Monetary Theory

Monetary Theory

Alan A. Rabin

Alan Rabin argues that new Keynesian and new classical macroeconomics, which have dominated the literature and textbooks, have crowded the monetary-disequilibrium hypothesis, or orthodox monetarism, off the intellectual stage. Trying to remedy this imbalance, the author concentrates on what he judges to be the essentials of monetary theory.

Chapter 7: Disequilibrium Economics (2)

Alan A. Rabin

Subjects: economics and finance, money and banking


THE LOGIC OF PRICE AND WAGE STICKINESS Prices and so the purchasing power of the money unit do not dependably adjust fast enough to maintain continuous equilibrium between desired and actual quantities of money. A theory spelling out the reasons and implications may be eclectic, but so what if it corresponds to reality? Brown (1931, pp. 88–9, 104) explained why price cuts would not immediately absorb a contraction of money, credit and spending. Producers, dealers and workers would not easily see why they should accept reduced prices and wages. Rather, they would hesitate making changes until they were sure that their costs or expenses had also been reduced. Brown was alluding to the ‘who-goes-first problem’ explained below. It is illegitimate to suppose that people somehow just know about monetary disequilibrium, know what pressures it is exerting for corrective adjustments in prices and wages, and promptly use this knowledge in their own pricing decisions. One cannot consistently suppose that the price system is a communication mechanism – a device for mobilizing and coordinating knowledge dispersed in millions of separate minds – and also suppose that people already have the knowledge that the system is working to convey (compare Garrison, 2001, p. 27). Business firms do not have a quick and easy shortcut to the results of the market process. They do not have it even when the market’s performance is badly impaired. Even if an especially perceptive entrepreneur did correctly diagnose a monetary disequilibrium and recognize what adjustments were required, what reason...

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