Kling asks why are mackerels different from money? Why should the M in MV=PY stand for money, and not mackerels?
Why can't an excess demand for mackerel cause a recession? Why can't an excess supply of other goods be matched by an excess demand for mackerel?
.
(snipped material, but it is all worth reading, follow the link.)
.
The textbooks mention three properties of money:
1. Money is a store of value. So are mackerel (if frozen or canned). Forget that.
2. Money is a medium of account (we measure prices in money). Mackerel aren't. But so what? Prices are sticky in terms of money. But the price of mackerel is also sticky in terms of money. So prices are sticky in terms of mackerel as well, by transitivity. So no difference there between money and mackerel.
3. Money is a medium of exchange. Aha! Because (outside of US prisons) mackerel is not a medium of exchange. An excess demand for mackerel might cause a general glut and recession in US prisons, but only an excess demand for what the rest of us
law-abiding folk use as money can cause a general glut and recession elsewhere.
I don't agree with Rowe about the medium of account. If mackerel were the medium of account, then clearing the mackerel market would require that everyone in the economy adjust their prices. With the price of a mackerel being one, and all the other prices changing, then the price level and nominal income (which is measured in mackerels) would change depending on the supply and demand conditions in the mackerel market.
As I have said before, I don't really think barter is relevant. Kling is claiming that the ratio of the quantity of mackerel to nominal GDP is irrelevant. I agree. And that money is no different than mackerel. The ratio of the quantity of money to nominal GDP is irrelevant too. And, in a way, I agree. But the demand to hold money and the quantity of money is essential.
If mackerel were the medium of account, then the ratio of mackerel to nominal GDP wouldn't be that important, but the supply and demand for mackerel would determine the equilibrium price level and so the equilibrium level of nominal income.
Rowe argues that even if a barter economy quoted prices in mackerel, it would suffer no general glut or recession in response to an excess demand for mackerel. Those who cannot buy mackerel at its current "price" would instead buy something else.
I don't really understand how prices in terms of mackerel, and so, the price level and nominal income in mackerel, all get to equilibrium in barter. But I agree that it isn't through a general glut.
On the other hand, I know a good bit about how a monetary economy using something other than money, say mackerel, as a medium of account would work. And basically, monetary disequilibrium would be generated to clear the mackerel market, an excess demand for mackerel would involve a general glut, and in equilibrium, the price level and nominal income would depend on the supply and demand for mackerel.
Bill: Yes, if mackerel were the medium of account, the price level and nominal income (measured in mackerel) would depend (very strongly) on the demand and supply of mackerel.
ReplyDeleteWhy would an excess demand for mackerel cause a general glut? Does an excess demand for rent controlled apartments in New York cause a general glut? Nope. Unable to buy (i.e. rent) as many rent controlled NY apartments as they want, people buy something else instead. They don't stop buying other things because they want to buy (rent) a NY apartment.
Nick--
ReplyDeleteI don't think I understand your segue to rent control in this context, given that rent is not the medium of account. If it were, everything would be priced in units of rent -- store prices would read "1 month" or "eighteen minutes." If rent were both the medium of exchange (rent certificates -- presumably using an average due to heterogeneity) and unit of account, rent control would create a general glut as the demand for rent increased. People would refuse to sell their rent certificates (money) for everything else as the demand for rent at the capped price rose and rent-denominated expenditures would decline.
If bank IOUs denominated in rent units were the medium of exchange (i.e. you'd write checks denominated as "eighteen minutes") and there were no rent certificates, you'd isolate rent as solely the unit of account. In that case, you'd imagine the demand for Bank IOUs increasing upon rent controls because they are denominated in rent, causing the same general glut. This might ultimately cause problems for the entire monetary system. But the rent control case still seems to go against your initial claim that the difference between excess demand for mackerel and excess demand for money has nothing to do with money's use as the unit of account.