Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

another information related to today's conversation. Our email address is mailadicontalk.org. We'd

love to hear from you. My guest today is Steve Fisari, Professor of Economics at Washington

University in St. Louis. Steve, welcome to Econ Talk. Steve, what is the Keynesian theory

of the business cycle? Why in the view of Keynes and those who follow his viewpoint? Why

do capitalist economies slump and boom? The most direct determinant of output production,

employment in the Keynesian view is the amount of money people are spending in the economy,

what economists call aggregate demand. So the more spending that's going on and the more

businesses are selling, the more they're selling, the more people they employ and the more

they produce. There are lots of nuances, but at the most basic level I think that's the

message of Keynesian macroeconomics. Any change in aggregate demand, particularly reduction

that would cause a recession? Yeah, that's right. The problems we're facing right now,

the most direct cause here would be reduction in the amount of money people were spending

on new houses that caused less demand for housing. So if you were workers in the housing

market, also the concern that people were borrowing lots of money against their houses

to finance their consumption spending. So if they don't use their houses of piggy bank

anymore, they won't spend as much. And as a result, businesses that produce consumption

goods won't sell as much and they won't hire as many workers.

Let's, is there a distinction here between short run and law run? Let me give you a

scenario that I've often commented on that always drives me nuts and make you have a different

...