Econ 101 Might Be Wrong About Supply and Demand

As you might expect, economists tend to talk about lots things in terms of supply and demand. Macroeconomics is no different. The basic model of recessions and booms that gets taught in undergrad classes relies on the notions of aggregate demand and aggregate supply. Just like the demand for oranges is the number of oranges people want to buy at a given price, aggregate demand is the amount of things in general that people want to buy -- cars, back massages, video games, the works. And aggregate supply is the amount of everything that sellers want to sell. The interaction between these two determines whether growth is high or low.

The public conversation, too, is full of references to this model. Self-described Keynesians believe that recessions -- or at least, most of them -- are caused by shortfalls in aggregate demand, which the government then needs to rectify. Monetarists use the supply-and-demand framework too -- Scott Sumner, now at the Mercatus Center at George Mason University, once described it as “the goldilocks model.”