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David Colander writes:
<< The real problem, in my view, is that the macro economy is a complex system, and cannot
be described by simple graphs--which are meant to convey understanding to students. The
story is in dynamics, not equilibrium. The reality is that we simply don't understand much
of the fluctuations in the economy in a clear way, which is evident from our difficulty in
predicting the movements of the aggregate economy.>>
According to Keynesian multiplier theory, the Yd's are income generating expenditures and
so when trying to build an AD function for the final goods market, try as we will, we
always inevitably end up with a locus of points, (P, Yd=Ys), for which the market is in
equilibrium.
If we assume that an AD curve is a desirable thing to have, say, it helps students
understand how a complex economy actually works, then we might try starting out by
propounding all the essential properties that should govern the derivation of such a
function and then see if we can come up with something that is consistent with those
properties. A Nobel prize for the winner(s) of this research project, I would think, would
even create the necessary incentive to get the ball rolling in the desired direction.
After all is said and done, however, I think we would end up in the same predicament, that
is, attempting to build a micro foundation for a "macroeconomic" function and, in the
process, either simplifying the complex workings of the "macro" economy or creating
unnecessary complications for the understanding of it. Also, there is the danger that
students will inevitably end up thinking in terms of a single good economy, e.g.,
MacConnell and Brue, in their macro principles, build a price index assuming the economy
produces a single good, pizza no less.
If our desired goal, however, is not to disguise economic complexities, but is, in fact,
to instruct students as to their actual workings, then the best approach, I believe, would
be to preserve the micro market model, but build a macro foundation for it. This, of
course, would mean jettisoning the AD function for good.
Chas Anderson
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