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Where Is This Aggregate Demander?

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July 12, 2010 – Comments (11)

Vacation has been better than I could have hoped.  Istanbul was far more beautiful than I expected and Athens is wonderful.  Of course, all this historic sightseeing stimulates the mind, and well, my fiancee isn't the type to engage in protracted philosophical discussions - though.. ahem.. she does other things well. 

One question I have for the CAPS community is this: Have you seen the Aggregate Demander?  I know the textbook definition of aggregate demand, but it makes no sense.  It's like Keynesians have no idea what happens in the exchange of goods and services.  If you say that something has a demand, that is only because a market participant, or multiple participants, want to exchange something they value less for it.

You can have an Ipod demand, and we can measure that demand by seeing what people in the market give up for an Ipod.  In fact, that's how we know that there is an Ipod demand - people demand it over other goods.  Likewise, there is a demand for every product and service under the sun precisely because there are people that demand those products.  Without the market participants, there is no demand.

So, who is this mysterious market participant who demands everything the economy produces?  He or she is the Aggregate Demander!  To consider how silly this idea is, remember that the process of exchange is more accurately a process of exchanging something less valuable for something more valuable.   So this Aggregate Demander is constantly exchanging items that are less valuable for more valuable items, and then immediately chnaging his (or her) mind and doing it all over again.

Behold, the Great Aggregate Demander!  He is quite confused....

Now, I'm sure all the Keynesian apologists will say I just don't get it.  They're right.  I don't think the economy is a machine that can be tuned to perfection with a few snappy calculations.  First, I know that these equations can't be solved a priori on paper.  The market process can not be mimicked with fancy calculus.  Second, I recognize that the market is in fact much more complex than the Keynesians suppose.  It is not a machine, but an evolving ecology that is delicate, natural, and vastly more complex than it first appears.  Tinkering with it like a mechanic tinkers with an engine is dangerous and foolish.

I'll keep an eye out for this Aggregate Demander.  He shouldn't be hard to spot.  He's the guy exchanging everything for everything else at the same time.  They have an aisle for that at Walmart, don't they?

Alright, back to planning tomorrow's sightseeing.

David with a splendid view of the Acropolis

11 Comments – Post Your Own

#1) On July 12, 2010 at 5:08 PM, chk999 (99.97) wrote:

Remember, that people exchange goods that are less valuable to them for goods that are more valuable to them. If I value shoes less than cheese and you have the opposite valuation, we can exchange shoes and cheese and both feel like our utility increased. If everyone had exactly the same preferences then trade goes away.

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#2) On July 12, 2010 at 5:24 PM, whereaminow (21.50) wrote:

Remember, that people exchange goods that are less valuable to them for goods that are more valuable to them

Right, that's what I was trying to point out.  (Did I f*ck that up?  Blame it on the ouzo.)  Even money is a good, in the sense that we can value holding money less than buying a plasma TV with that money, for example.  Or we can desire holding money more than any available good or service available to us.

The Great Aggregate Demander, on the other hand, wishes to purchase the entire output of our economy, but what does he propose to give in trade?  I don't know....

David in Greece

 

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#3) On July 12, 2010 at 5:35 PM, Dow3000 (< 20) wrote:

I would vote you in as Ron Paul's VP...I'm jus sayin.  That wasn't Money McBags funny...but still.  Haha, the Great Aggregate Demander...you have made my day.

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#4) On July 12, 2010 at 7:32 PM, binve (< 20) wrote:

The Great and Powerful Oz?

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#5) On July 12, 2010 at 8:59 PM, ChrisGraley (29.64) wrote:

Dave, you have obviously not met my 2 year old niece.

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#6) On July 12, 2010 at 9:58 PM, SockMarket (40.21) wrote:

I would be currious to know David's Alternative Theory of Economics.

Sorry for the cynicism, I am no great fan of Keynsian economics (and I am not an apalogist for it) and do have several issues with the AD model (below) but I would like to see you refute the correct argument. I did suffer through this lesson last year and what you are saying differs some from the actual theory. As I understand it where it differs is as follows:

and we can measure that demand by seeing what people in the market give up for an Ipod.

 The calculation is AD = C+G+I+X(n). What you are talking about here is called Opportunity Cost, or the value of the 2nd best decision. 

 

Without the market participants, there is no demand.

Not entirely clear which side of participants you are talking about. I assume consumers. Technically this is true but since AD covers all of the economy which includes things like food, water, and shelter, I can assure you that as long as there are people there will be some demand for these things. And again, as long as there is a GDP, no matter how small, there is an AD (see said calculation).

 

Behold, the Great Aggregate Demander!  He is quite confused...

Have you ever been shopping with a girl (or woman)? I can guarantee you it is a she!!! :-)

Seriously though this proves that you don't understand what aggregate demand is. It is the economy, not a mythical person exchanging junk.

 

It is not a machine, but an evolving ecology that is delicate, natural, and vastly more complex than it first appears.  Tinkering with it like a mechanic tinkers with an engine is dangerous and foolish.

The first sentence is true, the second is not. 

I will give you that tinkering is dangerous, I give you the fed raising interest rates at the start of the great depression (which no doubt exaserbated the problem) however I think you should also note that since the Fed has been in place the average time between recessions has more than doubled. It used to be 1.5-2 years (occasionally 3+ which is why I didn't say tripled) pre-1913 and it is now on the order of 7. Therfore I say it is not guaranteed to be foolish. 

 

My issues are not so much with AD but how it is used in the AD-AS model. First off GDP (the said and said again equation) DOESNT F***ING SLOPE!!! Especially not in a linear way! Try halving the supply and seeing what demand does. I guarantee you it doesn't stay put. Therefore you cant have 1/2 the GDP (the x axis in the model) from halving supply. 

Second, there is no such thing as Long Run Aggregate Supply (LRAS). Now is always short run and unless you have perfectly balanced economy you will never be at "long run equilibrium". What are the chances that you ever have a perfect economy. Therefore if you believe the theory you are always moving toward LRAS, which by nature of how it shifts is pretty much always moving. I guess it could be illustrated something like a Tom & Jerry cartoon.

I could go on but I think that is enough, and you will probably cover most of my other complaints. 

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#7) On July 13, 2010 at 3:10 AM, whereaminow (21.50) wrote:

daniel,

I'm obviously having a little bit of fun here.  For my alternate economics, see my previous posts.  I don't consider Keynesianism to be economics. 

David in Greece

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#8) On July 13, 2010 at 11:46 AM, Rehydrogenated (32.12) wrote:

From a small business standpoint, looking at aggregate demand is always a mistake. This recession brought a lot of execs in our company out of the woodwork who would say things like "we need to figure out what most of our customers are looking for in this economic environment". The truth is the majority of people buy the things that the majority of other people are buying. If you ask most of your customers why they bought your product/service they would say they were referred by someone else, or they heard about the company's work on this project or that project. We keep reminding everyone to look at our core customers, the ones that are making intelligent/thoughtful decisions and its working out very well.

My point is, if you look at aggregate demand to form your conclusions, it will almost always be a mistake and you will lose core customers, and over the long-term your aggregate will fall as well. I can't imagine that looking at aggregate demand from a total economic standpoint can be any more accurate.  Unfortunately, although we can understand our core customers in our business, it's impossible for economists to get data on the core customers of every business (although if they could, economics might actually be useful).

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#9) On July 13, 2010 at 8:01 PM, SockMarket (40.21) wrote:

yeah I got that from the second part. The first I assumed you were serious though. Oh well.

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#10) On July 15, 2010 at 9:14 AM, starbucks4ever (97.65) wrote:

The US economy ceased its existence yesterday as all the exchange stopped: everybody was happy with the items they currently owned. :)

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#11) On July 15, 2010 at 8:11 PM, kdakota630 (29.45) wrote:

Thought you might enjoy this, if you haven't seen it already.

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