There's something really wrong with the way we do short run macroeconomics. We focus all our attention on the output of newly-produced goods and services. That's what we call "Y". We talk about Aggregate Demand and Aggregate Supply, and what we mean by AD and AS is the demand and supply of those same newly-produced goods and services.
Keynesians then go on to divide Y into C+I+G, and C+S+T. Monetarists talk about MV=PY. Both agree that a recession is a fall in Y, caused by a drop in demand for Y.
But a moment's reflection tells you this is wrong. It's not just new stuff that is harder to sell in a recession; it's old stuff too. New cars and old cars. New houses and old houses. New paintings and old paintings. New furniture and antique furniture. New machine tools and old machine tools. New land and old land.
If you want to sell new stuff in a recession, you have to either drop the price, or not sell it. If you want to sell old stuff in a recession, you have to either drop the price, or not sell it. And some people can't or won't drop their price, and some stuff doesn't get sold. That's true for both new and old. There is absolutely nothing special about new stuff.
Imagine, just imagine, a world in which newly-produced goods and services never ever get bought or sold. There are apple trees, that produce apples, that live for ever, and have existed since the beginning of time, and you can't grow a new tree. But nobody ever buys and sells the apples. It's tabu. They only buy and sell the apple trees. And pear trees, and peach trees, etc. And imagine that people's tastes change, year by year, so one year I want to eat only apples, and the next year I want to eat only pears, and so on. But in order to switch from eating apples to eating pears I have to sell my apple tree and buy a pear tree. And suppose everyone else's tastes are constantly changing too, in random ways. And that it's very unlikely there will be a double coincidence of wants, and that multilateral barter is hard, so we all buy and sell trees for money. We live in a monetary exchange economy.
By assumption, there cannot be a drop in the output of newly-produced goods and services in this economy. The trees keep on producing fruit, regardless. And that fruit will get consumed, regardless. And we can't even talk about an excess supply of fruit, because there is no market in which fruit is bought and sold. Y=C, and both Y and C are fixed.
But there can be a recession, nevertheless.
Suppose the price of trees is sticky, and the stock of money falls. There is now an excess demand for money. People stop buying trees, because each person wants to increase his stock of money. And because people stop buying trees, people find they cannot sell trees. There's an excess supply of trees. The quantity of trees bought and sold falls. And everybody is worse off, because they are stuck eating apples when they want to eat pears, or stuck eating pears when they want to eat peaches, or stuck eating peaches when they want to eat apples.
That's a recession, even though Y hasn't changed. Recessions aren't (just) about Y.
I have no idea how I would modify Keynesian macroeconomics to handle an economy like that. How can you talk about a demand function like C=a+bY, when C and Y are never bought or sold, and Y is fixed anyway?
I know exactly how I would modify monetarist macroeconomics to handle an economy like that. You know that MV=PY equation? OK, scrap it. Replace it with the original MV=PT. Where T is the quantity of transactions in trees. No problem.
Worthwhile Canadian Initiative 
Nick: Deep waters, these. Nobody has yet explained money to me satisfactorily. But the MMTers seem to be getting much closer, at least.
“Not all money is credit.”
In one sense it certainly is: other people will give give you credit towards their goods if you give it to them. A Target gift card is credit, and so is a dollar bill. That credit’s (necessary?) relationship to debt (and even more so, collateral!) is more complicated, and to me still mysterious.
“there’s gold, silver, cowrie shells, cigarettes, cans of mackerel etc.”
(Not Wray speaking here I don’t think, me:) They’re all fiat money. If a gold coin’s fiat value designation is less than the value of the melted-down gold (when either is traded for bananas or labor), people will melt it down. In your city-state it’s worth the designated value. But in the next city-state over, it may only be worth the value of the gold. People don’t give it “credit” over there.
“”And the only way to store money is to lend it.” — That just seems plain wrong to me. I’m storing money right now, in my pocket.”
By what I call strong-form MMT thinking, that money is credit you’re holding towards paying your taxes. I don’t think I’m distorting their thinking by saying that refraining from using that credit you’re in a sense “lending” it to the government. (This may be contorted thinking — by me or them –but I don’t find it totally specious.) In any case, we’re only talking about physical currency here, which is really small change these days. If you put money in your checking account, you’re lending it to the bank.
“And when i lend money I don’t store money, I store wealth. Just like if I lend wheat I don’t store wheat, I store wealth.”
Very interesting, given (as you’ve seen) my obsession with definitions, usages, understandings, and people talking past each other. I’ve been thinking quite hard about the definition of “wealth.” It doesn’t seem to be a rigorously or consistently defined term, so economic discussions using it can get quite muddled.
i.e. Adam Smith: “”the annual produce of the land and labour of the society.”
Wealth is a flow? That certainly doesn’t seem right.
Will ponder further.
Nick
Gold, silver have few uses apart from money, and the exchange value of a gold or silver coin almost always exceeds its value as raw metal (that is, if you want gold for some purpose such as jewellery, you do not collect gold coins). Ditto cowrie shells. There is nothing in the history of metallic coinage to suggest that the metals were seen as the ultimate test of value because of their uses – rather they were the most widely exchangeable unit of account – the most generally accepted IOU if you like.
Cigarettes etc as currency are more units of account (like the cows or measures of wheat in early history, or koku of rice in medieval Japan). Regular Canadian banknotes are also IOUs – they are IOUs on the Canadian banknote-using community in general.
Agree death is only a limit in Utilitarianism if coupled with individualism (there can be no individual utility in being dead). The limit I referred to is the assumption that all utilities be ranked on a single scale – so that death (or unemployment) is simply a more annoying form of having to eat apples when pears are your preference. The empirical and philosophical support for this is scanty, to say the least.
Nick, check the spam filter. F.
Steve and Peter. I just retrieved your comments from the spam filter. Sorry.
Well-spotted Frances!
That ain’t bad.