tag:blogger.com,1999:blog-4979477022008569617.post4872331127597123246..comments2016-06-10T07:02:05.180-07:00Comments on Roger Farmer's Economic Window: So you believe the stock market can directly affect the economy?Roger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-4979477022008569617.post-48957174879222556052016-03-16T08:14:31.038-07:002016-03-16T08:14:31.038-07:00On the contrary Philip. Economists spend far too m...On the contrary Philip. Economists spend far too much time learning calculus and other esoteric branches of pure mathematics. The typical Ph.D. economist probably knows more functional analysis than the average physicist and we cut our teeth on Kakutani's fixed point theorem. Is the value function twice continuously differentiable? Ask a graduate student in macroeconomics trying to pass her qualifying exams. <br /><br />Give me a student schooled in economic history any day!Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-64800860415797286012016-03-14T20:55:36.455-07:002016-03-14T20:55:36.455-07:00My book "Macroeconomics Redefined" http...My book "Macroeconomics Redefined" http://www.amazon.com/dp/B00ZX9O5XQ deals entirely with this. It argues that it is no accident that the Great Depression and the Great Recession both followed huge asset market crashes. The arrow of causation leads from huge falls in net worth (the median US household lost 18 years of net worth) to a compression in personal consumption expenditure to a fall in aggregate demand. In other words, unlike what Friedman's permanent income hypothesis and the Keynesian income hypothesis would have it, aggregate expenditure is not a function of aggregate demand but the other way around.<br /><br />The graph on http://www.philipji.com/item/2015-06-24/the-history-of-the-US-economy-in-one-graph makes this clear. It shows personal consumption expenditure falling even as personal disposable income first goes up in early 2008. Later personal disposable income follows the cue of personal expenditure.<br /><br />Personally, I am not sure economists are very good at mathematics although you wouldn't ever guess it from the complex equations you see in published papers. The graph above shows that while the average propensity to consume is close to one the marginal propensity to consume is close to zero. Therefore the Keynesian multiplier is never greater than 1. During the course of the recession proper it is even negative. But this is difficult to explain because I don't think economists understand calculus in a physical sense. To put it geekily, what matters is the partial derivative of expenditure with respect to income.Philiphttps://www.blogger.com/profile/16538860062019540619noreply@blogger.com