Nick Rowe Has Another First Class Rant About How Keynesians Are Really Monetarists
He has a point:
Worthwhile Canadian Initiative: Do Keynesians understand their own models?: Do Keynesians really understand their own models? Do they understand the central role of money and monetary exchange in generating recessions? If so, why the emphasis on fiscal policy?
Take a Keynesian model. Any Keynesian model. Start in long run equilibrium. Now hit it with the sort of shock that would cause a recession. Aggregate Demand falls, which causes output and employment to fall. Unemployment increases. OK, what's really going on here? The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut.... [B]arter is not easy.... The unemployed hairdresser is more than willing to give up her labour in exchange for a manicure, at the set prices, but is not willing to give up her money in exchange for a manicure. Same for the other two unemployed women. That's why they are unemployed. They won't spend their money. Keynesian unemployment makes sense in a monetary exchange economy.... It makes no sense whatsoever in a barter economy, or where money is inessential.
Keynesian unemployment is an excess demand for the medium of exchange. It's a coordination failure.... We buy newly-produced goods with money. A Keynesian recession is an excess supply of newly-produced goods, and a deficiency of Aggregate Demand. In a monetary exchange economy, a deficiency of Aggregate Demand, and an excess supply of goods, is an excess demand for money.... What's fiscal policy got to do with it?...
There is a legitimate Keynesian defence. If a doctor can't fix a broken leg, he might recommend a wheelchair as a second best fix until the leg heals itself. He might argue that it will help the leg heal quicklier. OK. But he should admit that it's a second best, and be looking for a first best, and encouraging others to seek a first best. He shouldn't be selling wheelchairs.
The trouble with Keynesians is that they aren't radical enough. They need to look at their own models and see the root of the problem, and recommend policies to get at the root of the problem. The root of all Keynesian recessions is monetary.
Just like Milton Friedman said.
I would say that the right way to think about the current situation is to move from a two-commodity model--money and goods--to a three-commodity model: goods, money, and "high-quality interest bearing assets." When there is an excess demand for high-quality interest bearing assets the interest rate goes to zero, in which case money becomes a perfectly good high-quality interest bearing asset. Then money gets swapped out of the "transactions" balance account into the "speculative" (or "insurance") balance account, and all of a sudden you have an excess demand for transactions-balance account money and so by Walras's Law a deficient demand for currently-produced goods and services.
I'm happy to call that a "monetary phenomenon" if it will make Nick Rowe happy.
But might it not be more illuminating to call it a financial phenomenon? A Minkyite or Kindlebergian or Bagehotian phenomenon?
