So far the attempts to defend the meaningfulness of the AD curve (Fred
Foldvary, Kevin Hoover, and George Horwich) have depended upon the fact
that the curve has been derived from the IS-LM model. What if we come
to realize that the IS-LM model itself is not a legitimate or reliable
framework with which to analyze the macro economy? For example, why
would the IS curve (for a closed economy) shift rightward when
government spending increases? Note that whatever the government
spends, it must take from the public through taxes or borrowing. Or why
would the IS curve shift rightward when investment spending increases?
Note again that investors rely on the public's savings (borrowing from
banks, issuing stocks or bonds/corporate paper). Even retained earnings
belong to the public (shareholders), just as are depreciation funds.
And why would the IS curve be expected to shift leftward when savings
increase? Note that savings are spent; they are not the equivalent of
hoarding, as the classics have taught us.
Now if you can't shift the IS curve from any of the above episodes, it
seems to me that the so-called AD curve is stuck in neutral or "dead in
the water." I would think that historians of economic thought know
where all this IS-LM mess came from -- the attempt to avoid the
implications of the classical quantity theory of money as the legitimate
explanation of price level determination (J.M. Keynes), not aggregate
supply and aggregate demand. I can appreciate the frustrations of Alan
Blinder (AER May 1997) when he writes that "30 years after Hicks, the IS
curve stills needs work ... While the LM curve has collapsed in recent
years, and key aspects of the IS curve are still in dispute" and David
Romer (JEP 2000) who seeks to do "Keynesian Macroeconomics without the
LM Curve." The failure of historians of economic thought (who are also
textbook writers) to help put this theoretical fraud to rest baffles
me. David Colander came close but stops short with: "But IS/LM is a
model of goods/money market equilibrium--so what one gets from that
derivation is a goods market equilibrium curve, not an aggregate demand
curve. However, then, in AS/AD analysis, one adds an AS curve, and talks
about disequilibrium as well as equilibrium.Yes, the math for the
equilibrium points can work out, but the discussion of disequilibrium
adjustment forces in the texts is generally problematic, if not
downright wrong."
I'm enjoying Robert Leeson's help in burying this MADD analysis with the
AD.
James Ahiakpor
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