Note to Self: I need to resolve this. I am profoundly dissatisfied with 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 it is not a correct way. There are, however, two problems:

  1. What is the "correct" way, exactly?
  2. How can we teach something closer to the "correct" way than Mill's "excess demand for money is excess supply of everything else" without losing our audience?

In the meanwhile, think upon:

Daniel Kuehn: Whack-A-Mole General Gluts and Money: The interest rate is really one price functioning in two markets.... 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: "Walras' Law says that a general glut (excess supply) of newly-produced goods (and services) has to be matched by an excess demand for... money... bonds; land; old masters; used furniture; unobtainium; whatever.... 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: "Money as an ordinary good begs many questions: surely money plays a special sort of role.... [Plus] 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... [but] the assumption of at least temporarily rigid nominal prices is one of those things that works beautifully in practice but very badly in theory...

And please tell me what to do instead of Mill (1829)!

#shouldread #macro #monetarytheory