thanks to the hard work and insight of Acemoglu and others, the old dream of a network model of the economy is a little closer to reality. Someday we may draw maps of economic linkages the way we now draw circuit diagrams, and use supercomputers to simulate economic disturbances as they make their way through the web.
The paper is by Daron Acemoglu, Ufuk Akcigit, and William Kerr. Tyler Cowen was at the conference where the paper was presented, and he blogged some random comments.
My thoughts:
1. Because input-output tables do not incorporate prices or substitution, it is easy to get Keynesian multipliers out of them. To the extent that there is substitution and price adjustment, multipliers should vanish. The authors claim to find large multipliers, which suggests that that they have found some validity to the no-substitution, no-price-mechanism approach, at least in the context of their analysis.
2. While this is not treating the economy as a GDP factory, it is only slightly better. What they call demand shocks might be described as, respectively, a competing-with-Chinese-imports factory and a government purchases factory.
3. The task of coming up with new patterns of sustainable specialization and trade, which I think of as one of the central issues in the PSST story, is not captured in the input-output framework.