Highly deserving

Some posts merit the widest audience possible. That´s my justification for linking to this beautiful piece by Nick Rowe:

Keynesian unemployment makes sense in a monetary exchange economy, where money is what Hahn calls “essential” for trade. It makes no sense whatsoever in a barter economy, or where money is inessential.

Keynesian unemployment is an excess demand for the medium of exchange. It’s a coordination failure, because if all three spent the $20 to buy what they wanted, all three would find her purse is a widow’s cruse. The $20 reappears as soon as it is spent. But the widow’s cruse fails unless all three increase spending at once. And, in Nash Equilibrium, none of the three wants to do that. She prefers the $20 in her purse.

We buy newly-produced goods with money. A Keynesian recession is an excess supply of newly-produced goods, and a deficiency of Aggregate Demand. In a monetary exchange economy, a deficiency of Aggregate Demand, and an excess supply of goods, is an excess demand for money. Money is what we demand goods with.

So, what should we do Watson? But Holmes, that´s a no brainer!

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