Five things: (i) the credit-worthy family's decision that it could afford to buy a newly-built house, (ii) the contractor's decision to trust the family to pay, (iii) the workers' decision to trust the contractor to pay, (iv) the workers' decision to trust the bank with their savings, and (v) the bank's decision to lend to the credit-worthy family. If any of those fail then the cash stays in the bank (or under the mattress) and the workers stay unemployed.
Brad DeLong states the Keynesian assumption, the Two choice alternative assumption.
But Brad still has to have a Ricardo function, even with the Keynesian mattress theory. After 30,60 years of mattress, there would be two industries, mattress making and mattress stuffing. That fixed point is incorrect, that was the whole point of decoupling, eventually we have to have an adjustment. You know, what is unsustainable will not be sustained.
Cochrane's point is that Ricardo is an outcome of theory, a necessity if the economist wants an algebra construction from a calculus. If the Ricardo adjustment is the periodic flipping between Keynes' two step and normality, then so be it, that is your Ricardo. The Keynesian economy must have a mattress flow, the mattress flow must be Ricardo regulated, otherwise we are not here, we are not on the computer.
Does channel theory have Ricardo thingies? Built right in, the underlying assumption is that household and firms watch internal inventory, then unknowingly plan together for an adjustment, done with economies of scale. There is a silent agreement among all human brains, they agree on Signal to Noise ratio.
Is the Keynesian Two Step a valid theory?
The bankruptcy process looks very Keynesian, it goes fast, sometime markets cannot react. So, yes, there was Keynesian like things going on in the year since the bankruptcy, lingerings for the judge. That was an equilibrium ago.
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