Economics

No such thing as aggregate demand

In Phil Levy’s essay on the Chris Sims/Tom Sargent Nobel (“The End of Comfortable Keynesianism“) he wrote:

At a dinner with Sims, when I was just coming out of graduate school, I made some mention of aggregate demand. He asserted that there was no such thing.

The always interesting Eric Falkenstein says:

One characteristic of Keynesian thinking is to think the problem currently is with inadequate Aggregate Demand, as if this is some simple analytical construct that is just as meaningful as the demand for apples. This is nonsense. Aggregate Demand and Aggregate Supply are incoherent constructs that require heroic assumptions. You might as well talk about the current law of motion on the Hegelian Dialectic, which for decades was discussed as if it were real. Things exist before people know they exist (e.g., nations, atoms), and things also don’t exist even when many are certain they do (e.g., anthropomorphic God, aether, phlogiston). About what one can not speak, one should remain silent, and you can’t talk about something that is as logically vacuous as aggregate supply and demand.

Don’t say Aggregate Demand, say subsidies to investment of some kind, or more government spending, because that’s more meaningful, and then ask, should we be subsidizing these investments, or having more government spending? The indirect effects are so speculative you might as well ignore them, and just ask if the direct effects are worthwhile.

3 thoughts on “No such thing as aggregate demand

  1. This must be too profound for me to understand.

    Is there such a thing as product demand? In a 2-person 1-good economy I demand 3 units of a good at $5 and she demands 4 units at $5 so together we demand 7 units at $5, or spend $35. Loosely, we could describe that as the “aggregate demand” for that product at a $5 price.

    Now introduce a second good for which I demand 5 units at $1 and she demands 6 units, so together we demand 11 units at $1 and spend $11. Now “aggregate demand” for the two goods is $46 expressed in money terms. Have we violated either economic theory or the English language by terming it thus?

  2. I second Mike’s comment. I do agree that the demands for unlike objects are being lumped together in this way, but that is the definition of aggregate demand. You have aggregated the demands for all goods and services. As a general concept, this is quite useful. I would also agree that, because of the differences in types of G&S, geography,supply variables, etc an increase in one category of aggregate demand may not have a corresponding effect on the rest of the economy, but the general concept works.

  3. Like many economists you misunderstand the methodology that underpins your profession.

    The notion of aggregate demand is of course unrealistic, but economics makes use of conceptual models that are abstractions of the real world and thus a degree of simplification is required.

    The difference between economists and scientists is that the latter are fully aware that they are dealing with approximations of reality in their models, whilst the former mistake their models for empirical reality.

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