Disaggregation in economic models

This article illustrates numerically that the adjustment path of the economy will not show how a national policymaker may be misled by overaggregation until it is too late for correction. Labor and other resources are overaggregated in the equilibrating mechanism of most economic models, tending to mislead policymakers regarding both the amount and direction of change of important variables. Overaggregation also hides important constraints and tradeoffs which masks opportunities to use slack resources. In turn, this creates unnecessary dilemmas, such as that between inflation and unemployment which plagued the progress of the Humphrey-Hawkins Bill. The article first illustrates the hypothesis using simple models. Then its relevance to current analysis and planning is discussed.