Most people have some understanding of “demand,” at the level of individual products. Most people think aggregate demand is somehow related to that concept of demand. It isn’t.
Here’s an interesting exchange between Matt Yglesias and Michael Mandel:
I find the “slow rate of innovation” hypothesis much more convincing than weak demand http://marginalrevolution.com/marginalrevolution/2013/11/are-real-rates-of-return-negative-is-the-natural-real-rate-of-return-negative.html …
@MichaelMandel For any given level of innovation, a level of demand that produces high unemployment and low inflation is inadequate.
@mattyglesias Innovation–the creation of new goods and services that people want to buy– is what produces higher level of demand
(Yglesias had the middle comment, Mandel the other two.)
At first I thought Mandel was making some sort of “Say’s Law” argument. Supply creates it’s own demand. If so, they would have been talking past each other, as Matt Yglesias actually is talking about aggregate demand, whereas Say was talking about what we’d now call “quantity demanded.” Say was saying that if the LRAS curve shifts to the right, there will be a new equilibrium at a higher level of quantity demanded, even if the AD curve does not shift at all. And that’s true. But of course it doesn’t address the claim of people like Matt and myself, which is that AD is too low, that the AD curve is too far to the left. That is a problem, at least in the short run (Say’s Law fixes it in the long run.)
On second reading I wonder if I misread Mandel. Perhaps he meant that companies needed to produce more nifty products, to whip up enthusiasm among consumers. In other words, he’s saying there are too many products out there like BlackBerry, which are not innovative, and hence consumers are sitting on their wallets.
If so, that would also be wrong, but in an interesting way. AD has nothing to do with “demand” in the microeconomic sense. Matt’s right that in the 1930s there were plenty of nifty products; the problem was that consumers had too little money to buy the goods. What would it look like if lack of nifty products really were the problem? Imagine next Tuesday every store in American announced a sale; every product was priced at one cent. Even Tiffany diamonds, Ferraris, Hollywood homes, etc. Also assume that shopping did not pick up on that day. Then we’d be living in a Mandel world, were a lack of nifty products was holding back AD. Of course we clearly do not live in that world.
At the micro level “demand” is a sort of real concept, the amount of BlackBerries that consumers want to buy at various prices. Aggregate demand is nothing like that. AD went up more than a trillion-fold in Zimbabwe a few years back, and yet “demand” as most people visualize the term remained anemic. (I.e. demand in terms of relative prices.) AD is a nominal concept, a concept related to money, not consumer goods. Only the central bank can solve our AD problem, no one else has the proper tools.
If consumers have the money, I assure you there will definitely be things they want to buy. I’m already preparing my shopping list just in case all stores announce a one cent sale next Tuesday.
PS. Or maybe Mandel had a third meaning that I missed, in which case—never mind.
PPS. Counterarguments based on income inequality won’t help either. That’s simply a one-time velocity shift; monetary policy still drives AD.