A Rant Against Monetarism
By Arnold Kling
My position is that a general glut can *only* be caused by an excess demand for the medium of exchange.
Oy. Such confusion. And this is nothing personal about Nick Rowe. Most economists believe this, or something like it. I used to believe it, or something like it. I think that it is a horrible, horrible, confusion.
Think about the problem of the “double coincidence of wants.” If the baker wants meat and the butcher wants bread, they can trade. But what if the baker wants candlesticks, the butcher wants bread, and the candlestick-maker wants meat? Only if they contrive a medium of exchange can they trade.
Today, you have a former construction worker and a new college graduate who are both unemployed. In some sense, there are goods and services that they could be producing and trading, but in the context of a huge, complicated economy, they cannot figure out what to produce and trade. The construction worker’s wants do not coincide with the college grad’s skills, and vice-versa. There is some very roundabout trading pattern that would work, but they do not know what it is.
If you took money out of the picture, the construction worker and the college student would still be unable to solve their problem. When it comes to the failure of wants to coincide, the existence of money is part of the solution, not part of the problem.
Which is not to say that printing more money is what solves the problem. What solves the problem is a series of entrepreneurial experiments, many of which fail, that ultimately create a roundabout pattern of production that enables the construction worker to produce something that is indirectly of value for the college grad, and vice-versa.
Perhaps my rant should be directed against Walras’ Law, which says that excess supply somewhere implies excess demand somewhere else. Who the heck enforces Walras’ Law? Nobody. Entrepreneurs are trying to figure out how to make a profit. Their aggregate groping is what discovers a viable pattern of comparative advantage and specialization.
Don’t start with Walras’ Law. For that matter, don’t start with Say’s Law. There is nobody around to enforce that one, either. In a complex economy with roundabout production, thinking in terms of Walras’ Law will only steep you in confusion.