A Rant Against Monetarism

I am sympathetic to your argument, but I’d like to see you expand on this and describe how you view the effect of changes in demand for money (although I’m sure you have before). Would you still say this is often a source of unemployment (as Scott Sumner would say, I think), perhaps as a secondary effect of a real shock?

Kling:

Your argument doesn’t apply to a world of scarcity. There is huge variety of products, all of which are currently being produced, of which additional quantities could be used by someone for some purpose.

There is no problem coming up with goods and services that people could use. We know this because they have prices greater than zero.

You imagine a world in which we have trouble thinking of things for people to do. A world without scarcity.

People want to work and make money, or more likely, to invest and make money, but there are no new, fancy toys they want. If we come up with some new toys, then people will want to buy them, and then, there will be an opportunity to earn incomes by making them.

People were buying houses to make money. They don’t want to do that now. What do they want to do now? We have to come up with something new.

Well, the production of those houses took resources away from the production of many other existing goods that could have been produced in larger quantities instead. That is why houses had a cost of production. They entailed the sacrifice of other goods. The people who could have used those other goods had to be detered from using them by higher prices.

It is those other goods that should be produced. The “problem,” is how to signal this. Normally, the demands for them (the spending of money on them) expands. The firms producing them sell more. They need more resources and they try to hire more.

If, as is likely, labor and other resources are not perfect substitutes, the result will be shortages of some resources and surpluses of others. The production of those capital goods with shortages can expand, which allows further expansion of their products.

So, we see expanded hires in many sectors of the economy. We see high vacancy rates, and–sadly–greater layoffs as well. There is _structural_ unemployment.

This is the situation of an economy in prosperity. Most indurtries grow, some shrink. People lose jobs in the shrinking sectors. New jobs are created in growing sectors.

But if, instead, 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 all applies to an economy with scarcity. You know, the one economists study. It 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.

Nobody enforces the laws of scarcity, demand, and opportunity cost either. Should we disregard them as well?

“But if, instead, 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.”

Calling the problem “excess demand for money” is a clever way of framing the issue. It naturally implies the solution of printing more money.

You could instead say that prices are too high across the board, and the need for recalculation and price adjustments is severe.

The must-print-money story assumes that people are collectively *wrong* by feeling uncertain about the future and wanting to save money today to spend later in some way they’re not yet sure about. The recalculation story allows the deferring of economic activity to be a constructive part of the readjustment process. I don’t rule out the possibility that people are collectively wrong (they were in the recalculation story too), but I am skeptical that having planners print money to restore the status quo ante is the radiantly correct answer it is presented to be.

I know we’re told that if we allow prices and wages to fall we will enter a deflationary spiral and have another Great Depression. Maybe this is correct. A lot of people smarter than me are sure it is correct. However, I’m convinced that *most* people who say this are just parroting what someone else said and haven’t studied or questioned the claim for themselves.

Also, there are more recessions and depressions out there besides the Great Depression. Are there any studies that tried to look at recessionary shocks around the world for, say, the last 100 years, and tried to empirically look at different responses and their effects? I think this is an extremely difficult question–people can’t even agree on what happened in Japan for the last 20 years–but it would be interesting to read if anyone has tried.

Great post. Say’s law has no exceptions.

1. Why do economists focus on excess demand instead of excess production? Because they have drunk the Keynesian Kool-Aid. Austrian theory says that bad investment decisions cause excess production in some areas.

2. There is no general glut of goods/services. The glut happens by far in capital goods, with a tiny amount in consumer goods. The glut today is in capital goods production and the glut has been in that sector since Cantillon first noticed it 300 years ago. Why? Excessive investment in capital goods caused by cheap credit. Economists will never make any progress on business cycles until they begin to disaggretate goods into at least capital and consumer goods.

3. The destruction of capital in capital good production destroys jobs for those who depended on the capital for employment.

There is no interest or intent to restore the status quo ante. Only an interest in writing off sunk costs and an intent to move forward. There is no general glut on the island, only a excess of flowers and a shortage of rum. Is there a general glut? Very close to it if not it. Disinflation has continued, and while oil, the ultimate consumer good is higher in expectation of recovery, investment in increased production is falling. The only areas of growth have been those funded largely by government.

False. It is due to its lack that government is growing. The greater the failure of the Fed, the greater the need of fiscal policy to handle its shortcomings.

There is no glut of rum. A glut of rum means Robinson wants to produce and sell more than he can. There is a shortage of rum or Friday would not be upset. This could be due to crop failure of sugar cane or Robinson’s changing taste. If the latter, Friday would do better to produce his own rum and let Robinson collect his own flowers. Specialization is supposed to enhance output. If it doesn’t, it has no point. If the former, there is a reduction in production, but not one anyone can do anything about.

One factor that seems missing to me in the Friday-and-Robinson scenario: desire/interest/willingness/boredom etc — the internal, subjective factor. What if Friday just doesn’t feel like gathering flowers any longer? His interests have gone elsewhere. What if Robinson would rather spend a few days taking walks than brewing anything?

I don’t see these behaviors as needing economic explanations or accounts, but at the same time I see them as 1) more than plausible (I see people behaving in this way all the time) and 2) important. They’re gonna have an impact on the way this island’s economy develops (or doesn’t develop).

So my conclusion is that any account of economic life that doesn’t factor in people’s moods, whims, energy levels, desires, fantasies, mistakes, boredom attacks, resentments, even their attacks of disliking having to engage in trade or act sensibly or be productive (there’s much fun to be had in acting a non-sensibly) isn’t worth paying attention to. Lots of people don’t like working, y’know? Other people are willing to work and earn up to a certain point and then lose interest in working any further.

Another hunch is that these hard-to-predict, zigzagging energies and factors will gum up any attempt to create a systematic account of how economies work.

But I’m just a fan of economics. Still, can anyone tell me why I’m wrong in my hunches and conclusions?

Nick Rowe says “a general glut can *only* be caused by an excess demand for the medium of exchange.” No matter whether that sentence is correct or not, “fundamentalist” has a reply that makes it merely academic: We don’t have general gluts. Paraphrasing “fundamentalist” above: There is no general glut of goods/services. The glut happens by far in capital goods, with a tiny amount in consumer goods. The glut in a capital good, which might be better explicitly labelled as “falling price” rather than a “glut”, is brought on by excess investment followed by disinvestment, brought on by a change in reasoning by some people who previously were demanding the capital good and now don’t want it. In the senario where there’s an excess demand for the medium of exchange, printing money is the superb solution. But it doesn’t solve the problem that Arnold was talking about.

Walras Law suggests I don’t believe that there is a correlation between excess supply somewhere implies negative excess demand somewhere else. I think countries use their comparative advantage to produce more products. We can’t say that excess production here in America means that there is Negative excess demand in India. I believe there is a reason why it is like that we call it Competitive Advantage. I just don’t think there is direct correlation.

The quote seems to imply that an episode that creates severe structural adjustments cannot spill over into malaise for the economy as a whole, even for a temporary period, if monetary policy is sufficiently loose. That can’t be right.