AAA = Aggregates Annoy (Crude) Austrians

And as Daniel Kuehn, bloggers “Unlearning econ” (see number six), and “Lord Keynes” argue, wrongly.

Aggregates are useful; otherwise we would have no purpose for concepts like “the structure of production.”  The task, however, is to see which aggregates are useful, and when it is useful to deaggregate.  Of course, too much deaggregation can be just as useless and unnecessary as not deaggregating at all.

The bottom line: there is no deaggregation vs. aggregation dichotomy.

(I would disagree, however, with parts of “Lord Keynes'” post, since gross domestic product, or even any output aggregate, is not necessary to know the merits of letting individuals of the market deal with industrial fluctuations without exogenous intervention.  This brings into consideration Lachmann’s [borrowing from Hicks] dichotomy between catallactics and plutology.  If we are studying catallactics, then the end should not be to conclude via output, but to conclude via exchange.  I would agree, however, that oftentimes even Austrians [even myself] are marred in the plutological approach.)

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  1. 3 questions for you

    (1) So you are willing to say that “aggregate demand” is a meaningful, valid concept?

    (2) Then presumably you would declare the following statements proof of “crude” Austrianism?:

    ‘When Krugman uses “demand,” he means “aggregate demand,” which economically speaking is a nonsensical term. There is no such thing as “aggregate demand’
    – William L. Anderson

    ‘”For all of his “credentials,” let us not forget that Krugman is a Keynesian who has no clue whatsoever what happens in a real economy. His world is the imaginary world of aggregates, GDP numbers, crude graphs, and no real people and certainly no real production.’
    – William L. Anderson

    (3) You say:
    “I would disagree, however, with parts of “Lord Keynes’” post, since gross domestic product, or even any output aggregate, is not necessary to know the merits of letting individuals of the market deal with industrial fluctuations without exogenous intervention. “

    Are you willing to say that an output aggregate measure IS necessary to ascertain whether the economy is, in fact, contracting or expanding, in terms of real (inflation-adjusted) output?

    • Some, or all, of these questions miss the point of the post.

      1. Whether it is meaningful or not doesn’t matter. That some aggregation is necessary doesn’t mean that all aggregation is necessary.

      2. I do think that Anderson is wrong. Aggregate demand is a nominal figure; i.e. the sum of all spending. The uses of aggregate demand is another thing, however. I can find examples where an Austrian can rightfully say that “aggregate demand” is being misused (e.g. using only aggregate demand as a measure to gauge the “health” of the economy).

      3. This seems like a nonsense question. Of course, if output is growing output has grown. This doesn’t tell us anything with regards to what I was originally commenting on — i.e. “recovering” from a recession.

      • Jonathan,

        Straight from the horse’s (Anderson’s) mouth:

        Q (to Anderson): would you agree with this characterization or disagree, and if you disagree, where do you take issue with it:

        “Aggregates are useful; otherwise we would have no purpose for concepts like “the structure of production.” The task, however, is to see which aggregates are useful, and when it is useful to deaggregate. Of course, too much deaggregation can be just as useless and unnecessary as not deaggregating at all.
        The bottom line: there is no deaggregation vs. aggregation dichotomy.”

        A (from Anderson): That is OK, I guess. The larger issue, however, is the notion that government policies should be based upon false concepts of aggregate supply and aggregate demand. Nonetheless, Structure of Production is anathema to AS-AD.

        So, is Anderson still a “crude Austrian”? He seems to have been saying the same thing we’ve been saying all along. Do you still take issue? If so, where?

  2. (1) Your reply here seems incompatible with (2), unless you’re just being evasive.

    (2) Thank you for the straight answer here.

    (3). Of course, if output is growing output has grown.

    And how would you know, without an aggregate measure?

    • Maybe it has to do with what is “meaningful.” Aggregate demand, as a nominal value, is as valid as any other logical aggregate. What the aggregate is useful for is another topic altogether.

      With regards to (3), we were talking about recovering from a recession. If we look at the economy from a catallactic perspective, then aggregate output is not really necessary.

  3. An organism is an aggregate of cells and other things and is more than the sum of its parts. The Keynesian obsession with aggregates is based upon the false premise that an aggregate of individuals or individual sales and exchange prices is like an organism or more than the sum of its parts.

    This is just more typical nonsense from people who still do not understand economic calculation, human exchange or catallactics.

    • “An organism is an aggregate of cells and other things and is more than the sum of its parts. The Keynesian obsession with aggregates is based upon the false premise that an aggregate of individuals or individual sales and exchange prices is like an organism or more than the sum of its parts.”

      So now we see the laughable retreat from your nonsense on the Krugman in Wonderland blog, such as:

      “Of course, there is no such thing as “aggregate demand”. Once malinvestment has been revealed, people find themselves poorer than they had previously thought”

      “There is no such thing as “demand” and certainly no such thing as “aggregate demand” except as a suspect statistical category. “

      “Also, I deny that there is any such “thing” as “aggregate demand”. I don’t see your point at all.”

      “Of course, there is no such thing as “aggregate demand” as I’ve explained so many times before.”

      • I still don’t have a problem with having said “There is no such thing as “demand” and certainly no such thing as “aggregate demand” except as a suspect statistical category. “

        I suppose that I could have been more clear by saying that these are statistical accumulations after-the-fact but not “things” or mechanistic organisms as envisioned by Keynesians. Further, in each exchange, one side “demands” something and one side “supplies” something. “Demand” does not stand alone as envisioned by the Keynesians. These were blog comments, not a dissertation. At the same time, I understand Jonathan’s desire to be precise.

        Regardless of how clear an Austrian might be, the Keynesian is never going to engage the concepts surrounding catallatics.

  4. The nub of the Keynesian’s world view is that society and/or the “economy” is like an organism (more than the sum of its parts) and that it is mechanical and susceptible to simple manipulation by wise bureaucrats (them) backed by SWAT teams. Indeed, without this wise guidance from them, the machine will run off the tracks.

    This explains the psychological reason why Keynesians simply and always recoil from and refuse to engage the concepts of catallactics.

    • Since “catallactics” is nothing but an archaic term for elements of microeconomics (“Catallactics is the praxeological theory of the way the free market system reaches exchange ratios and prices,”, your statement reduces to the claim that “Keynesians simply and always recoil from and refuse to engage the concepts of microeconomics.”

      Better to draw a veil over such absurdity and move on.

      • That’s not what catallatics means. Mises called “catallatics” the study of monetary economics. John Hicks called “catallatics” the study of exchange. Since for Mises money is a medium of exchange, we can say that both definitions are more or less the same.

        • “Mises called “catallatics” the study of monetary economics.

          Then why does it say this in Peter J. Boettke’s Handbook on contemporary Austrian economics?:

          “Catallactics is part of the wider discipline of praxeology with a specific focus on “all market phenomena with their roots, ramifications, and consequences” (Mises [1949] 1996, p. 233). Catallaxy is grounded in purposeful human action and focuses on how market activity results in the emergence of exchange ratios and prices (ibid., p. 234)”

          Boettke (ed.), Handbook on contemporary Austrian economics p. 18.

          In other words, almost exactly the same as what I’ve said above.

          And even if “catallatics” were to mean “monetary economics”, the charge that “Keynesians simply and always recoil from and refuse to engage the concepts of monetary economics” is still absurd beyond words.

          Keynes’s General Theory and Post Keynesianism in general take money and monetary theory very seriously indeed.

          If anyone ignores the role of money, it would be mainstream Walrasian neoclassicals, who analyze the economy as if it were a pure barter state, as if money doesn’t exist.

          • There are differences in how different economists approach catallatics. Like I said, “catallatics” is not just an Austrian word. John Hicks uses the word, as well, to mean “economics of exchange.” Mises did not invent the term; he too borrowed it from someone else. How different economists approach the study of exchange is another topic altogether; I could make the argument that there’s a lot in Keynesian economics which is plutological in nature (such as the focus on output).

            I’m not defending the argument that “Keynesians simply and always recoil from and refuse to engage the concepts of monetary economics.” I’m just trying to correct what catallatics is.

    • Bob Roddis’s point is that Keynesians seem to make arguments on the macro level which are inconsistent with things they claim to believe as true on the micro (catallactic) level. When this inconsistency is pointed out, things like the “paradox of thrift” are cited as reasons why economic law changes when you consider a lot of micro things together (macro). But there is no explanation given as to how this transformation or suspension of micro economic law is accomplished.

      It’s always put forth that the truth of such a statement is obvious and if you don’t understand it, you should trust the Keynesian to know what he’s talking about.

      I think this is what Bob Roddis means when he makes the claim that Keynesians recoil from engaging in the concepts of cattalactics.

      • For the sake of using the word “catallatic” right, catallactics is not just about micro. I think you are using it right, but I want to clarify for people who read your comment and don’t get it. Macroeconomics has microfoundations; macroeconomics must be studied catallactically, or by looking at microfoundations. But, clearly, catallactics is both micro and macro; it’s just that you can’t do the latter without the former.

  5. Jonathan,

    Would you agree with this characterization:

    “Aggregates are a CONSEQUENCE of economic activity, not a CAUSE.”

    The point you’re trying to make, I think, about “enlightened Austrian” reasoning on aggregates if that’s what we might call it, is that at some level we can study the CONSEQUENCES of economic activity through a macro, aggregate perspective to derive meaningful takeaways about what has transpired.

    But the way the “Keynesian” (I know this is a sensitive descriptor on this blog) economist approaches aggregates, they are a starting point for analyzing, predicting and manipulating (this last bit is key) economic activity. By using aggregate data and behavior as the starting point of analysis, or looking at aggregates as the unit variable to adjust, the Keynesian believes he can CAUSE economic activity to result in particular favored outcomes.

    The “enlightened Austrian” viewpoint is that, while aggregates exist and are useful, they’re useful for studying CONSEQUENCES, not providing CAUSES, as the Keynesians believe. One mindset is observational, the other interventionist.

    (Note: I am using the term “enlightened” to differentiate from the “crude” or dogmatic Austrian characterization, I am not using it to imply there is something superior or higher in a transcendental sense about this viewpoint.)

    • Taylor,

      I don’t think I would. There can be an aggregation of causes; whether this aggregate tells us anything meaningful is another question.

      Even in Keynesian theory, btw, aggregates are used to study concepts. For instance, fiscal policy will raise aggregate demand, but Keynesians know that this is because individuals are buying and using “idle resources.”

      • Jonathan,

        I don’t understand your response. It seems like you did not understand my question.

        “An aggregate of causes” is not the same concept as “an aggregate cause.”

        The former could be a number of heterogeneous causes which are all part of the same category (say, regulatory), the aggregate being general, “causes”, while the latter treats causes as homogeneous, the aggregate being specific, “demand” for example.

        According to an Austrian analysis, the CAUSE of a business cycle would be the manipulation of the interest rate structure by a central bank, which, through a number of micro interactions between FRB banks and the investment community, results in a social discoordination between the supply of resources for productive investment and the demand of resources for productive investment.

        The observable aggregate CONSEQUENCE is a rise in the prices of certain investment projects, then a fall in those projects, etc. In the Austrian framework, these observable phenomena in aggregate measures is symptomatic, not problematic– it is the result of causal factors, not the causal factors themselves. This is due to and related to the heterogeneous nature of economic inputs and economic activity.

        According to Keynesian analysis, the CAUSE of the business cycle is the observable change in various aggregate measures, such as aggregate demand. Because economic inputs and economic activity are taken to be homogeneous along basic categorical lines (capital, labor, land, etc.), by simply boosting an aggregate like “demand” which is observed to be falling, the business cycle can be corrected.

        The CONSEQUENCE of not doing so is everyone goes broke and we have an economic catastrophe (which is itself confusing because in this sense the CAUSE and CONSEQUENCE are the same thing, for example, the falling aggregate “demand” is the CAUSE of the CONSEQUENCE of people losing their incomes because no one is demanding their services.

        In your original point, you said “aggregates are useful.” But the conceptual difference between Austrians and Keynesians regarding aggregates is night and day.

        For Austrians, “aggregates” such as “the structure of production” are merely logical/intellectual shorthand to save time rather than saying, “The way in which the miner supplies the ore mill supplies the foundry… etc.”

        For Keynesians, aggregates such as “capital” are the “unit of account” for understanding economic activity itself.

        There IS a dichotomy. Austrians DO use aggregate terminology, but not aggregates. The Keynesian “capital (K)” is not shorthand and equivalent to the Austrian “pool of real savings”. The Keynesian “production/output (Y)” is not shorthand and equivalent to the Austrian “structure of production.”

        These are, conceptually, two completely different ways of approaching the economic problem.

        • I don’t know if this takes away from the point you’re trying to make, but with regards to the business cycle, that’s not entirely right. You are right that a lowering of the rate of interest of the loanable funds market will cause a change in the distribution of profits in the structure of production, which may lead to a lengthening and widening of said structure of production. This, in turn, is what causes malinvestment, and therefore what forms the key characteristic of the business cycle.

          In any case, what you’re trying to say is that when Keynesians look for cuases, they don’t disaggregate enough to see the micro-causes of macroeconomic events. I agree with this, and never would have suggested otherwise. This is what I mean when I say that what matters is how you use aggregates. Yes, Austrians and Keynesians use aggregates differently — but, nobody said otherwise.

          However, the real world is not one in which there is one cause which leads to certain, known consequences. Our world is complex and dynamic, where the outcomes we observe are caused by multiple causes. So, the exact shape of our current recession, for instance, has multiple causes (intertemporal discoordination being one of them). If you are going to aggregate consequences, then you have to aggregate causes, because there is no one cause which lead to all these consequences.

    • The purpose of theory is to apply it to reality — i.e. to interpret real events. Austrian business cycle theory doesn’t tell you everything you need to know about business cycles. It gives you a general picture of how it arises (i.e. the boom) and how it ends (i.e. the bust). It does not tell you the structure of the boom. The real world boom is a complex, or aggregated, event, and has complex, or aggregated, causes.

      • Jonathan,

        I have to assume you’re not purposefully being obtuse in your responses but I scratch my head because you keep coming at me with all this complexity stuff like I don’t know it or disregard it.

        I feel like you keep validating my point but then say you disagree with my wording and proceed to lecture about how complex everything is and I keep missing that.

        I just said, quote,

        “For Austrians, “aggregates” such as “the structure of production” are merely logical/intellectual shorthand to save time rather than saying, “The way in which the miner supplies the ore mill supplies the foundry… etc.””

        So, the “business cycle”, as shorthand for ALL the COMPLEX things you listed, does have one cause, does it not? Is it not the discoordination of nominal and real time-preference caused by interest rate manipulations? Is this not the one cause that leads to all the numerous other consequences and individual, COMPLEX observable phenomenon of the business cycle?

        Or are there other causes than interest rate manipulation –> malinvestment which can lead to the COMPLEX interactions and observable phenomena we refer to, by shorthand, as the boom and bust of the business cycle?

        • Like I said earlier, interest rates alone don’t explain business cycles. What causes business cycles is intertemporal discoordination in the production process, or investment in the structure of production that calls for a greater pool of capital than actually exists (is saved). It is conceivable, and has possibly occurred historically, that an artificial decrease in the rate of interest has no led to malinvestment, because that crucial process of (mal)investment never took place.

          But, pedantry aside, artificially low interest rates + increase in investment in the structure of production will lead to a bust. But, this “bust” is hardly comparable to a real world business cycle. There are additional factors which explain the structure of real world business cycles. For example, the recourse rule explains the overinvestment in mortgage backed securities.

          So no, you can’t say that one cause leads to all consequences. Multiple (aggregated) consequences are oftentimes caused by multiple (aggregated) causes.

          What you seem to be missing is that there are complimentary events which occur, form part, and enhance the boom-bust ideal type of Austrian business cycle theory.

          • Jonathan,

            I haven’t missed a thing. You keep implying I have this simplistic, naive view of business cycles and that I seem bent on fitting them into my “ideal type Austrian business cycle”.

            I know it’s complex. You are being pedantic. Overly pedantic. I don’t know why. Maybe because this whole post started with a pedantic point and devolved from there.

            Every business cycle looks slightly different, in both qualitative and quantitative ways. But there are key elements that are present in EVERY business cycle, “ideal Austrian” or not, without which, you wouldn’t get a business cycle. Those elements (or element) is the cause of the business cycle as a general concept, the specific way it plays out aside.

          • You didn’t address the important part of what I said, which is that aggregated consequences have aggregated causes. In other words, each individual aspect of the aggregated consequence has an individual cause.

          • Jonathan,

            What you say is true, with the assumption that none of the individual consequences would’ve been individually caused if there wasn’t a categorically relevant root cause (in the case of the business cycle, malinvestment, which has its own root cause) which set the entire process in motion.


            Individual consequence– man loses his home because he lost his job and with it his income necessary to service his mortgage
            Individual cause– the man’s job was eliminated because the business he worked for was no longer economically viable

            However, in this particular example, this event didn’t happen in a vacuum. The business the man worked for was initially economically viable because of the specific causes and consequences we generally bundle up and refer to as the “business cycle boom”, and the etc. etc. we generally refer to as the “business cycle bust.”

            And THIS phenomenon was caused by the general aggregate term we use called “malinvestment” and the malinvestment occurred in specific duration, extent and depth because of the specific features of this particular business cycle but in general it was caused by monetary/interest rate adulteration (intervention by coercive central planners).

          • Taylor,

            It doesn’t matter if there is a root cause or not.

            You said that causes are individual and consequences are aggregates. This is not always correct. Aggregated consequences oftentimes are caused by aggregated causes, which is the same thing as saying that many consequences are caused by many causes.

            It doesn’t matter if one specific cause is necessary to give the superficial structure to what we perceive the consequence to be (the business cycle). The fact of the matter is that without the other causes, the specific structure of the business cycle would never appear — it would look completely different.

  6. Jonathan,

    To an Austrian, there is no “macroeconomic event.”

    For example, “the business cycle-bust” is shorthand for the idea of the general experience whereby numerous individual entrepreneurs find their projects are unsustainable, numerous individual banks/bankers have to call in loans, numerous individual people lose their jobs or suffer a fall in income, etc.

    It is easier to refer to all those different consequences (complexity!) by the “macroaggregate” linguistic shorthand of “the business cycle-bust”. But there is no “real” or existential “business cycle-bust”. It’s a conceptual shorthand, not a conceptual unit.

    • Taylor,

      I’m talking about reality, or what Mises called history. There are macroeconomic events, like the business cycle. You admited this in an earlier post, when you called consequences aggregates. Malinvestment is both a micro and macro term. When Austrians say that the bust is where the malinvestment is liquidated, they mean this both in micro and macro terms. They necessarily aggregate the concept of malinvestment, even though no individual malinvestment is the same.

      We’re not talking about singular single-causal events, like the theoretical Austrian business cycle; we’re talking about real world events, where macro events are multi-causal.

      • Jonathan,


        But for Austrians, we know that the “macro event” is multi-causal BECAUSE the “macro event” is really a bunch of micro events, which, to save time and energy, we refer to by a “macro event” label, because we assume it is not a mere coincidence that all of these events occur around the same time and are similar in nature and economic significance.

        For Keynesians, the change in aggregates IS the macro event. They don’t see the “macro event” as multi-causal but mono-causal– the aggregate is falling (or rising) so it must be stimulated (or sequestered).

        For example, this would be why stagflation confused Keynesians of the day. The simple causal relationships between their favored aggregates didn’t behave as expected. Because their aggregates don’t represent things… they are things. So it should’ve “worked” that if you make the aggregates go up, it makes the other related aggregates go up, etc.

        Am I completely off base here?

        You say there is no dichotomy, we all use aggregates. I say there IS a dichotomy because we use aggregates in different ways. For Austrians, aggregates are just shorthand or simplified ways to discuss a lot of complex, individual phenomena that are related. For Keynesians, aggregates are the relevant unit of account. They’re constantly befuddled by observed economic phenomena because they disregard the sub-aggregate items. It’s not that they aren’t deaggregating far enough– the deaggregated items are not part of their conceptual toolkit. Meanwhile, in Austrian-land, Keynesian aggregates simply don’t exist. Keynesian “capital (K)” is not equivalent to the Austrian “pool of real savings” concept or meaning.

        • That’s not what I said at all. What I said is that naive Austrians who argue that all aggregation is bad are wrong. That’s far different from saying that Keynesians and Austrians use aggregates in the same way. I said that the trick is to use aggregates correctly and to know when to deaggregate.

          The only thing I am debating is the deaggregation v. aggregation, cause v. consequence dichotomy.

          • Jonathan,

            Who says that?

            Who are these “naive Austrians” who don’t understand that aggregation as an explanatory shorthand, is okay?

          • The same Austrians who, for example, say aggregate demand “doesn’t exist” (or whatever it is), i.e. professional economist William Anderson. I bet “Lord Keynes” could come up with a list of examples.

          • Jonathan,

            So, to be clear, you believe Anderson is saying something different than the Keynesians and the non-crude Austrians (a viewpoint you and I have elaborated upon here at length and reached agreement about its definition) with regards to the significance of aggregates.

            So, Anderson does not believe:
            1.) That aggregates are the meaningful unit of account when doing economic analysis (Keynesian position)
            2.) That aggregates serve a linguistic/logically simplifying function by easily representing a group of categorically similar individual interactions or events (enlightened Austrian position)

            In other words, you believe Anderson rejects both these claims and, most significantly, I assume that means you believe his position on aggregates is such that he’d argue with the use of linguistic or logical concepts like “structure of production”, “pool of real savings”, “business cycle” or even “the economy”?

            Is that how you interpret Anderson? Is this what you in good faith interpret his arguments to represent?

          • The way I interpret Anderson is that his is a very, very crude criticism of crude Keynesianism, where he makes arguments that would be silly to make in a more sophisticated debate.

          • Jonathan,

            In qualitative terms, what do you interpret Anderson to believe if not the two ideas I listed above? You have described the depth of his beliefs as “very, very crude” but I am concerned with how his beliefs differ from one of the two options presented above. If, in fact, you think his belief is the same as one of the viewpoints expressed above, I fail to see what your disagreement with him is on the issue of Austrian vs. Keynesian use of aggregates.

      • Taylor,

        Don’t shift the goal posts. This isn’t what Anderson said,

        When Krugman uses ‘demand,’ he means ‘aggregate demand,’ which economically speaking is a nonsensical term. There is no such thing as “aggregate demand.’

        There is nothing to defend here. Anderson is categorically wrong.

        If Anderson wants to make the arguments you outline above about the use of aggregates he can, but that wasn’t the argument he was making.

        • Jonathan,

          Not sure how I am shifting the goal posts. What he’s saying seems to be entirely consistent with what you and I have both said. I don’t know what evidence you have to support the idea that Anderson means to say something different than “There is no ‘aggregate demand’ in the Keynesian sense of it being a causal factor.”

          You are accusing Anderson of not just crudely attacking Keynesians but of not even understanding basic Austrian economic reasoning.

          I don’t know why you accuse me of moving goal posts instead of just telling me what he IS trying to say that is different from the two options we’ve outlined ad nauseum above.

          Do you mean to contradict yourself now and say there is such a thing as “aggregate demand” as a causal economic factor and that therefore you vehemently disagree with Anderson’s crude criticisms?

          • You’re adding words where they didn’t previously exist. Anderson never said anything about cause or effect. He simply said “aggregate demand” is a nonsense term. Don’t give Anderson credit where credit isn’t due, because if you do then you’re not pursuing the problem objectively. You’re defending Anderson where there is no merit in a defense. Anderson is just plain wrong — simple as that.

  7. In other words, you believe Anderson rejects both these claims and, most significantly, I assume that means you believe his position on aggregates is such that he’d argue with the use of linguistic or logical concepts like “structure of production”, “pool of real savings”, “business cycle” or even “the economy”?

    To be honest, I’m not fond of using these aggregates as well. I use them in a pedagogical way, but never when understanding things for myself or in any kind of depth. My work on the nature and extent of ABCT of course illustrated these aggregates, but I made sure at every turn to explain the microeconomic – or, personal – relationships these aggregates held. The “market rate of interest” is just shorthand for the collection and averaging of all the relevant factors that all market participants share – ie, time preference, entrepreneurial risk estimation, price premium, liquidity premium (uncertainty premium). But instead of going through that every single time, I just said “market rate of interest” which does a good enough job.

    • But again, it’s important to bring these aggregates to reality and remember that they are important only inasmuch as they catalog and represent real life individual events and categories. The Keynesians, to my knowledge, do not often make this step. They treat the aggregates themselves as having determining power, as opposed to the microeconomic factors that the aggregates are representing (Aggregate demand, for instance).

      • There’s two different arguments being made, and Taylor isn’t accepting this. There is,

        (1) Keynesians misuse aggregates. None of us Austrians disagree.

        (2) There are crude Austrians who reject “Keynesian” aggregates altogether, on the basis that they’re aggregates (like they are “nonsense” terms, et cetera). This is a crude way of approaching the mistakes in the Keynesian analysis.

        • But where do you draw the line on which aggregates are “meaningful” and which aren’t?

          Is aggregate demand an aggregate that can be used meaningfully and substantially? What about “total volume of labor hours” or “gross domestic product” or national income accounting aggregates? I think there is very little use in looking at GDP statistics because that big aggregate disguises all the interlocking parts of what we call an economy.

          • The value of the aggregate is in its use. Disagreeing with a use doesn’tnecessitate dismissing the aggregate altogether. This is evident in that Austrians like to sometimes construct their own incomeaccounting aggregates, for instance.

          • Jonathan,

            I know you just said you can’t reject an aggregate simply because you disagree with it’s use, but you also said the value is in the use. So, if the use is not valuable, how is the aggregate valuable?

            On what grounds COULD we reject an aggregate, if not “This isn’t valuable” or, as Mises explained in the neutrality of economic inquiry, “If the means chosen can not arrive at the end desired, the means must be rejected.” Or something like that :)

  8. Correct me if I’m wrong, but don’t Austrians object to aggregation because they are not convinced there is any casual link between movements in aggregates? A few excerpts from Rothbard:

    “But aggregates are meaningful only in the world of arithmetic, not in the real world. Business firms may receive in the aggregate just what they had expected; but this does not mean that any single firm is necessarily in an equilibrium position. Business firms do not make earnings in the aggregate. Some firms may be making windfall profits, while others may be making unexpected losses. Regardless of the fact that, in the aggregate, these profits and losses may cancel each other, and each firm will have to make its own adjustments to its own particular experience. This adjustment will vary widely from firm to firm and industry to industry. In this situation, the level of investment cannot remain at 10, and the consumption function will not remain fixed, so that the level of income must change. Nothing in the Keynesian system, however, can tell us how far or in what direction any of these variables will move.

    This failure of the Keynesian model is a direct result of misleading aggregative concepts. Consumption is not just a function of income; it depends, in a complex fashion, on the level of past income, expected future income, the phase of the business cycle, the length of the time period under discussion, on prices of commodities, on capital gains or losses, and on the cash balances of consumers.

    Furthermore, the breakdown of the economic system into a few aggregates assumes that these aggregates are independent of each other, that they are determined independently and can change independently. This overlooks the great amount of interdependence and interaction among the aggregates. Thus, saving is not independent of investment; most of it, particularly business saving, is made in anticipation of future investment. Therefore, a change in the prospects for profitable investment will have a great influence on the savings function, and hence on the consumption function. Similarly, investment is influenced by the level of income, by the expected course of future income, by anticipated consumption, and by the flow of savings. For example, a fall in savings will mean a cut in the funds available for investment, thus restricting investment.

    A further illustration of the fallacy of aggregates is the Keynesian assumption that the State can simply add or subtract its expenditures from that of the private economy. This assumes that private investment decisions remain constant, unaffected by government deficits or surpluses. There is no basis whatsoever for this assumption. In addition, progressive income taxation, which is designed to encourage consumption, is assumed to have no effect on private investment. This cannot be true, since, as we have already noted, a restriction of savings will reduce investment.

    Thus, aggregative economics is a drastic misrepresentation of reality. The aggregates are merely an arithmetic cloak over the real world, where multitudes of firms and individuals react and interact in a highly complex manner. The alleged “basic determinants” of the Keynesian system are themselves determined by complex interactions within and between these aggregates.”

    That sure does seem like the so called “crude” Austrians only object to aggregation on the basis that it is unrealistic and no causality can be established from aggregates.

    • WIth regards to consumption, a Keynesian would actually not disagree with you — all those are factors, for instance, considered by Keynes. Keynes was very big on the subjective factors that lead to income expenditure.

      I think what people don’t realize is that the biggest problem with Keynes are not the aggregates per se, but the microfoundations behind those aggregates — i.e. the marginal efficiency of capital and what causes drops in aggregate demand. There is more complexity than a lot of people give credit for in Keynes’ economics.

      I do agree that oftentimes many economists misuse aggregates — there’s no quarrel there. But, really, aggregates are used in ideal types. They aren’t supposed to represent the real world, as much as they are made to abstract from the real world, so they can emphasize certain aspects of it.