Barkley and I debated AS/AD back in 1994 (I think) on pen-l. I recently reread
my side of the exchange, and I stay convinced. I agree that Keynes has
something like an upward-sloping AS curve, in the sense that he recognizes (as
we all should) that, beyond a certain point, nominal expansion can't be real.
Whether capacity constraints are responsible for particular real-world inflation
episodes is another question altogether, however. Also, international
substitution (which I criticized as a justification for AD back then) is not the
only, nor even the most significant open economy effect on domestic macro
outcomes. (Recall that international substitution requires that exchange rates
not offset movements in the price level.)
Peter
"J. Barkley Rosser, Jr." wrote:
> Peter,
> Two points: I. AS and AD are not about inflation.
> The vertical axis is the price level, not the rate of inflation.
> 2. There is no reason why it should deal only with a closed
> economy. Indeed, the international substitution effect is
> one of the standard textbook reasons for why AD slopes
> down, as I already mentioned.
> Are there lots of problems with AS and AD? Yes.
> Is the analysis still useful, if properly done? I think so.
> Of course, one must make clear that AS and AD are
> very different from their micro equivalents, which also
> have problems, btw.
> I don't see it as at all unrealistic to claim that prices
> can (and do) change more rapidly than wages, even if
> "in the long run" wages will eventually catch up.
> BTW, a not widely known fact is that one can find
> the standard "short run" AS curve with the flat zone
> followed by the upward sloping intermediate zone followed
> by the vertical zone, using the bottleneck argument, in
> the General Theory itself. See Chapter 21, Section IV.
> It is a bummer what Colander has done to his book,
> in the meantime. Good luck finding a decent text.....
> Barkley Rosser
