From Brad DeLong's Grasping Reality....:
I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St. Louis into a great university, that WUSTL now employs people like David K. Levine:
Levine, you see, appears to believe that we live not in a monetary but in a barter economy. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:
David K. Levine: The Keynesian Illusion: "I want to think here of a complete economy peopled by real people...
Now suppose that the phone guy suddenly decides he doesn't like tattoos enough to be bothered building a phone.... Catastrophe. Everyone is unemployed.... The stupid phone guy... is lazy and doesn't want to work.... The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed....
Maybe the government should follow Keynes's [note: Levine means "Milton Friedman's" here] advice and print some money.... Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper--ooops... he can't buy a phone because there are no phones.... [Perhaps] the burger flipper realizes he shouldn't sell the burger because he can't buy anything he wants... and we are right back... with everyone unemployed.... Maybe he doesn't realize that and gets left holding the bag... a Ponzi scheme.... It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag....
DKL's argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct--if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.
Expansionary monetary policy in such a situation will indeed produce inflation. People's expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It is not clear to me why DKL calls this a "Ponzi scheme" rather than "unanticipated inflation".
But does anybody--save DKL--believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008?
No. Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL--trading phones for tattoos, etc.--but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.
This matters a lot.
So let's rerun DKL's scenario, with one small change--adding money to the economy--that makes all the difference:
Suppose that the phone guy has a bunch of Mortgage-Backed Securities in her retirement portfolio, which suddenly crash in value with the financial crisis.
The phone guy looks at her zero-value retirement portfolio and sets to work building a phone--but decides to use her earnings not to get a tattoo but to hold them in the form of outside money: cash. Catastrophe. Everyone is unemployed.... The stupid phone guy who is causing the problem by not wanting to buy a tattoo but instead to accumulate financial assets--is 'voluntarily unemployed'--finds that she cannot sell her phone because the tattoo artist cannot sell his services to the phone maker, and the hairdresser cannot sell her services to the tattoo artist, and the burger flipper cannot sell his services to hairdresser, and so the burger flipper cannot even buy the phone. Everyone is "involuntarily unemployed". The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed....
Should the government follow Milton Friedman's advice and print up some more money and so boost the phone guy's cash holdings? Yes! If the phone guy is happy with his real balances of cash, then the the phone guy will buy a tattoo, and the tattoo guy will buy a haircut, and the haircutter can buy a burger, and the burger-flipper will buy the phone!