Wednesday, February 25, 2009

Economic Zen - Go Long

In a blog I read today by Scott Sumner, he makes a very interesting point (hat tip to Marginal Revolution):

"When I hear people discuss the long run I am sometimes reminded of students who mistakenly assume the term ‘long run’ means ‘the distant future’ and ’short run’ means ‘the present or near future.’ But that is not at all what these terms mean. The present, right now, is the “long run” for policies instituted years ago."

This is in stark contrast to the well-known Keynes quote: In the long run, we are all dead.

So, welcome to Bill Clinton's or Ronald Reagan's or maybe even FDR's long run.

The response from some people has been that we can't be in the long run right now because we aren't at equilibrium. The problem is that equilibrium is, in a Zen sense, not a very useful concept. To the 'real business cycle' economists, the economy is always either at or coming back to equilibrium without any policy intervention. If equilibrium is where we always are, no matter where we are, it's not a very useful concept. On the other hand are the folks (mostly Keynesians) who believe we are perpetually in the short run and never in a 'long run' equilibrium, making it again a very non-useful concept.

It also reminds me of a delightful quip from Val Lambson, one of my BYU Profs, who said that the typical Econ 101 student defines equilibrium as the place where supply meets demand. He responds, "And where is that? Dallas?"

Define universe and give two examples.

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