.S.
appeared to do. So it is no surprise that there was inflation. It is
apparently also true that the special conditions in international
exchange markets led to some "export" of inflation from the U.S.. But
that is not part of your AD-AS story, is it?

The second article is by Tom Willett:

ANNALS, AAPSS, 460, March 1982 The United States and World Stagflation:
The Export and Import of Inflationary Pressures By THOMAS D. WILLETT

The article is in JSTOR and Sage publications. You can probably access
it for free.

Moreover, the whole discussion is beside the point. As you will recall,
my claim is that AD-AS biases the exploration of "macroeconomic
problems." It directs one's attention away from causes and towards
government spending as a solution. What is your response to that?

If one's aim is to present a theory of the effects of a sudden increase
in the price of foreign oil on the U.S., one should analyze exchange
rates and how international oil prices are determined. One should
include an analysis of speculative markets in commodities and about the
U.S. share of the oil market. Of special importance, in my view, is how
a sudden change in any price disrupts the coordination that would have
otherwise occurred. Of course, it is much easier to draw a scissors
diagram on the white board and show students how simple it is to explain
how an oil price hike can cause inflation and low "real output" (and, by
implication, how smart macroeconomists are and why a more detailed
analysis that incorporates markets, prices and entrepreneurship is
unnecessary).

The mere fact that it is possible to use the AD-AS framework to tell a
story is not evidence that it SHOULD be used, is it?

Pat Gunning