Monday, November 1, 2010


Professor Krugman writes this today (excluding the phrases in brackets) about why running a business does not automatically qualify you as a macroeconomist:

The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending [equals total production], so that if some people spend less, either someone else must spend more, or aggregate income must fall. [If somebody produces less, then somebody must spend less.]

This is why we have a field called macroeconomics.

I agree! That's why modern macroeconomics pays attention to supply, and not just demand, even while the average businessman may think that "more customers" are all he needs to be successful. And that's why it's wrong to expect policies that reduce production to increase spending.

1 comment:

Tino said...

More evidence for your "supply-still matters" story:

"Native-born workers lost 1.2 million jobs in the year following June 2009, when economists say the recession officially ended, reported the Pew Hispanic Center, a division of the Pew Research Center.

In that same period of time, foreign-born workers gained 656,000 jobs, according to the center, which based its analysis on statistics from the U.S. Census Bureau and the Department of Labor. "

Just like for summer-workers, the economy created hundreds of thousands of jobs for new immigrants. This during a period where Krugman claims demand is zero.