The comment section of my post this morning got into some material on Hayek, but the really, really meaty stuff was actually on a recent dispute between Keynesians and "quasi-Monetarists" over the relationship between Keynesian theory and monetary disequilibrium.
Nick Rowe provides a great response to all that here. He differentiates between a "paradox of thrift" and a "paradox of hoarding". I don't think that's such a big deal - in a liquidity preference framework there's not that much of a difference between the two. Still - the point is a fine one to make, and probably helps in discussions with people who latch too energetically on the idea that "lots of savings is good because it means there will be lots of investment" - once again, the problem of mistaking an accounting identity (I=S) for a behavioral law.
Here's a very important selection from Rowe's post:
"Keynesian macroeconomics makes no sense whatsoever in a barter economy. Unemployed workers want jobs, so they can buy goods? Firms won't hire them, because they can't sell goods? What's the problem? Why can't the firms just pay the workers in goods?
The problem is: we live in a monetary exchange economy. We don't do barter. And we don't have a Walrasian autioneer trading everything for everything in one big market. Unemployed workers want to sell their labour for money, and firms want to sell goods for money. And if everybody wants to hoard their money, it ain't going to happen.
Yes, I'm a quasi-monetarist. And all Keynesians too should be quasi-monetarist. Because Keynesian economics makes no sense otherwise. It only works in a monetary exchange economy, where workers sell their labour for the medium of exchange, and firms sell their goods for the medium of exchange, and nobody swaps goods for labour in direct barter. It's an excess demand for the medium of exchange - hoarding - that causes an excess supply of labour and goods."
To a large extent the whole general glut controversy boils down to the minions of Jean Baptiste Say treating money like any other good, rather than like the medium of exchange that it is (or in some cases, I suppose, completely ignoring the existence of a medium of exchange).
I feel vindicated -- a little. By the way, I don't think liquidity demand is important unless it spills over into an excess demand for money. Of course, I am the least educated person in the room, so I probably am deluded in believing that I understand this stuff!
ReplyDeleteWell, I think Nick Rowe presents a least common denominator. There are other differences, to be sure. I think it's important to note where there is agreement, though - and there is certainly not disagreement on this point. If that's something to feel vindicated about, by all means feel vindicated. But if you read the Krugman and DeLong posts he's responding to, they agree with all of this and really always have (as far as I'm aware, at least).
ReplyDeleteI would agree with you on liquidity preference. And I think in most cases there is some excess demand for money - it's just so negligible that it's not worth thinking about. The fetish for liquidity deriving from our fear of the unknown (and granted - a rationally justifiable fear) is a drag on growth. How much of a drag it is depends on where interest rates are (if they're not near zero it's not as big of a deal), and how monetary policy responds.
Perhaps "vindicated" was the wrong term.
ReplyDeleteI say a lot of stuff in the comments of blogs like this and have thought about the paradox of thrift quite a lot. But I don't really read much, and nor do I talk about this stuff in my "real" life. A good part of what I write is just stuff I think up while working or whatever. It's nice to see actual economists expressing views that I have independently arrived at, because it means my armchair economising is not entirely without fruit.
I do wish they'd stop calling the "paradox of thrift", because it gives thriftiness a bad name that it doesn't deserve. And when framed as a matter of the supply and demand for money, there is nothing slightly paradoxical about it.
ReplyDeleteWhen you stop treating money as if it were not subject to the law of supply and demand then you get financial crises. So money is more than a medium of exchange.
ReplyDeleteNon-sequitor alert!
ReplyDeleteThanks Lee Kelly :)
ReplyDeleteXenophon - could you explain how I act as if it were not subject to the law of supply and demand? How do you figure I don't? Do you have a reason for saying that? What is it?
Lee Kelly,
ReplyDeleteWhenever someone argues that one should hew closely to the initial subject matter of blog conversation (not a comment on published work in a journal), well, I just don't see the point.
Daniel,
The world does not revolve around you.
Your government at work: http://content.usatoday.com/communities/dailypitch/post/2010/09/health-inspector-called-on-the-reds-for-celebration-cigars-/1
ReplyDelete