Note to Self: I am once again teaching the origin of business cycles and "general gluts" via John Stuart Mill's 1829 "excess demand for money is excess supply of everything else", and in an economy of sticky prices, wages, and debts produces the recessions and depressions that we all know and love so well. It is a quick way to get into the subject. It is a convincing way. But is it a correct way?
Smart people say: "no"!:
- Daniel Kuehn: Nick Rowe, Brad DeLong, and Me on Whack-A-Mole General Gluts and Money: "The interest rate is really one price functioning in two markets: the bond market and the money market. People want loanable funds and people want liquidity.... This is a major problem.... You can arbitrage your way out of whack-a-mole gluts. You cannot arbitrage your way out of an overdetermined system...
- Nick Rowe: Walras' Law vs Monetary Disequilibrium Theory: "Walras' Law says that a general glut (excess supply) of newly-produced goods (and services) has to be matched by an excess demand for some other good. But it could be matched by an excess demand of anything that is not a newly-produced good. It could be an excess demand for money. Or it could be an excess demand for: bonds; land; old masters; used furniture; unobtainium; whatever. Daniel Kuehn calls this the 'whack-a-mole' theory of general gluts. The excess demand that matches the excess supply of newly-produced goods could pop up anywhere. Monetary Disequilibrium Theory says that a general glut of newly-produced goods can only be matched by an excess demand for money. There's only one mole to whack. Money is special. A general glut is always and everywhere a monetary phenomenon...
- Paul Krugman: There's Something About Macro: "The idea of treating money as an ordinary good begs many questions: surely money plays a special sort of role in the economy. Second, almost all the decisions... involve choices over time:.... So there is something not quite right about pretending that prices and interest rates are determined by a static equilibrium problem.... Finally, sticky prices play a crucial role.... While I regard the evidence for such stickiness as overwhelming, the assumption of at least temporarily rigid nominal prices is one of those things that works beautifully in practice but very badly in theory...
#notetoself
#monetaryeconomics
