2015-03-03
In his 1936 treatise, Keynes formulated Say’s Law as proposing that “supply creates its own demand.” It is not clear exactly what Keynes meant by this. The statement implies an assumption of equilibrium where all excess demands are zero. That is, if supply creates its own demand, then quantity demanded of a good and the quantity supplied must be equal. This is at worst a misrepresentation of...
2015-02-25
Today we add short-run aggregate supply (SRAS) to the analysis. The short-run aggregate supply curve is tricky to justify theoretically. Given an increase in the money supply, the SRAS convey that total output increases as a result of increase in aggregate demand and a delay in price adjustments. It is convenient to think of this in terms of nominal income and then consider the behavior of the...
2015-02-24
Money may be thought of as the life blood of any economy. Possession of money by an agent empowers that agent to coordinate resources and even other agents. It is a mistake to look at money only as one good among money. This perspective may aid analysis of changes in the value of money and its allocation, but they only partly capture money’s influence. Money is the universal numeraire. It is...
2015-02-19
Today I’m going to work some fast math magic. Yesterday I reviewed the equation of exchange. Working with the products can be somewhat confusing. So, briefly, I will show the reader how to transform the equation of exchange into (approximate) sums of percent changes. The process is straight forward. 1. Begin with the equation in its basic form MV = Py 2. Log both sides ln(MV) = ln(Py)...
2015-02-18
Where does the value of money derive from? There is a common misconception that money must have some intrinsic value. A common question I hear from students is: “The dollar is backed by gold, right?” While the earliest moneys came into existence by virtue of the use value of the commodity traded, this is not the case in the world of modern finance. As you know if you have been reading this...
2015-02-11
Just as it is possible to construct a theory of the emergence of money based on principles of agent preference and action, so too is it possible to build a theory of the state monopoly of money with such principles. Both history and theory converge on the conclusion that money was by no means a creation of the state. Money arose as agents confronted difficulties associated with barter. Instead of...
2015-02-08
To the lay observer, the existence of money appears to be a given, and this is if they even notice money’s peculiarity. Money is a good, but unlike other goods, its primary use is as a medium of exchange. In the pre-modern era, money was typically linked to a commodity, but in the modern financial system, this is no longer true – at least not for base money. So how does money become an object of...
2015-02-04
The manner in which we economists conceptualize entrepreneurship sometimes does a disservice to the complexity and difficulty of entrepreneurial action. Kirzner describes the entrepreneur as being alert to profit opportunities. Kirzner’s entrepreneur brings into existence trades (pure pareto improvements) that would have otherwise not occurred. Schumpeter's entrepreneur brings innovation to...
2015-02-03
Entrepreneurs guide production according to the needs of consumers. Remember that a good is a typ e of object whose definition is a subjective. The final consumer must expect that the good will improve his or her position enough that he or she actually purchases the good. The entrepreneur’s role is to provide that good to the consumer. Note the inherent difficulty in this role. Consumer demand is...
2015-01-28
In the last post, I listed 9 classes of objects that are pertinent to the study of economics. I stopped short of describing all 9 classes. Left are prices, expectations, and entrepreneurship. Each of these deserve their own post. Today I start with investigating prices, their place within economic analysis, and the system that they form. As I mentioned previously, the price of a good is equal to...