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Aggregate Demand

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andrewfelekos posted on Fri, Oct 26 2012 7:19 PM

In the ABCT printed money ends up stimulating the economy and increases AD. So in the Austrian view of the economy AD can be increased by govt.  that means that Austrians are kinda like Keynesians, in how they view the economy right? Also do Austrians believe in rational expectations, and the efficient financial market hypothesis?

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It's not really that inflation increases AD so much as that it distorts the shape of AD. With this said Austrian Economics doesn't really recognize a singular AD curve because it doesn't accept the idea of really "one" economy, more an integrated process. We can look at total outlays, but looking at this in terms of a simple graph is misleading. With this said there's a lot more overlay between Austrian and Keynesian economics than one might think. I've argued before that Austrian economic analysis differes only because of two key concerns (knowledge and price stickiness).

Rational expectations has some validity, while EMH utterly confuses the market system itself, it's nonsense. The whole point of AE is that the economy is endlessly changing and people have different feelings about the future and that these factors lead to a tentative equilibrium point, all knowledge is not magically displayed in prices instantaneously

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Demand is infinite. New fiats trick people into underpricing their stuff, all the stuff gets consumed, economy is still depressed. Not like keynesians at all. Demand is infinite, remember that. The efficient market hypothesis is bunk. People outperform "the market" all the time, because some people do have relevant information and/or insight, and those people buy things. In a market, this increased buying of things makes the price of those things go up, because the supply is decreased, so then the market adjusts. The emh would have us believe that no one could predict this increase in prices. The increase in prices only happened because people were smart enough to buy those items in those quantities. its like trying to figure out what to feed your cat based on a superficial examination of his leavings. A doctor of feline veterinary science would tell you to feed him fish or poultry. Then you can forget about the catshit.
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It's not really that inflation increases AD so much as that it distorts the shape of AD. With this said Austrian Economics doesn't really recognize a singular AD curve because it doesn't accept the idea of really "one" economy, more an integrated process. We can look at total outlays, but looking at this in terms of a simple graph is misleading. With this said there's a lot more overlay between Austrian and Keynesian economics than one might think. I've argued before that Austrian economic analysis differes only because of two key concerns (knowledge and price stickiness).

Rational expectations has some validity, while EMH utterly confuses the market system itself, it's nonsense. The whole point of AE is that the economy is endlessly changing and people have different feelings about the future and that these factors lead to a tentative equilibrium point, all knowledge is not magically displayed in prices instantaneously

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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Demand is infinite. New fiats trick people into underpricing their stuff, all the stuff gets consumed, economy is still depressed. Not like keynesians at all. Demand is infinite, remember that. The efficient market hypothesis is bunk. People outperform "the market" all the time, because some people do have relevant information and/or insight, and those people buy things. In a market, this increased buying of things makes the price of those things go up, because the supply is decreased, so then the market adjusts. The emh would have us believe that no one could predict this increase in prices. The increase in prices only happened because people were smart enough to buy those items in those quantities. its like trying to figure out what to feed your cat based on a superficial examination of his leavings. A doctor of feline veterinary science would tell you to feed him fish or poultry. Then you can forget about the catshit.
Keep the faith, Strannix. -Casey Ryback, Under Siege (Steven Seagal)
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Wheylous replied on Sat, Oct 27 2012 10:10 AM

If I recall correctly, no one claims printing money increases demand. Monetary expansion increases I in Y = C + I + G + NX (the investment part), and hence creates more jobs, etc. To increase demand you borrow and spend through government.

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Neodoxy replied on Sat, Oct 27 2012 10:52 AM

^

Huh? The whole point of the original Keynesian formula was that you have monetary and fiscal policy. Originally a monetary policy of inflation drives down the interest rate drives up Y and possibly G but it soon increases C as well. An increase in any of these shifts AD to the right and hopefully hits AS at full employment.

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Wheylous replied on Sat, Oct 27 2012 11:12 AM

Wow, I have no idea how I got a 5 on AP Macro, then :P

But doesn't increasing the money supply increase investement, and hence SRAS?

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Neodoxy replied on Sat, Oct 27 2012 11:32 AM

As far as I know SRAS is pretty much stagnant by definition specifically because inputs and prices are fixed, but IDK maybe I'm thinking of too short a short run. I know that investment and innovation is supposed to shift LRAS to the right but I could be mistaken and it may apply to the short term as well, but that would indeed be very fast acting investment.

At any rate the Keynesian prescription has always been about increasing demand, not supply.

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Wheylous replied on Sat, Oct 27 2012 11:42 AM

Welp, I'll be re-reading some intro macro textbook before next semester :P

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Both I and C can be interpreted as demand-side variables. Investment is demand for factors of production. It's true that Keynesians target C, and advocate more consumption, but only because they perceive a multiplier: higher consumption leads to higher investment. Monetary stimulus is not meant to target G, although I suppose it can.

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Neodoxy replied on Sat, Oct 27 2012 11:49 AM

I thought they targeted C and I, although C was preferred and that both of these spawned the multiplier because it increases someone's income?

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Esuric replied on Sat, Oct 27 2012 12:53 PM

 I thought they targeted C and I, although C was preferred and that both of these spawned the multiplier because it increases someone's income?

Targeting C indirectly targets I due to the acceleration principle. The demand for consumer goods and the demand for the producer goods, in the Keynesian model, move in the same direction because total consumer expenditure on final goods and services (again, in the Keynesian model) is seen as a proportionate change in revenue for all firms (there is a single phase of production in the Keynesian circular flow model), I.e., a proportionate increase in retained earnings. 

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Esuric,

Can't that (Keynesian) line of thinking be immediately disproved by a reductio ad absurdum in which we imagine a world with no savings and pure consumer spending? If consumer spending is all that matters for investment then this would mean that pure consumer spending would result entirely in investment, but this couldn't be done without some sort of savings.

This is a vague question (which might fundamentally be incorrect) because it's been a while since I read the work, but in what I read of Hayek he talked about how most money in the economy was invested rather than spent, at a theoretical ratio of say 1:8. What I didn't understand was how is it that this could be done when interest is demanded implicitly or explicitly on all goods. So from whence does the money come to provide the interest to the invested funds if only 1/8 of those invested funds is actually spent by consumers in that given year?

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Can't that (Keynesian) line of thinking be immediately disproved by a reductio ad absurdum in which we imagine a world with no savings and pure consumer spending? If consumer spending is all that matters for investment then this would mean that pure consumer spending would result entirely in investment, but this couldn't be done without some sort of savings.

Keynesians don't deny the role of savings in funding investment. I haven't looked too far into it, but when I first read The General Theory I considered it something of a paradox. Increases in investment, which lead to increases in output, allow for a rise in income. A falling proportion of new income will be consumed. I don't remember exactly what Keynes wrote, but it seems to me that he envisions an economy where savings of increases in income make up for the initial gap between desired investment and desired savings. But, in any case, Keynes perceives there to be a limit to desired investment, which is decided by two factors: the marginal efficiency of capital and the rate of interest. The solution is either to increase consumption to avoid a fall in income, or to socialize investment.

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Regarding the second question (on Hayek), are you sure it wasn't a 1:8 ratio of consumers' goods to producers' goods (I think Hayek estimated between 70–80% of goods are producers' goods)? There is a significant difference. The prices of capital goods are imputed from those of consumer goods, and so the market can see an exorbitant amount of spending on consumers' goods, yet these can physically represent a very small proportion of total wealth. This is why when people look at GDP and notice that C is the largest figure, they're mistaken to conclude that the economy is "consumption-based" (apart from the fact that it's trivial that an economy be consumption driven, since all action is committed to gain satisfaction).

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That, that would make a lot more sense than what I thought that he was talking about. However, I am fairly certain that I have seen Austrians (probably Rothbard?) refer to hypothetical scenarios where there is more investment than consumption. Is this possible? If I have a 2 to 1 ratio in favor of investment then even if the interest rate was only 1 percent would this not require 2.02 in consumption to pay off the investment unless there is some prediction of a future shift in the ratio?

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