Peter Dorman argues that the AS-AD model — that’s “aggregate demand-aggregate-supply” for those of you who ignored the “wonkish” label — plays no role in the economic blogosphere, and suggests that its fairly prominent role in textbooks is there only to “occupy student brain cells” until something actually useful comes up. Mark Thoma says he’s wrong, and among other things provides several examples (including one of my own) of the AS-AD framework being applied to current issues.

As it happens, I’ve thought about this issue quite a lot; it comes up with each revision of Krugman/Wells, where we have to ask whether AS-AD belongs in the exposition. The problem is not that the “real” model is DSGE (New Keynesian theory with intertemporal optimization yada yada); in practice, when it comes to thinking about macro policy Robert Waldmann has it right:

most have gone all the way back to an IS curve (real interest and output) assuming AS doesn’t matter and with the LM curve replaced with something like a Taylor rule. AS if anything, is an adaptive expectations augmented Phillips curve which matters only because of real interest rates, the monetary authority’s response to inflation and debt deflation/inflation.

You can see something pretty much along these lines in this piece from David Romer (pdf).

Now, this isn’t AS-AD for two reasons. First, the AD curve is no longer an economic relationship so much as a model of central bank behavior; a rising price level doesn’t reduce demand through its effect on the real money supply, it reduces demand through its effect on the mind of Ben Bernanke. Second, what we almost always talk about is the rate of change in prices rather than their level. (This happens not to be true when we’re worrying about issues of competitiveness within the euro area, which is why AS-AD makes something of a comeback in that discussion).

So why do AS-AD? First, you do want a quick introduction to the notion that supply shocks and demand shocks are different, that 1979-80 and 2008-2009 are different kinds of slump, and AS-AD gets you to that notion in a quick and dirty, back of the envelope way.

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run. That’s a relatively easy case to make in AS-AD; it raises all kinds of expositional problems if you replace the AD curve with a Taylor rule, which is, as I said, essentially a model of Bernanke’s mind.

So there is a place for AS-AD, although it’s an awkward one, and the transition to IS curve plus Taylor rule plus Phillips curve, which is the model you really want to use for America right now, is a moment that fills me with dread every time we take it on in a new edition.