"Inflation is always and everywhere a monetary phenomenon" was Milton Friedman's slogan. It was revolutionary (or counter-revolutionary) when he said it in 1970, but it's now very widely accepted. After all, we make central banks responsible for keeping inflation on target. We do not make fiscal authorities responsible for targeting inflation (unless they happen to control monetary policy too). And we certainly don't give the Competition Bureau or Industry Canada responsibility for targeting inflation (which would make perfect sense if economists believed, as many did in 1970, that inflation was caused by monopoly power).
But nobody strictly believes the full quote from Milton Friedman. I bet hardly anybody even knows the full quote. "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Nobody believes that last bit is strictly true.
What about my own slogan (though it might easily have been Friedman's): are recessions always and everywhere a monetary phenomena? And if so, in what sense?
Robinson Crusoe doesn't use money. If Robinson Crusoe has a bad harvest, his GDP will drop. It's conceivable he might even work less, if there is less to harvest. But is that a recession?
Well, you could call that a recession if you like. But it is missing one very distinctive feature that we normally associate with recessions.
In a recession, it gets harder to sell stuff, and easier to buy stuff. It takes more effort to find a buyer, if you want to sell goods or labour; and it takes less effort to find a seller, if you want to buy goods or labour. Most economists look at an economy like that and say that goods and labour are in excess supply. In the olden days, we would say there's a "general glut".
It's the excess supply of goods and labour that makes it a recession. The fall in output and employment is merely a typical symptom of that excess supply. Less stuff usually gets sold when there's less demand than supply.
In fact, I can imagine an economy having a recession even while output was rising, even rising faster than normal. An economy could experience a general glut, and at the same time have a massive oil discovery that causes its output to rise. Unlikely maybe, but I can't see why it couldn't happen. Just have the central bank halve the money supply at the same time as oil production skyrockets. That should do it. If the discovery is big enough, the increased oil production and oil exports could be quite enough to offset the decline in the rest of GDP.
Inflation is a rising price of goods in terms of money. Because money, understood as the medium of account, is what we price goods in. I don't see how anyone could sensibly talk about inflation without mentioning money.
A recession is an excess supply of goods in terms of money. Because money, understood as the medium of exchange, is what we buy goods with. I don't see how anyone could sensibly talk about recessions without mentioning money.
We live in a monetary exchange economy. Sure, some parts of the economy are handled by barter, like production within the household, and exchanges with close neighbours. But the barter parts of the economy seem to do OK during a recession. Maybe even expand when the monetary economy falls, so people are forced to rely on their own production of vegetables, or that of their family, friends, and neighbours.
It's the monetary exchange economy that suffers during a recession. It gets harder to sell stuff for money. It gets easier to buy stuff with money. There's an excess supply of other (non-money) goods, and there's its flip-side: there's an excess demand for money.
I don't see how anyone could sensibly talk about inflation without mentioning money. I don't see how anyone could sensibly talk about recessions without mentioning money.
When it comes to inflation, we are (nearly) all monetarists now. At least in accepting the shortened version of Milton Friedman's slogan. But very few (if any) economists would accept the full version of Milton Friedman's slogan. We turn a blind eye to the bit where he adds "… in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output". OK, we say, he was wrong on that bit, but still right nevertheless. We still say that central banks' monetary policy can be given full responsibility for targeting inflation. We recognise that a change in the money supply will change the price level, other things equal. We recognise that a change in some of those other things can also change the price level, holding the money supply constant. That's OK, we say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause inflation to vary from target.
Similarly, if we accept that recessions are always and everywhere a monetary phenomena, that does not mean that changes in the money supply are the only thing that can cause a recession. That's OK, we should say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause a recession.
There ought to be a symmetry here. We are all (quasi-)monetarists when it comes to inflation. We should all be (quasi-)monetarists when it comes to recessions.
Worthwhile Canadian Initiative 
Gizzard:
http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics
Total Cash = 51.37 Billion
Total Debt = 13.14 Billion
http://finance.yahoo.com/q/ks?s=AAPL+Key+Statistics
Total Cash = 28.4 Billion
Total Debt = 0.00 Billion
Might want to include some of the 47.761 Billion in long term investments for Apple too.
Are those the right numbers?
Nick,
“Ron T. Thanks. But the idea that fiscal policy can shift the AD curve is not something invented by MMTers.”
I am not talking about shifting the AD curve, this is true by definition – mode spending = more AD. But the idea that it is spending vs output that controls inflation (vs some monetary shenanigans that mysteriously leave Y constant and only affect prices, all this based on warped understanding how banks work) seems to escape modern economists, including you.
Do you agree that you could maintain full employment and control inflation with fiscal policy ONLY?
If not, that MMT insight is something you want to study.
Go with ‘true’, for ‘useful’ cannot be derived from the budget constraint. And stop claiming the ‘useful’ version is Walras’ Law.
As for what useful things the ‘true’ version tells you: here, go back to the essay from which you pulled that quote and look at all those words. Let me summarize it for you. a+b+c=excess demand for money. Hold b and c constant, this gives you the case where agents cannot adjust plans. Then a=excess demand for money. Allow agents to adjust, and equilibrate the non-a markets. Then, as expected, a is in lower excess supply, and the combined basket of b, c, and money are all in excess (supplies for goods, demands for money).
Isn’t that much more concise? 🙂 The intuition is quite simple really, too: a shock makes quantity and prices wrong. Where neither can adjust, excess demands cannot flow. Where one but not both can adjust, excess demands leak through ‘a little’, where both can adjust, excess demands spread themselves out.
Off topic, and at the end of a long and interesting thread. I read this via Thoma and thought immediately of Nick, an Economic Anthropologist on the evolution of money:
“It really deserves no other introduction: according to this theory all transactions were by barter. “Tell you what, I’ll give you twenty chickens for that cow.” Or three arrow-heads for that beaver pelt or what-have-you. This created inconveniences, because maybe your neighbor doesn’t need chickens right now, so you have to invent money.
The story goes back at least to Adam Smith and in its own way it’s the founding myth of economics. Now, I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now. After all people have been looking since 1776, when the Wealth of Nations first came out. But if you think about it for just a second, it’s hardly surprising that we haven’t found anything.
Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. So, if your neighbor doesn’t have what you want right now, no big deal. Obviously what would really happen, and this is what anthropologists observe when neighbors do engage in something like exchange with each other, if you want your neighbor’s cow, you’d say, “wow, nice cow” and he’d say “you like it? Take it!” – and now you owe him one. Quite often people don’t even engage in exchange at all – if they were real Iroquois or other Native Americans, for example, all such things would probably be allocated by women’s councils.
So the real question is not how does barter generate some sort of medium of exchange, that then becomes money, but rather, how does that broad sense of ‘I owe you one’ turn into a precise system of measurement – that is: money as a unit of account”
http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
RonT
“Do you agree that you could maintain full employment and control inflation with fiscal policy ONLY?
If not, that MMT insight is something you want to study.”
Of course, that is possible. Studies were done on this topic during the War in both the UK and the US. In the US, none other than Milton Friedman was involved in that debate. The reason that this however is not considered these days, is that it is horribly wasteful to control inflation with fiscal policy.
MMT is more than 70 years old. The reason present day economists have trouble struggling to understand what MMT is, is because it is presented as if it is something new, instead of something quite old.
Thanks TMF very interesting.
I find it hard to believe that Apple has NO debt (see what I mean about internet numbers). It may in fact be true but I would suggest that its also NOT the norm in our corporate world. Microsoft and Apple both benefit form our worlds near insatiable demand for the products of silicon valley.
Gizzard, my point is that it seems to me there are a FEW rich people and a FEW rich entities that own most of the debt and MANY other people and MANY other entities that owe the debt.
Why does every macro post these days always get taken over by MMT?
Determinant,
“Why does every macro post these days always get taken over by MMT?”
Because MMT (Post Keynesians) as the only econ school had a coherent warning well before the crisis and now offer a cogent explanation of the situation and possible fixes.
Random thoughts on comments:
I’ve had a very good argument here with david. david understands what Walras’ Law is, and is an able defender. He hasn’t really changed my mind, and I probably haven’t changed his either. But I now understand my own previous beliefs better and more clearly than I did before, and also understand a little better what more I must add if I am to persuade someone like david. One thing I have definitely learned is that, when discussing effort needed to buy/sell something in excess demand/supply, one really must distinguish marginal from total effort. Obvious, in hindsight.
Determinant: “Why does every macro post these days always get taken over by MMT?”
Good question. Sometimes it really depresses me. Like reading Ron T.’s
“I am not talking about shifting the AD curve, this is true by definition – mode spending = more AD. But the idea that it is spending vs output that controls inflation (vs some monetary shenanigans that mysteriously leave Y constant and only affect prices, all this based on warped understanding how banks work) seems to escape modern economists, including you.
Do you agree that you could maintain full employment and control inflation with fiscal policy ONLY?
If not, that MMT insight is something you want to study.”
There are so many mistakes and misunderstandings in that comment that dealing with it would require a fisking down to the level of individual words. Yet it is delivered with supreme confidence in its own rightness, and in the total ignorance of everyone else.
Sometimes I really regret ever trying to engage MMTers. It is like inviting Jehovah’s Witnesses in the door when you are having a conversation about Buddhism. Or Moonies. (Anybody remember Moonies?)
I basically agree with Martin: “MMT is more than 70 years old. The reason present day economists have trouble struggling to understand what MMT is, is because it is presented as if it is something new, instead of something quite old.”
(Paul Krugman says he is having trouble with trolls recently. I don’t know what sort of trolls, and it would probably take me a couple of hours reading his comment threads to find out.)
TMF
Point now taken and agree. When 98% of the people are overleveraged to the 2% you have a serious problem, even though every debtor has a creditor.
So MMT is 70 yrs old while classical economics (you know the type that ignores money and pretends you can examine the system by imagining it is a barter system with money as simply another commodity) is hundreds of years old AND still classical economics is incapable of explaining anything or accurately predicting anything.
Gizzard: you over-egged the pudding there. Your comment would have been better if you had said that Neo-classical economics is exactly 140 years old (1871 marginal revolution), and is very bad at explaining recessions, precisely because it either leaves out the medium of exchange or treats it as simply another good. If you had said that, you would have been saying something that is very much in line with what I am arguing here.
Nick’s post said: “Your comment would have been better if you had said that Neo-classical economics is exactly 140 years old (1871 marginal revolution), and is very bad at explaining recessions, precisely because it either leaves out the medium of exchange or treats it as simply another good.”
What if the medium of exchange “market” (used loosely) has more than one “good” (used loosely) in it?
Gizzard said: “TMF
Point now taken and agree. When 98% of the people are overleveraged to the 2% you have a serious problem, even though every debtor has a creditor.”
That is what I see as the biggest problem with price inflation targeting and/or NGDP targeting. They both basically ignore currency denominated debt. They both seem to say as long as price inflation and/or wage inflation are not problems then don’t worry about currency denominated debt levels (and probably asset price levels either).
Nick Rowe: “In other words, if there is a market in which apples trade for money (or anything else), then it is trivially true that the excess demand for apples in that market must equal the excess supply of money in that same market. That’s what we mean by a “market”. And we can add up those n market equations if we like, but it doesn’t tell us anything new. It gives us absolutely no restrictions on economic behaviour across markets. The original version of Walras’ Law was supposed to tell us what was happening to the nth good, or the nth market, if we knew what was happening to all the other n-1 goods, or n-1 markets. This one tells us nothing about the nth market that we didn’t already know.
“(One of these days I am going to have to try to get my head around what it means to talk about “the sum of the n excess demands for money” too.)”
Suppose that there are two people, Buyer and the Seller. The Seller sells apples and pears. One day the Buyer buys all the Seller’s apples and pears, and has $1 left. The Buyer says, “I would pay you this dollar for three more apples or four more pears.” How does it make sense to talk about two disjoint markets?
Mattay: “Actual money. The sort that does not have the string of private debt attached. Note that one can use actual money to pay down bank credit money, effectively converting the bank credit money into actual money.”
Hmmm. That sounds to me like actual money has been used to destroy bank credit money. No?
Ah! Perhaps you are saying that actual money is created in order to destroy the bank credit money, so that there is the same amount of money in the economy after the debt has been paid as there was before the actual money was created. In effect, then, the one has been changed into the other?
Min: “How does it make sense to talk about two disjoint markets?”
Under your assumptions, it wouldn’t make sense. We would have to treat the apple and pear markets jointly, if buyers made conditional offers to sellers like that. The seller would know there’s only an excess demand for $1 worth of apples+pears. And normally the apple sellers don’t care about the pear sellers, and vice versa. In this case they are the same person, so they would.
Too hard to think about.
Thanks, Nick! 🙂
“We would have to treat the apple and pear markets jointly, if buyers made conditional offers to sellers like that. The seller would know there’s only an excess demand for $1 worth of apples+pears. And normally the apple sellers don’t care about the pear sellers, and vice versa. In this case they are the same person, so they would.”
What I had in mind was the normal budgetary constraint on buyers. I only have $1 to spend. What shall I spend it on? If the sellers are different people, I might make my offers seriatim. But the two markets are still interdependent, right?
OC, usually there are plenty of apples and pears to choose from. Here we are talking about the condition where both markets have excess demand. But as long as the buyers are unable to buy all the apples and pears that they would if they could, aren’t the markets interdependent? And wouldn’t that be fairly common, given excess demand?
Min: “But the two markets are still interdependent, right?”
right.
“And wouldn’t that be fairly common, given excess demand?”
The opposite would be extremely uncommon. Same with excess supply. Spillovers everywhere.
I have $10 to spend on fruit. Apples are my first choice. No apples for sale. $10 excess demand for apples. Bananas second choice. No bananas for sale. $10 excess demand for bananas. $10 excess demand for cantaloupes, dates, ….. etc. There’s $10 in my pocket, that creates $260 excess demand for fruit, as I work my way through the alphabet.
I have actually seen this in action at Carleton, when the double cohort all tried to get seats in courses. The excess demand for seats was far greater than the number of seats the students could fill. We put on a few more seats, and the excess demands fell by a multiple.
Same with excess supply. The signals that markets get are all over the place, and don’t correspond with what would happen in the absence of spillovers. If you lose your job cutting hair, you demand less apples.
And, if everyone just wants $10 more cash in their pockets, excess supplies will appear all over the place, far bigger in aggregate than $10.
Thanks, Nick!
Very interesting and instructive. 🙂
“Determinant: “Why does every macro post these days always get taken over by MMT?”
Good question. Sometimes it really depresses me. Like reading Ron T.’s
…
There are so many mistakes and misunderstandings in that comment that dealing with it would require a fisking down to the level of individual words. Yet it is delivered with supreme confidence in its own rightness, and in the total ignorance of everyone else.”
Yeah, I somehow expected that you would fail to address the issue.
Can a general glut occur without money?
I have shoes. I want bread. You have bread. You want potatoes. George has potatoes. He wants shoes. I could trade shoes for potatoes and potatoes for bread, but I don’t, because I don’t know that you want potatoes.
Would you define this problem away? Would say that this is not a recession because buying and selling are equally difficult? Or do you have some other explanation?
Alan: that looks to me like a “PSST” problem. (Arnold Kling’s term). I say that can be a real problem, and problems like that are happening all the time, in or out of recessions, but that real recessions don’t look like that, empirically.