I've just come up with a new theory of what caused the recent recession.
There was a technological improvement in making gizmos. The productivity of gizmo producers increased, so the price of gizmos fell. The demand for gizmos is price-inelastic. So total revenue from gizmo production fell. So incomes from producing gizmos fell.
The fall in their incomes meant that gizmo producers couldn't afford to buy as many non-gizmos. Which meant demand for non-gizmos fell, and so the incomes of non-gizmo producers fell too. Which meant non-gizmo producers demanded fewer gizmos and non-gizmos. Which created a vicious circle of unemployment and deflation. Which caused the recession.
Monetary policy obviously won't help, since the cause of the recession is a structural problem that had nothing to do with money. We need more government investment to increase productivity, because increased productivity will help cure the problem that increased productivity caused.
That is my theory.
None of the above makes any sense. You just can't do macro like that. It all goes wrong from the very beginning. The fall in the price of gizmos, for a given quantity of gizmos sold, and for given prices of non-gizmos, reduces the real incomes of gizmo producers, but increases the real incomes of non-gizmo producers by an equal amount. If the price of gizmos falls by $1 each, and one million gizmos get sold each year, gizmo producers have $1 million less income, but non-gizmo producers now have an extra $1 million to spare which they can spend on something else.
Sure, an improvement in productivity may cause deficient demand, but it does this by increasing Aggregate Supply, not by reducing Aggregate Demand. And the appropriate response by the monetary authorities would be to loosen monetary policy to increase AD by the same amount that AS has increased, in order to prevent deflation.
Sure, if the unemployed gizmo producers are totally immobile, and can't produce anything else other than gizmos, there will be structural unemployment. But that simply means there's no increase in AS, and so no deficiency of demand. The unemployed gizmo producers can't put downward pressure on other wages and prices by assumption, if they are completely immobile and can't do anything else.
Sure, if gizmo producers are very different from non-gizmo producers, and have different marginal propensities to hoard their income, the change in the distribution of income from the first to the second group might have aggregate effects on Aggregate Demand. But my theory made no mention of that.
If you want to talk about a deficiency of aggregate demand, and why Say's Law sometimes fails, you really do need to talk about monetary exchange economies and an excess demand for money at the aggregate level. You can't just do partial equilibrium analysis and cobble it all together.
I'm trying to remember what Keynes said. Something about the pot containing all the ceteris paribus clauses bubbling furiously and boiling over.