Why I am not a Keynesian

Cross-posted from a comment at econlog, replying to the idea

But if, instead, we see lower demands for nearly all goods, low hires everwhere, low vacacancy rates, reduced production of everything, we _must_ have an excess demand for money.

I wrote:

Imagine Robinson Crusoe and Friday on their desert island. Obviously, there is no medium of exchange. Friday picks flowers, some of which he uses to decorate his hut, and some of which he exchanges for some of the rum Robinson brews. The situation is at equilibrium.

One day, Robinson decides he doesn’t like decorating his hut with the kind of flowers Friday is picking. He’s hardly willing to give Friday any rum at all for them, which makes it not worth Friday’s while to pick them. So Friday spends half the day picking flowers for himself, and is sad because he has no rum. Robinson spends half the day brewing rum for himself, and is sad because he has no pretty flowers to decorate his hut. We can call this “unemployment” and “fall in output.”

We could prime the pump by forcing Robinson and Friday to make the trade, but the basic problem is that the trade is no longer economic, and the longer we do that, the longer we put off the real solution. What really needs to happen is for someone to scour the island until they find some flowers that Robinson actually wants. Then Friday can go pick them, exchange them for rum, and “employment” and “output” will go back to normal.

EDIT: Note that in this thought-experiment, the fall in employment and production is across all sectors of the economy. Obviously, it cannot be attributed to excess demand for money, because there is no medium of exchange! This is basically the Recalculation story, the economy needs to find a new Pattern of Sustainable Specialisation and Trade. Arnold Kling gives his own illustration of the co-ordination problem.


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