A quick response to Peter Dorman to try to dispel misunderstanding.
1. Of course a curve does not "explain" anything. The issue is
whether it points you toward a mechanism that does so.
2. I don't know why a supply shock has to be defined as "a change in
one or more relative input prices." I think of a supply shock as
a change in a primary input cost (e.g. labor, imported raw materials)
relative to the current prices of produced output, or as a change in
production conditions (having nothing to do with prices).
3. I don't understand how you have concluded that we are so
very far apart on the NAIRU. It sounds like you are attributing
to me the conventional view that it represents something that
could be called "full employment" in the labor market. This is
a view that I have rejected since day 1. But I do think that there
is at any given time a rate of unemployment which "offsets
other pressures for an acceleration of inflation;" I lean to a
conflict-theory bargaining-power explanation of this rate,
though other factors are surely also at work. My most recent
posting did not endorse a market-force-based NAIRU; at one point
I simply observed that -- for the issue at hand -- it made no
difference how the NAIRU was determined.
4. Like you, I have no idea "what it means to say that
there is any long-run level of Y to which the economy tends in
the absence of active economic management." What is the
meaning of a long-run level of Y? The issue is whether there
is a tendency to move to a long-run rate of unemployment (or
aggregate rate of capacity utilization) at which there is no
tendency for the rate of inflation to change. Obviously such
a point cannot be depicted on an AS/AD diagram; but, to repeat
an earlier point, that does not ipso facto render an AS/AD
diagram useless as a stepping stone to the required P-dot/U
Phillips Curve framework. On the substantive question as to
whether there is any "natural" tendency for the economy to
adjust to the NAIRU (however defined), I continue to think that
there probably is -- but that such a long-run tendency would
in any event be swamped by short-run forces, so that it is of
virtually no interest in practice (as opposed to theory).
I am discouraged by the fact that this discussion seems to be
generating more misunderstanding than understanding.
<Tom Weisskopf>
