I had plans to write a big long post about Say's Law, prompted by Nick Rowe's excellent criticism of a Joe Stiglitz Vanity Fair piece that a lot of people are scratching their heads over*. But I'm having a little trouble writing it because honestly I have trouble thinking about Say's Law, gluts, monetary disequilibrium, etc.
It's not that I don't understand the concepts and how they all fit together, I just never quite understood the preoccupation with Say's Law and these sorts of ideas. I certainly never understood why anyone would believe the Law itself (as it's come to us - I should clarify - Say said lots of things at lots of different times), but I've also never quite understood why people would think that supplying excess demand for money itself is necessarily a solution to the problems we really care about. So rather than post determinately, I'm just going to raise a bunch of questions that you all can solve decisively for me in the comment section while I'm taking my math exam.
First I never quite understood why we care whether markets clear or not. There are microeconomic reasons to care associated with efficiency, but from a macroeconomic perspective it seems largely irrelevant. I'll take a full employment labor market that doesn't clear over a clearing labor market significantly below full employment. I'll also take a developed Western democracy with lots of problems with clearing markets over an undeveloped banana republic where everything clears.
Most crucial to my interests is that the phenomenon we follow so closely and call "unemployment" is not inherently about a clearing labor market. The CPS surveyors don't go around asking what peoples' reservation wages are and then only count them as "unemployed" if their reservation wages are at or below the market wage. That's ridiculous. The social fact we claim to care so much about is the people who are to the right of the labor market equilibrium (whether that equilibrium clears the market or not) who show some appreciable interest in working. So again - what is the concern with markets clearing and "excess supply" and "excess demand"? In a market-clearing sense, unemployment doesn't have to be "excess supply", despite our regular conflation of those terms.
Say's Law also bothers me because it seems so static, when the actual activities of human beings depend on more than a contemporaneous balancing of the scales. The usual discussions that go on about monetary disequilibrium act as if investment demand is low because money demand is high - a whack-a-mole theory of recessions where when you push down demand in one area it pops up somewhere else, and money plays this special role of being (1.) fixed - at least base money, and (2.) a transmission mechanism to make a glut "general". It follows, then that if you get money right so there's no more excess demand for money, then there will be no more deficient demand for anything else. But this acts as if the economy is just a big self-regulating, self-organizing calculator - determining a bunch of relative prices that the weird qualities of money can throw out of whack sometimes. But this is a very limited view about what human economic behavior consists of. We're not just price-equalizers. We also anticipate and plan for the future, so any reasonable market equilibrium needs to be intertemporal. Deficient investment demand now is very likely to be a response to excess supply of a good in the future (or equivalently, deficient demand for a good in the future), and have nothing at all to do with any monetary disequilibrium. Currrent demand for investment goods is intimately tied to future supply of consumer goods. Indeed, that's practically the definition of "investment good". In that case, a depression could be general if there is a general expectation of lower future demand than previously anticipated without any excess demand for money at all. Excess demand for money could be the source of a general depression, but it doesn't have to be when you realize that Say's Law or monetary disequilibrium is really an intertemporal equilibrium.
None of this is to denigrate monetary disequilibrium or concerns about an excess demand for money. I am not one to downplay concerns about excess demand for money. But these are some of the reasons why I've never been able to fully jump on board with this idea that monetary policy is by itself a silver bullet. They're underdeveloped concerns, I know, but they're also not concerns that are really spoken to by the usual explanations of monetary disequilibrium that we all know.
As I noted yesterday, I see monetary disequilibrium in the way that I think Keynes did - as a "limiting factor", but not as an "operative factor". This means I am 100% on board with Sumner/Glasner/Rowe and am second to no one in validating the wisdom of going off the gold standard in the 1930s. But I still have a big concern that while that is going to improve things, it might not get us where we want to be.
*I want to say two things about Stiglitz. First - I hope Arnold Kling mounts a spirited defense of Stiglitz, because this is essentially Kling's theory of the Great Depression. I also hope that all the libertarians that cheer Kling also defend Stiglitz and throw some thoughts in. Too often I see people praise PSST and technological unemployment when it comes out of Kling's mouth but mock it when it comes out of someone else's. Second, I do want to draw attention to this comment on Nick's blog defending Stiglitz: "Stiglitz is telling a story that, in principle, cannot be modeled by the kind of highly abstract story. A structural change is not the same as a short period reallocation of incomes due to changes in productivity. This is what Marshall knew that economists today seem to not know. See his "Distribution and Exchange." And that is a lesson that Keynes very clearly learned from Marshall (but Pigou didn't) but that Keynesians seem to have not learned from Keynes."
45 minutes ago