In the comments on what I am hoping will be a classic post (my rant against monetarism), Bill Woolsey insists [and Nick Rowe echoes]

[if] we see lower demands for nearly all goods, low hires everwhere, low vacacancy rates, reduced production of everything, we _must_ have an excess demand for money.

Of course, this…doesn’t apply to your world where people want to produce, presumably to earn incomes, but not because there is anything they want to buy.

I think that Woolsey does not get the coordination-failure aspect of what I am talking about. Let me try a metaphor, based loosely on the scene in the movie The Music Man in which Professor Harold Hill discovers that the bickering City Council members are an ideal barbershop quartet.

Suppose that four young people

(a) are unemployed
(b) would buy barbershop quartet recordings
(c) could constitute a barbershop quartet

The problem is that no one has discovered that these four people could be barbershop quartet recording artists. They are not hoarding money (there is no money in this story). They just sit around, living off their parents, because they do not know that they could harmonize with one another. Once they are discovered, they will engage in economic activity that will be counted as GDP. Until then, they are unemployed.

Note that they do not even have to want to buy barbershop quartet recordings. They may want to sell their recordings to others and use the proceeds to buy something else. The reason that they are not working as a barbershop quartet is that they do not know they are a barbershop quartet. (The main problem with this metaphor is that it understates the complexity of the problem. Harmonious economic activity in a modern economy with its abstract and roundabout production methods can require the correct alignment of thousands–perhaps millions–of people.)

Economists tend to posit a world where all production techniques are known, everybody’s skills are known, all tastes are given, and the only co-ordination problem is to find a wage and a price vector that will get everybody to choose the optimal pattern of production and consumption. Instead, I want to think about a world in which production techniques, skills, and tastes are constantly evolving and need to be discovered. (There are plenty of heterodox economists who have done thinking about this. Leijonhufvud comes to mind, as do a number of Austrians. It’s not that the ideas I am trying to push are original. It’s just that they discomfit those who adhere to other theories.)

In this world, the price mechanism is a necessary but not sufficient condition for coordination. Trial and error, search, and adaptation are also needed. Until the adjustments take place, marginal products can be very low. (Note that if health insurance costs more to firms than its value to workers, this wedge, which can be significant, has to be subtracted from the gross marginal product.) Opportunity costs, given that people can live for a while on savings, unemployment benefits, and other sources of support, are not so low. Hence, we observe unemployment.

During the Great Depression, support was harder to obtain, so that opportunity costs were lower. However, marginal products also were very low. Thanks to the Dust Bowl, the marginal product of a farm worker might have been less than what he would need to feed himself. In that case, the problem is the real marginal product, not the money wage. There are people who are employed and who can eat, and there are inframarginal farm owners who can supply food, but the former farm laborers caught in the coordination failure cannot find jobs that will feed themselves.