Laidler and Sumner on the State of Macro
By Arnold Kling
Will WIlkinson notifies me of Scott Sumner’s essay at Cato Unbound. Self-recommending, with interesting commentators lined up.
On a related note, David Laidler writes,
The point of [Keynes’] liquidity preference theory was that money, whose use as a means of exchange and unit of account made coordinated economic activity feasible in the first place, also could and did function as a store of value along-side claims to the income streams generated by capital goods
he argued, a monetary economy is not an “as if barter” economy precisely because, when money can be held as a store of value, the rate of interest also acquires a crucial role in portfolio allocation decisions, which may undermine its capacity simultaneously to coordinate the allocation of resources over time.
Pointer from the indispensable Mark Thoma, who has assembled a number of links on the topic of what’s wrong with macro.
You will find Laidler’s paper heavy going, but worthwhile if you can slog through it. I agree with the view of macroeconomics as describing co-ordination failures. That is my Great Recalculation story, and you can tell from Laidler that it is nothing original. Where I disagree is that Keynes helped matters by stressing money as a store of value. I think that is neither necessary to tell a story of co-ordination failure nor empirically relevant to modern macro crises.
When people save, they do not at the same moment put in an order for a precise future consumption good at a precise future time. Instead, firms have to make guesses about what it is that people are saving for. Sometimes, firms guess wrong. Often, it is hard for firms to know whether a decline in demand for their products is temporary (in which case, they should continue to invest in capacity) or permanent (in which case they should let their capital depreciate or go out of business altogether).
The economy functions better when demand patterns are reasonably stable and predictable. A sudden shift, as in the current shift away from housing production and frenetic activity in mortgage securities markets, creates a recalculation problem that the market takes a long time to solve.