For the Virtual Green Room: June 18, 2011
What Is the NLRB Doing with Boeing?

Working with Say's Law: Tyler Cowen Gets Something Elementary Wrong Edition

Admittedly, a rare event--Tyler's mistakes are almost always complex and subtle ones. But I recommend anybody within 100 km of Nick Rowe take cover immediately...

Tyler writes:

Marginal Revolution — Small steps toward a much better world.: Before the financial crisis, symphony orchestras had considerably more financial support than they do today.  We now observe the Philadelphia Orchestra, one of America’s most classic musical institutions, dealing with issues related to bankruptcy.  Other orchestras are on the verge on folding or at least scaling back their season’s programs. The initial negative shock of the crisis, among its other effects, caused donors and potential donors to see that support for these projects was weaker than they thought.  Many of these donors are now less than keen to keep pouring money into losing endeavors.  An unraveling process has set in.  It’s not just the negative wealth effect, but new information has been revealed about popularity and sustainability of the underlying venture.  Neither monetary nor fiscal stimulus will prove any kind of easy cure for these institutions or, potentially, for these jobs.

There is a well-known literature in finance about how trading, combined with the possibility of sudden price dips, causes market participants to learn the shape of the market demand curve and thus revalue the appropriate overall level of prices.  The mere act of trading can generate market volatility.  This kind of insight is not yet sufficiently appreciated in macroeconomics.  The financial crisis caused us to see that many market institutions were on shakier ground than we had thought.

You will note, once again, that this structural problem — like so many others — does not imply excess demand for labor in any sector.  Why do I keep reading literally hundreds of blog posts which conceive of structural labor market problems only in terms of “‘excess supply of labor in one market, excess demand for labor in another.”  That’s a simple, unforced error.

Hmmmm... Philanthropists suddenly decide to stop spending money on symphony orchestras. Unless they decide to hoard their cash--to build up their cash balances for whatever is the appropriate definition of "cash" in this case--they thereby decide to spend their money on something else. Suppose they decide to spend it on charter schools. Voila: excess supply of violinists and excess demand for fifth-grade math teachers.

Only if the recognition that there is less support for symphony orchestras induces wealth-holders to conclude that the world is riskier than they thought it was and they need to hold larger cash balances will there be an excess supply of violinists not offset by another excess demand for some other kind of labor. This Say and Mill had straight by 1829...