*Keynes and critics

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Here is Econobrowser with a hypothetical if the Great Recession wasn't caused by a lack of demand:

If a collapse in aggregate demand is not at fault, then was an aggregate supply shift? A quick-and-dirty evaluation using some back-of-the-envelope calculations

In 2008Q4, GDP fell at an annualized rate of 8.9%; it fell another 5.6% going into 2009Q1. One interpretation is that aggregate demand collapsed. An alternative interpretation is that supply fell; in this view, aggregate demand management policies would have no effect, or even be counterproductive. In this light, I thought it of interest to consider what must be true in order for the supply side view to be correct.

Interpreting the Great Recession in a Classical Framework | Econbrowser

If output is completely supply determined, then one has to think about the fact that the change in output must be attributable to either the change in total factor productivity, TFP (&Phi, the capital stock (K), or the labor stock (N).

Using a Cobb-Douglas production function, Econobrowser arrives at:

Either multifactor productivity declined by 3.7%, the effective labor stock fell by 6.2%, or the capital stock declined by 9.3% (all calculations assume labor share is 0.6, capital share is 0.4).

The two competing frameworks preduct diffferent things in terms of some economic variables:

1. Prices rise in the supply framework, decline (or decelerate) in the demand framework. Since prices declined sharply, this is consistent with the demand framework
2. TFP ["using John Fernald’s utilization adjusted estimate of total factor productivity, one finds that productivity rose 2.5% over the corresponding period (discussed in this post)."] Consistent with a demand framework, not a supply framework.
3. Neither is a big sudden decline in the capital stock very likely
4. Or a big sudden decline in labor.

So data make a supply shock rather implausible.