Does anybody know what school (or economist, or whatever) uses the following model? It is from Reisman’s book, and I’m wondering whether he made the model up or it’s used by a certain school of “consumptionists”. I haven’t really encountered this model anywhere else.
I can’t recall seeing a combination of graphs quite like this. The top one shows perfect inelasticity of both demand and supply. The bottom one seems to show elasticity in the quantity of labor/output given the top graph.
The only thing I can recall this resembling is a topic where the good consumed was something like oil… and I want to say it dealt with overconsumption of a good.
I may be wrong, however. I would have to go back to my textbooks and notes to check. Sorry I couldn’t be more helpful.
i’ve never read reisman, but it looks like that the graph is basically saying that both demand and supply for “output” are perfectly inelastic wrt price and that employment is a linear function of output supplied. the apparent shift in the output-to-employment function throws me off, though.
anyways, i’ve never heard of anyone using a model exactly like that. in fact, its a little confusing as this seems to imply to me that no trades will take place, right? quantity demanded will always be less than quantity supplied.
on a different note, this does kind of remind me of input-output models like those used in regional economic impact modeling. except with those models, you assume that the supply of the output of a particular industry is totally elastic wrt price so that output becomes only a function of “final demand”. similar to this model, input output models also assume linear relationships between output employment.
really, the input output model sounds more like a “consumptionist” model to me. there, the only means of economic growth is through increasing “final demand” (in the context of regional development this is ussually accomplished by increasing exports to other areas).
Reisman is using the model to both describe and disprove some “consumptionist” doctrines. He interprets it as a model of general overconsumption, or of aggregate demand versus aggregate supply. For example, take the notion of an increase in productivity due to the introduction of machinery: originally, the aggregate supply curve would be under the aggregate demand curve, representing some type of equilibrium. The introduction of machinery leads to a rightward shift in the aggregate supply curve, thereby creating overproduction. The overproduction is “solved” by a decrease in production, but this necessarily leaves X amount of workers unemployed.
It is a criticism of the doctrine which assumes aggregate demand to be independent of aggregate supply (or one separate from Say’s Law), or fixed in relation to the quantity of people in a market.
Reisman doesn’t specify what “consumptionists” he is referring to. He does mention Keynesian, and many of the doctrines he refutes do resonate with Keynesian theory, but not all of it is Keynesian. For instance, Keynesian employment models are based on LM/IS, as far as I know (he attempts to refute IS/LM many hundreds of pages later, in any case).
This model makes absolutely no sense. In the first chart, we see that there’s a shift in aggregate supply beyond aggregate demand (from A to B), or what is also known as a “general overproduction.” At the same time, in the second chart, the general overproduction initially yields higher levels of total employment (from F to H), and then falls back to it’s previous quantity (from H to F), but there’s an outward shift to a relatively elastic curve. Also, the model assumes that there’s some level of permanent unemployment/underutilized resources, an that total employment is a function of output.
Also, Austrian’s are sometimes called “overconsumptionists”
This model makes absolutely no sense.
To clarify, Reisman is critisizing the model. Yes, it is a general overproduction model.
I wasn’t asking what it was. I was asking who uses it.
Well Marx, Keynes and Minsky (to some degree), but they don’t believe that general overproductions (which are impossible, as I’m sure you know) increase total employment, as the model suggests.
Well Marx, Keynes and Minsky (to some degree), but they don’t believe that general overproductions (which are impossible, as I’m sure you know) increase total employment, as the model suggests.
I don’t think the model suggests that overproduction increases total employment. Rather, the model assumes that there is a fixed demand independent of aggregate supply (see the fourth or fifth post), and therefore overproduction must lead to a period of recession (or where supply readjusts with aggregate demand). Taking the model further, it suggests that improvements in productivity will cause permanent unemployment, until aggregate demand shifts to the right.
I always thought that Keynes’s model was more complicated, and closer to Hicks’s later IS/LM representation.
EDIT: For referense, see Reisman (1990), pp. 544–556.
Yes, I see this.
But in the second graph, the bottom one, we see that the shift in aggregate supply (again, from point A to point B) increases total employment (from point F to point H), and then reduces total employment back to previous levels (from point H to point F). Here’s my problem with the model:
I don’t think that any economist has ever held such a position (general overproductions reduce unemployment rates).
Well the model assumes a permanent level of unemployment from the get go (the fact that unemployment first falls and then rises back to its previous positions suggests that there is a natural rate of unemployment).
Well it’s not literally a Keynesian model; but overproduction frameworks are very similar to underconsumptionist frameworks.
johnathan,
Reisman doesn’t specify what “consumptionists” he is referring to. He does mention Keynesian, and many of the doctrines he refutes do resonate with Keynesian theory, but not all of it is Keynesian. For instance, Keynesian employment models are based on LM/IS, as far as I know (he attempts to refute IS/LM many hundreds of pages later, in any case).
as a side note, IS/LM is just a model for aggregate demand, so you would need to add other assumptions to get to employment impacts.
but anyways, if reisman thinks this type of model characterizes keynesian thought, i think he just misunderstands keynesianism. there is nothing contradictory between say’s law and the keynesian explaination of recessions (though i guess that partly depends on how you define say’s law. tyler cowen has a good break down of the litany of definitions that have been offered for say’s law and whether keynesian economics violates them in this article: “Say’s Law and Keynesian Economics”, too bad not online 
).
Just to clarify, it’s assumed that at the beginning full employment is equal to the number of able and willing workers. In other words, the economy is in an equilibrium between aggregate demand, aggregate supply, and the labor force. It might be a long-shot premise, but that’s the point I think.
Student, Reisman critiques Keynesian economics later (I haven’t gotten there yet), and centers more on the IS/LM model. He doesn’t specify who uses the above model, although maybe about eight or ten pages later he quotes Samuelson and suggests that Samuelson’s doctrine applies to the above “overconsumption” model. Reisman’s arguments are convincing, but since he does little in the way of referencing (apart from direct quotes), it’s hard to tell if he just set up something he could easily refute, rather than refuting something which is actually advanced as serious economic theory.
@ Johnathan:
I went through my notes from undergrad. The only thing I have that comes remotely close is about overconsumption of resources. The example that was used was oil and it was used in reference to peak oil theories. I don’t have a specific economists name written down, or a specific school of thought.
On a side note, I did scribble something about the OPEC cartel and government intervention in the price of oil but that’s not relevant to this thread.