The phone guy looks at her zero-value retirement portfolio and sets to work building a phone-but decides to use her earnings not to get a tattoo but to hold them in the form of outside money: cash. Suppose that the phone guy has a bunch of Mortgage-Backed Securities in her retirement portfolio, which suddenly crash in value with the financial crisis. So let's rerun DKL's scenario, with one small change-adding money to the economy-that makes all the difference: Everybody else believes that the right way to model the economy is not the barter economy of DKL-trading phones for tattoos, etc.-but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services. Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. It is not clear to me why DKL calls this a "Ponzi scheme" rather than "unanticipated inflation".īut does anybody-save DKL-believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008? People's expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag.ĭKL's argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct-if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.Įxpansionary monetary policy in such a situation will indeed produce inflation. Maybe he doesn't realize that and gets left holding the bag. the burger flipper realizes he shouldn't sell the burger because he can't buy anything he wants. he can't buy a phone because there are no phones. Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper-ooops. Maybe the government should follow Keynes's advice and print some money. The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed. Now suppose that the phone guy suddenly decides he doesn't like tattoos enough to be bothered building a phone. The phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. Each can produce one phone, burger, haircut or tattoo. The burger flipper only wants a phone, the hairdresser only wants a burger, the tattoo artist only wants a haircut and the phone guy only wants a tattoo. a phone guy who makes phones, a burger flipper, a hairdresser and a tattoo artist. Levine: The Keynesian Illusion: "I want to think here of a complete economy peopled by real people. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:ĭavid K. Levine, you see, appears to believe that we live not in a monetary but in a barter economy. Louis into a great university, that WUSTL now employs people like David K. I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St.
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