Over the decades since Keynes first formulated this idea in his 1936 book, The General Theory of Employment, Interest, and Money, both his supporters and apparent critics have revised and reformulated parts of his argument and assumptions. But the general macro-aggregate framework and worldview used by economists to analyze problems of less than full employment nonetheless still focus on government policy and formulate it in terms of the levels of output and employment for the economy as a whole and changes in it.
In fact, however, there is no such thing as aggregate demand, or aggregate supply, or output and employment as a whole. They are statistical creations constructed by economists and statisticians, out of what really exists: the demands and supplies of multitudes of individual and distinct goods and services produced, and bought and sold on the various distinct markets that make up the economic system of society.“The fallacy is the continuing legacy of the British economist John Maynard Keynes and his conception of aggregate demand failures. Keynes argued that the economy should be looked at in terms of a series of macroeconomic aggregates: total demand for all output as a whole, total supply of all resources and goods as whole, and the average general levels of all prices and wages for goods and services and resources bought and sold on the overall market.
If, at the prevailing general level of wages, there is not enough aggregate demand for output as a whole to profitably employ all those interested and willing to work, then it is the task of the government and its central bank to ensure that sufficient money spending is injected into the economy. The idea is that at rising prices for final goods and services relative to the general wage level, it again becomes profitable for businesses to employ the unemployed until full employment is restored.
The Market’s Many Demands and Supplies
There are specific consumer demands for different kinds and types of hats, shoes, shirts, reading glasses, apples, and books or movies. No one demands just “output,” and no one creates just “employment.”
When we go into the marketplace we are interested in buying the specific goods and services for which we have particular and distinct demands. And businessmen and entrepreneurs find it profitable to hire and employ particular workers with specific skills to assist in the manufacture, production, marketing, and sale of the distinct goods that individual consumers are interested in.
In turn, each of these individual and distinct goods and services has its own particular price in the market place, established by the interaction of the individual demanders with the individual suppliers offering them for sale.
The profitable opportunities to bring desired goods to market result in the demand for different resources and raw materials, specific types of machinery and equipment, and different categories of skilled and less-skilled individual workers to participate in the production processes that bring those desired goods into existence.
The interactions between the individual businessmen and the individual suppliers of the factors of production generate the prices for their purchase, hire, or employment on, again, multitudes of individual markets in the economic system.
The macroeconomist and his statistician collaborator then add up, sum, and average all these different individual outputs, employments and specific prices and wages into a series of economy-wide measured aggregates.
But it should be fairly clear that in doing so, all the real economic relationships in the market, the actual structure of relative prices and wages, and all the multitude of distinct and interconnected patterns of actual demands and supplies are submerged and lost in the macroeconomic aggregates and totals.“
Austrian Economics & Public Policy, pp. 305-307, Richard Ebeling