Where are you Mark, Paul, and Brad? Seriously, you're not allowed to do any posts criticising Bryan Caplan for this, until after you have said that Joe Stiglitz is wrong too! It's only fair!
But, curses, I have exams to mark. And I really shouldn't be spending the time to explain fully why Bryan is wrong, until after I've marked my exams.
So here's a quickie:
Bryan Caplan and Joseph Stiglitz are making the same mistake. They are forgetting that income = output. And in a demand-constrained economy, output is determined by output demanded. And output demanded depends on output (=income). The only way to increase output in a demand-constrained economy is to do something that changes that relationship between output demanded and output, so that more output is demanded for any given level of output. That's what monetary and/or fiscal policy are supposed to do. All that micro stuff, messing around with relative prices like the price of food (Stiglitz) or labour (Caplan) won't do anything unless, as a by-product, it happens to change the relationship between output demanded and output.
Macro is not the same as micro. The micro labour demand curve slopes down because it assumes that the extra output produced by the extra workers can in fact be sold. But that's precisely what's at issue here. Otherwise, wage cuts simply cause an equal cut in prices, or else cause a change in the distribution of income only. Unless price cuts cause AD to increase (which depends on how monetary and/or fiscal policy responds), or unless a change in the distribution of income causes AD to increase (which depends on relative marginal propensities to hoard), they won't increase AD.
And none of this applies to me (though it might apply to them others):
"At this point, Keynesians could just bite the bullet: "Wages must fall!" But in my experience they don't - and I don't think they're going to start now. The reason, I'm afraid, is politics. Keynesians lean left. They don't want to say, "Wages must fall!" They don't want to think it. "Wages must fall!" sounds reactionary - a thinly-veiled reproach to centuries of anti-capitalist intellectuals and militant unions."
I'm no pro-union lefty.
Off to mark exams. Too bad. I ought to do a much better job on this, and write about Say's Law: where it's right, and where it's wrong. Because that's what's at root here.