Just listened to Arnold Kling on Econ Talk. I think I have a lot better idea of his concept now than I did from his posts. The value in a good dialog is enormous.

A couple of comments that will only really make sense if you listen to the podcast.

One, Arnold is the first person I’ve heard on EconTalk in a while who spoke about the New Keynesian paradigm in a way that was recognizable to me. Foremost, he made clear that money demand is a key part of this whole story.

There was still a bit more old Keynesian stuff in his explanation than I would feel comfortable with but the story was recognizable.

Second, the core idea of PSST, I think I more or less agree with. That is, that key in making the economy work is finding new and better ways to exploit comparative advantage.

In a draft dissertation I worked on an exogenous growth model, in which there were different tasks rather than different types of capital and (1) that developing tasks took time and resources and (2) a minimum number of workers had to do each task so technological change was limited by the size of the market, transportation costs and even marginal tax rates. The math turned about too much and I dropped it.

Anyway, the larger point is that while its very clear that this concept is key to growth and prosperity, its not clear that its key to understanding recessions. I think the key fact that we are working around is that recessions are related to accelerations and decelerations in the rate of inflation.

This inexorable tradeoff is the fact that turns our eye always back to money.

Third, Arnold says the 70s should have shaken people of the Aggregate Demand story. Why? I can see why they would shake one of a simple Phillips Curve, but why Aggregate Demand generally?

Fourth, if we have any sort of cash in advance, or credit in advance story then doesn’t it immediately pop out why entrepreneurs would have an easier time in a loose money environment than a tight money environment? I prefer thinking more in terms of “money in the production function” but either way when there is looser money its easier to start a business.

Fifth, one other word on money in the production function. A key part of getting any complex system of production is that work has to be done first then you get output. In order to coordinate this work you need to have access to cash before you can produce. Otherwise, every employee is basically an equity partner and getting someone to go in both as an equity partner and have the skills you need is a lot harder than just paying them up front from a pile of cash.

Sixth, doesn’t the ability to exploit comparative advantage along with access to capital – organizational and physical – explain why jobs are a good thing even if work is not? Maybe its just miscommunication but it still irks me when some people say “why do we want to create jobs, we work to live, not live to work”

Yes, but you have to work a lot harder to survive if you don’t have a job than if you do. Getting a job decreases the amount of work it takes to live. That’s why jobs are good.

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