Roy H. Grieve

Time to Ditch AD-AS?

Complementing previous, often ignored criticism of the AD-AS model - to the effect that this widely-used construction is inherently inconsistent - this note argues that a (rare) defence of the model by Peter Kennedy fails to convince and that the model does indeed, as alleged, give rise to confusing and misleading expositions of the working of the macroeconomy. JEL classification: A22, B22, E10.

The ADAS Model: Two into One Won’t Go

It has for some time been the almost universal fashion, amongst authors of intermediate macroeconomics textbooks, to employ the aggregate demand and aggregate supply (ADAS) model to explain the determination of aggregate output and the price level. Perusal of a representative selection of such texts reveals that most — all but three out of fifteen surveyed — make use of a version, or versions, of ADAS.1 Recently however dissident voices have been raised in criticism of the propriety of relying on the ADAS construction. Among those who have drawn attention to the inherent inconsistency of the standard model are Rao (1991), Barro and Grilli (1994), Colander (1995, 1996), Nevile and Rao (1996) and Grieve (1996). Colander, for one, does not mince words (1995, p.170): “ADAS does not fulfil the minimum requirement of a model: logical consistency. Its component parts are derived from models that reflect different, and inconsistent models of the economy.” This chapter seeks to set the problem of the ADAS model in the context of the development of macro theory.

Keynes, Sraffa and the Emergence of the General Theory

This paper considers the question of whether Sraffa had any significant influence on Keyness thinking in the period of preparation of The General Theory. Questioning the negative view expressed by Pasinetti (2007), we suggest there is a strong possibility that Sraffa, in introducing the idea that there exist as many ‘natural’ rates of interest as there are commodities that can be lent or borrowed, was instrumental in pointing Keynes to a way of escape from the traditional ‘productivity and thrift’ conception of the rate of interest; this new line of thought Keynes developed into the liquidity preference explanation of interest on money.

Aggregate demand, aggregate supply, a Trojan horse and a Cheshire cat

The recent publication of a sixth edition of Dornbusch and Fischer’s (DF as the authors themselves tell us, the book has been translated into many languages and is in use around the world “from Canada to Argentina and Australia, all over Europe, in India, Indonesia and Japan, from China and Albania to Russia”. The undogmatic “middle‐of‐the‐road” approach, together with the careful and clear presentation characteristic of this user‐friendly textbook, has won it many friends.

Pecuniary External Economies, Economies of Scale and Increasing Returns: A Note of Dissent

In a recent paper Chandra & Sandilands (2006) put forward three contentious propositions concerning the ‘mechanics’ of the process of economic growth: these propositions are to the effect (1) that ‘pecuniary external economies’ should not be considered instances of market failure; (2) that economies of scale are of little importance in accounting for increasing returns, increasing returns being, it is alleged, attributable to other factors such as external economies or ‘industrial differentiation’; and (3) that increasing returns are not ‘sector specific’, implying that particular sectors should not therefore be singled out for special promotion. This note investigates the arguments advanced by Chandra & Sandilands in support of these propositions, and finds that no convincing case is made for any of them. In particular, we stress the invalidity of Chandra & Sandilands’ contention that increasing returns are largely independent of economies of scale.

Some Thoughts on the Contentious State of Economics: Why So? What to Do?

This brief note, commenting on the disorderly state of the discipline, identifies several causes of disagreement, concluding that a major source of dissention amongst economists is over the question of how to “do” economics: whether or not attempts—as by “neoclassical” and “new classical” schools of thought—to emulate the methods of natural sciences such as physics are more likely to bring understanding or result in distortion of the subject matter.