Arnold Kling  

Money, Barter, and Keynesian Economics: a Follow-Up

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My views here may have been unclear. I said it better in my Hydraulic Macro Fable.

In a diverse economy with extensive division of labor, it is inefficient to pay people in the form of output. If I am the accountant for a bakery, it is not my comparative advantage to sell bread. Paying me in bread would lead to a waste of resources as I try to go out and exchange it for what I wish to consume. To take the point even further, picture me as an accountant in a hospital--am I to be paid in surgeries?

I think that to take the view that there would be full employment in a barter economy is to fall into an intellectual trap. That trap is set in part by thinking in terms of a representative agent and in part by putting too much emphasis on money as a store of value.

Although Keynesian economics has these traps, Keynesians do not need to fall into them. Robert Solow is quite good on this. He understands the problems with representative-agent models.

The intellectually useful line of thought to pursue is this:

1. We know from trade theory that there always exists comparative advantage.

2. When there is unemployment, people are not exploiting comparative advantage.

3. Why not?

The Keynesian/monetarist story has two components: deficient aggregate demand; and sticky wages. Both components are needed. You can have deficient demand in the worst way and still clear the labor market if wages are flexible*.

The recalculation story is that patterns of trade that exploit comparative advantage have to be discovered by entrepreneurs, through trial and error. These patterns are constantly shifting. When the changes required are incremental, you get low unemployment. A sudden lurch gives you high unemployment.**

*There may be some exotic stories of unemployment with perfectly flexible wages, but they are nowhere near mainstream.

**Probably the recalculation story requires some stickiness in wages as well. But I have learned from Garett Jones and Tyler Cowen that employers can view workers as capital, and sometimes the marginal product of a specific unit of capital can be close to zero. The worker has value somewhere in the economy, but at this particular firm the worker's value can drop to almost nothing. So "sticky wages" need be little more than "I refuse to work for nothing."

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CATEGORIES: Macroeconomics

COMMENTS (9 to date)
Hyena writes:

What about the consumer end of this?

Steven writes:

"There may be some exotic stories of unemployment with perfectly flexible wages, but they are nowhere near mainstream."

Not accurate. There are textbook new Keynesian and monetarist models with perfectly flexible wages and sticky output prices. The key is to have some sticky prices - they can be in either input or output markets.

Thomas DeMeo writes:

Whether you have money involved or not, human beings have relationships that can become damaged. The baker may promise to give 5 loaves of bread to the accountant, but then not do so, because he promised too much bread to others. The feud between them may stop the baking of bread, even though the comparative advantage is just as valid as before.

This isn't always about labor.

fundamentalist writes:

Modelers have been able to produce curves that look like business cycles using sticky wages and prices and search costs for hob hunting and matching, but that doesn't mean they are accurate. I can make similar curves with a simple cubic function. Schumpeter matched a lot of differing cycles to the business cycle. Curve fitting doesn't mean a lot, other than that the modeler is clever with math.

But in something like the PSST, massive dis-coordination caused by distorted prices will cause unemployment because a lot of capital gets wasted. Jobs require capital. Wasted capital that used to employ people will cause unemployment.

Nick Rowe writes:

Steven stole the comment I was about to write!

But I really like your explanation of why we have monetary exchange rather than barter.

Lord writes:

But what is it that gives that worker value other than demand? Managers choose to cut workers rather than wages. If demand is there, they will choose to add workers rather than raise wages. They will do this whether they believe the demand is real or nominal so long as unused resources are available and demand is sufficient not to be met by their current force. Yes, workers are not all interchangeable, but neither are they all unique for the purposes of production. They can be adapted, retrained, and brought into production, but only if the demand is there sufficient to make it worthwhile to do so. Part of the recovery is finding new patterns, but part is finding renewed demand, and when the former lags, the latter becomes more important. Even more capital is wasted in the bust than was wasted in the boom, human capital.

fundamentalist writes:
I think that to take the view that there would be full employment in a barter economy is to fall into an intellectual trap.

But that was Says point that production creates its own demand. In barter, or with gold as money and no credit, there will be no unemployment. Credit creation distorts relative prices and as Hayek used to say, loosens the joints (the close connects of production/demand, and savings/investment) of the market. Credit expansion prevents savings from acting as a break on investment as it should. The expansion of investment in capital goods beyond what savings (ex-ante) would allow causes the malinvestment that wastes the capital that employees workers.

another bob writes:

just a data point...i'm a software guy. i've changed projects and employers every 6 months to 3 years for the past 20 years.

my hourly wage today is less than half what it was in 2005.

in 2005 my customers were 100% in the US. now they are 100% outside the US.

flexible wages. new source of demand. low unemployment in my little bit of the economy.

also, for the past 5 months, the companies i know about have been hiring quite briskly.

rah writes:

In the assumption ‘when there is unemployment, people are not exploiting comparative advantage’ there is the implicit assumption that the comparative advantage will persist once the unemployed have moved to that particular job. That is not necessarily true. Especially when more and more firms are not interested in paying for retraining costs and such cost has to be borne by labor on the speculative assumption that they can pay it off. It is more prudent for labor to wait it out to be more sure that the comparative advantage persists. Which makes the recalculation more difficult for the entrepreneur. The entrepreneur can try to induce labor to commit by paying even higher wages while decreasing his entrepreneur profit – but he does not. So you can say there is a ‘sticky profit expectations’ of entrepreneurs. One way or another ‘stickiness’ has to come back into the economic dynamics.

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