Arnold Kling  

A Macro Play in Three Acts

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The characters: Bao, Esteban, Leroy, and Marcel

Act One (the boom): Bao and Leroy have opened a restaurant, as have Esteban and Marcel, serving curried baked beans and Pupusas in mushroom-wine sauce, respectively. There is a lot optimism and economic activity.

Act Two (the bust): It turns out that these dishes do not have enduring appeal. All four men are unemployed, and economic activity is down.

Act Three (the recovery): Bao and Marcel have joined forces and opened a successful restaurant serving French Vietnamese cusine. Leroy and Esteban have opened a successful Tex-Mex restaurant.

If you are attached to the standard macroeconomic paradigm of aggregate supply and demand, then this play can serve as an illustration. Nominal GDP is much higher in acts one and three than in act two.

On the other hand, if you are attached to the paradigm of Patterns of Sustainable Specialization and Trade, then this play also can serve as an illustration. The pattern of trade in act one was not sustainable. During act two, there was little economic activity while a Recalculation was taking place. During act three, a sustainable pattern of trade had been found.

My point is that the same sequence of events can be given multiple interpretations. In my view, the most important feature of the play is that the characters work in different configurations in act one and act three. To the extent that is the case, I prefer the PSST interpretation.


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CATEGORIES: Macroeconomics



COMMENTS (10 to date)
Lord writes:

The problem is there is no reason to expect a bust for what money is being spent on the restaurants afterwards should have just been spent elsewhere before they came about. Sure their income is reduced when they are unemployed, but there is no reason for total income to be reduced unless everyone is trying to do or not do the same thing at the same time. The pattern that wasn't sustainable wasn't their earlier attempts but their herding behavior. (In Act Four they go bust again as it turned out unsustainable again. A more reasonable example would be a successful restaurant that comes under pressure from a successful competitor and moves to regain their success, but this wouldn't result in a recession.)

Julien Couvreur writes:

To expand on Lord's point above, some key elements need to be added to the story to explain the clustering of errors and illustrate the destruction of wealth during malinvestment.

jsalvatier writes:

Merely asserting that GDP is lower in act 2 does not make it so. The customers are simply sitting on their funds during act 2? If so, why?

The issue you're not addressing and Woosley and others keep calling you out on is that *human behavior is optimized*. Obviously it is not optimal, but it has been optimized to a large extent. If people decide to use less resources to acquire good A, it is because they desire to acquire other goods, unless there are literally no goods of interest (which few believe).

Rob writes:

Could an alternative ending to act 2 be:

Bao and Marcel go out of business. Their customers go across the street to Tim and Dave's barbeque. Tim and Dave are better off, Bao and Marcel are worse off, customers are worse off (assuming Tim and Dave's was available in the first place).

JLA writes:

How does the recalculation story explain the two decade Japanese economic malaise?

Troy Camplin writes:

Hey, if you would like to work with a free market playwright to realize this play, I'd be happy to volunteer :-)

My play "Almost Ithacad" won first place at the Cyberfest playwrighting festival at the Hub Theater in Dallas a few years ago.

Artturi Björk writes:
The pattern of trade in act one was not sustainable.

How do you know?

What is the amount of money in the economy to make it a sustainable pattern or do you think that the patterns are independent of money in the short run?

I think you come very close to defining demand by some unobservable thing that people would wan't if they had more medium of exchange. Why not just define it as willingness (and ability) to pay?

Silas Barta writes:

@jsalvatier:

Merely asserting that GDP is lower in act 2 does not make it so. The customers are simply sitting on their funds during act 2? If so, why?

Because the eating-out option set stinks. Marginal customers cook for themselves rather than have that meal at the restaurant currently located where the unsustainable one was. They hold on to the funds in anticipation of better future opportunities to spend it. (Hey, maybe we could ban home cooking...)

This happens at the miniature scale all the time: "Waiter, rather than giving me a random item on this menu, I want this specific dish, and I will sit on my funds until you do so, or I find a better opportunity to spend my money (e.g. walk out in frustration)." In the time between the waiter not knowing what to bring out, and the time when the waiter knew, the customer's couldn't possibly been just sitting on those funds, could he?

If people decide to use less resources to acquire good A, it is because they desire to acquire other goods, unless there are literally no goods of interest

This, I think, is the non-sequitur that underlies the disconnect between PSST and AS/ADers. What if the good they desire is "the option to buy whatever is available tomorrow"? They're not spending, but they don't want to save it in any form involving irreversible transformation of capital (i.e. buy a tiny piece of bridge construction and "sell it" the next day when you need the money back).

jsalvatier writes:

@Silas, this is fine, but Arnold needs to explain his assumptions rather than merely assert an outcome.

Last paragraph: I agree that this is a critical issue. The issue is that saving, but not doing it in the form of an irreversible transformation of capital is not always possible at a reasonable price. Merely having a good called money does not ensure this is possible. In the end this option must come from one of two places, either a real option to store real resources over the short term (grain storage, or whatever) or some kind of promise to trade resources with a person over time (a financial promise). Such "hoarding" of money can cause problems if there's not enough of such opportunities to go around.

Silas Barta writes:

@jsalvatier: Agreed that Arnold_Kling should have been more specific about assumptions, but it's telling that he's revealed questionable assumptions from his opponents (that money not spent on X "must", in some sense, be spent on Y).

As for saving money for its option value, I would think the burden is on monetary disequilibrium proponents to show the fundamental difference between "hoarding" money for a few minutes (in the waiter example above) vs. hoarding for a few days (e.g. until it's "just right" to shop) vs. hoarding for years. At what point does the hoarding cause problems that can be efficiently corrected by random injections of new money units to maintain an arbitrary aggregate parameter?

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