Dan Kuehn on Sectoral Disequilibrium and General Gluts
Facts & other stubborn things: Why can't we all just get along?: My take on Callahan and DeLong's Macroeconomic History: Gene Callahan points us to an oldie-but-goodie from Brad DeLong on the history of economic thought.... [T]he "fight of the century" has really been over the general glut. In a lot of ways it's an extension of the earlier fight that Adam Smith fought over zero-sum thinking on trade. The vulgar mercantilists (there were some good ones) lived in a zero-sum world and they did not think that you could grow the pie from specialization and exchange. In a similar way, the general glut deniers operate off of zero-sum game thinking on the economy. How many times have you heard someone say "every dollar the government spends is a dollar that the private sector can't spend"? We just recently heard Stephen Landsburg say that, did we not? Classical assertions that we can't fall below the production possibilities frontier are the mirror image of mercantilist assertions that we can't move the production possibilities frontier further out. This zero-sum economics is bad economics. Smithian, Malthusian, and Keynesian economics dispels this notion of the zero-sum game.
But my title - "why can't we all just get along" - laments this tendency to pit sectoral shifts against general gluts. I noticed a line in Papola's video that he has brought up in conversation with me a lot in the past - that because some sectors are worse than others there can't be a general glut (see 4:54). Why would anyone think this? At any point in time - boom or bust - some industries are doing well and some aren't. In the midst of these sectoral situations, all sectors together can be better off than they would have been or worse off than they would have been. There's nothing in the claim that the economy is generally worse off than it would be that excludes the prospect of sectoral downturns.
So why do John Papola and others seem to think these ideas contradict each other? Why is this the fight of the century? Can't we conceive of both sectoral and macroeconomic processes and figure out what's more relevant at any given time?
Nothing is stopping general glutters from accepting sectoral downturns. You will never, ever hear a Keynesian or any monetary disequilibrium theorist for that matter say "it's impossible to have downturns that hit some sectors worse than others". You'll never hear it. You will occasionally hear people say that general gluts can't happen. That's zero-sum economics, and it's been proven wrong empirically and theoretically time and time again. We need more Smithian and Keynesian economics, but I don't think that means we need less Hayek or Lucas. It simply means that this paradigm shift needs to be more completely integrated and we've got to stop this balkanization of the discipline that is always looking for grand ideological fights.
Damned if I know why Lucas thinks that there can never be an excess demand for bonds the flip side of which by Walras's law is a deficient demand for goods and services, and which could be cured by getting the government to spend-and-borrow and thus issue bonds to soak up the planned excess demand. The logic is exactly parallel to the idea that when the money stock is too low there is an excess demand for liquidity the flip side of which by Walras's law is a deficient demand for goods and services. Or why Lucas thinks that disrupting the credit channel--which in this framework means that the private sector cannot create safe assets and so there is an excess demand for safety, etc.--cannot have an impact on production and employment, but he doesn't. Damned if I know what Hayek thought about anything macroeconomic. "His logic was not at its best," was what Milton Friedman once said to me--and Friedman had tried to teach.