THE LONG AND THE SHORT OF IT Roger W. Garrison, June 1999 The macroeconomy seems to experience (1) short-run cycles and (2) long-run growth. Should macroeconomists deal with these issues one at a time? Or should they look for the fundamental macroeconomic principles that underlie both? Opinions differ:
[Trevor Swan's writings serve] as a reminder that one can be a Keynesian for the short run and a neoclassical for the long run, and that this combination of commitments may be the right one.(2)
In the (Keynesian) short run, considerations of demand imply that current consumption and current investment move in the same direction. Scarcity is not a binding constraint. The economy experiences demand-driven oscillations of both consumption and investment. In the (classical) long run, considerations of supply imply that, with allowance for ongoing secular growth, current consumption and current investment can only move in opposite directions. Scarcity is a binding constraint. The economy faces a supply-constrained trade-off between consumption and investment. A major challenge to modern macroeconomics is one of reconciling the following statements.
(2) In the classical long run, C and I can only move against one another. (3) The long run is nothing but a sequence of short runs.
Notes: 1. Robert Solow (1997). "Is There a Core of Usable Macroeconomics We Should All Believe In? American Economic Review, vol. 87, no. 2 (May), pp. 230-232. 2. Robert Solow (1997). Entry on "Trevor W. Swan," in Thomas Cate, ed., An Encyclopedia of Keynesian Economics. Edward Elgar, p. 594-597. 3. John Maynard Keynes (1923). Tract on Monetary Reform, p. 65. 4. John Maynard Keynes (1936). The General Theory of Employment, Interest, and Money, p. 378. 5. Ludwig von
Mises (1949) Human Action: A Treatise on Economics. New Haven: Yale
University Press, p. 294.
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