Arnold Kling  

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From Karl Smith:

Getting a job decreases the amount of work it takes to live. That's why jobs are good.

This is very consistent with the PSST story. Economic activity consists of people specializing and doing things for one another. This is more productive than doing things for yourself. That is why economic activity is a good thing. That is why jobs are a good thing.

Since the 1930s, we have thought of economic activity as spending. That is partly because of Keynes, which has become folk Keynesianism, in which consumer spending is supposedly the engine of economic activity. It is partly because of Simon Kuznets and national income accounting, which put GDP (or GNP, back in the day) front and center.

I think of economic activity as patterns of sustainable specialization and trade. Karl says he got a better feel for my proposal from listening to the podcast with Russ Roberts and myself. So there is a genuine recommendation to listen to the podcast.

Below the fold I will respond to some of Karl's specific issues.

He writes,

this concept [PSST] is key to growth and prosperity, its not clear that its key to understanding recessions. I think the key fact that we are working around is that recessions are related to accelerations and decelerations in the rate of inflation.

But then you have the 1970's, when there were periods when inflation accelerated and unemployment did not fall I think that the 1970's are a problem for AD because they are a problem for AS. If you do not have a reliable aggregate supply curve, then it is hard to tell a story in which AD drives output.

He also writes,

A key part of getting any complex system of production is that work has to be done first then you get output. In order to coordinate this work you need to have access to cash before you can produce.

First, I do not think you need actual cash. You could use cash, but you also could use some sort of credit. The term that people used to throw around was trade credit. Some amount of trade credit is needed to enable the butcher to buy bread while he is waiting for the candlestick maker to come in and buy meat. But I do not think that you can go from the necessity for trade credit to a conclusion that economic activity is proportional to the quantity of money. There are many, many other factors that affect the ability of entrepreneurs to find ways to discover and exploit specialization and comparative advantage.

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CATEGORIES: Macroeconomics

COMMENTS (3 to date)
Joey Donuts writes:

I think its very difficult to finance labor with anything other than cash. Perhaps some labor financing can be done with stock options or other ownership arrangements but not all of it.

Its highly likely that there is a direct relationship between money and the amount of search activity taking place to find PSSTs. Since much of the search is trial and error, labor is hired and in some cases fails to produce the "right" product. Tight money when the search activity is highest is probably not the appropriate policy. Obviously search activity occurs continuously, but as I understand Arnolds propositions huge fundamental shifts cause search activity to surge.

Philo writes:

"I think of economic activity as patterns of sustainable specialization and trade." In other words, as production rather than consumption. But isn't it both, equally?

Anthony writes:

Cash and credit are good proxies for it, but what's really needed is not cash or credit, but trust.

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