Look, economics is about how people (the word “agents” is itself a kind of tribal marker) are motivated to take actions, and how those actions interact. Equilibrium is often a very convenient way to think through all of that, and all of us sometimes use wording about what the economy “needs” or “requires” as shorthand. When I talk about the Dornbusch overshooting model of the exchange rate, for example, I might say something like “the currency has to overshoot its long-run value, so that investors expect appreciation that offsets the interest differential.” But behind that verbal shorthand is a story about people doing stuff: investors selling the currency because yields are down, the currency falling until it’s so low that people figure it has nowhere to go but up.Let me put that in other terms, to show you what I think he is trying to say (this relates to a conversation with Nick Rowe in the comments section). I want to model the market for apples, so I draw a downward sloping demand curve and and upward sloping supply curve. There are particular factors that shift the supply and demand curves. If income increases, the demand curve shifts to the right, the price of apples goes up, and the quantity traded goes up.
I haven't looked at any principles of economics textbooks lately, but my guess is that in some of them you will find something like the following: When income goes up, consumers go out to buy more goods. At current prices, some of them are unsuccessful in finding goods to purchase, and firms may have to draw down their inventories of finished goods. As a result, firms increase their prices, and produce more output to restock inventories.
Of course, in the basic static model, the consumers and firms are all price takers. The consumers act under the belief that they can buy all the apples they want, subject to their budget constraints, and the firms act under the belief that they can sell all the apples they want at the market price. The model does not tell us what the consumers will do if they go to purchase goods and cannot find willing sellers. There are no inventories in the model. So what's that story about? That's something that comes from outside the model. If we thought that rationing, inventories, and price setting were important, we should have put those things in the model.
Telling stories outside of the model we have written down opens up the possibility for cheating. If everything is up front - written down in terms of explicit mathematics - then we have to be honest. We're not doing critical theory here - we're doing economics, and we want to be treated seriously by other scientists. I think this quote is to the point:
Academic economics, the stuff that is in the textbooks, is largely based on mathematical reasoning. I hope you think that I am an acceptable writer, but when it comes to economics I speak English as a second language: I think in equations and diagrams, then translate. The opponents of mainstream economics dislike people like me not so much for our conclusions as for our style: They want economics to be what it once was, a field that was comfortable for the basically literary intellectual.That was written by Paul Krugman, in 1996.
I agree with the notion that we have to be able to argue our ideas in plain English. That's what writing this blog is about. But the plain English should be restricted, as Krugman says, to a translation of what's in the mathematics. Otherwise, we can be accused of making things up on the spot that suit some end other than good science.
So, I understand that some of the ideas in my recent papers and blog posts might seem counterintuitive or, indeed, radical, especially if you're wedded to a particular way of looking at the world, or are not versed in recent developments in monetary economics. But give it a chance, and don't be so sad, Paul.