Home » Uncategorized » Fatal Flaw in AS-AD curves.

Fatal Flaw in AS-AD curves.

Imagine trying to model marriage with a simplified universe of Robinson Crusoe alone on island. It doesn’t work like that. Marriage requires two people minimum. You can’t model marriage with just one person. And if you do, good luck with all the stupid conclusions you will reach.

An AS-AD model is making the same mistake. It, too, is pretending there is only one producer creating only one product and selling to only one consumer. Such a model is as flawed as modeling a marriage with only one person.

If we assume only one of everything, the Keynesian story is inevitable. Less consumption means the one company in existence has to cut down on production and fire people, who have nowhere to go, forever. After all, there is only one job available in this economy, and they just got kicked out of that job. Conclusion: Consumption must be kept up at all costs if we wish to avoid chronic unemployment.

But once we make the simple modification in our model, of having various products and various producers, the whole picture changes. If people consume less, and as a result folks get laid off, they will now get to work making what they need for themselves, if there are no other consumers  to produce for. These people lost their jobs. They are broke. They need things. Some clever entrepreneur will notice this, and get them to work making what they themselves need.

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