Real vs Monetary Economic Models
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Contents |
Overview
One fundamental economic divide is the "real side" vs. "monetarist" debate. Real side economics says that money is simply a veil. It may lubricate the system, lower transaction costs, etc., but it doesn't change how things work. You can--and should--analyze the system in exactly the same way you did before. Looking at the money supply, interest rates, etc. may tell you things about the aggregate real side, but they don't effect anything.
Monetarist say that's hogwash. Of course there's a difference between a pure "goods and service" economy and one that uses money as the primary means of transaction. Everyone (I assume) agrees that money makes the economy more efficient, but the monetarist say it's not just a bigger engine, it's a different engine altogether. Money may be the oil in the engine, but it's silly to think that the engine can run without oil. Oil isn't just necessary to build a bigger engine, it's necessary to build an engine period.
Criticisms All Around
Both sides have a point. The problem with the real siders, in my view, is that they're looking at things to theoretically. It would be possible, for instance, to build a car engine that doesn't use lubricant, but the tolerances necessary are impractical. In practical terms, you do need that lubricant, and the lubricant does have an effect. It's not exogenous, but rather part of the engine. Too little, too much, too hot, too cold, and you have a problem.
The problem with the monetarist is that they're lazy and/or they get frustrated with/don't understand emergent systems. As far as being lazy, I mean they look at money because it's easy. We have very good records of money, where it goes and what happens to it. On the other hand, it's impossible to account for individual contributions to "economic value" and only just easier in the aggregate. So, they end up focusing on money because it's easy. The "real side" is much harder to quantify.
When I say they are frustrated with and don't understand emergent systems, I mean that they can't accept that the economy is really justs this big, sloppy mess that works very well without them, thank you very much. Moving interest rates has an effect, and even supposing that we understand enough to know the gross effects and even granting for the sake of argument that we get it more right than wrong in some sense, it's silly to say that we know what mucking around with monetary policy really does. We may know that the engine needs oil, and have some vague idea of what's way too much or way too little, etc. but in terms of overall performance, tweaking the oil can't actually do very much in terms of overall performance. You can wreck the engine, but you really can't go from 10 to 100HP just by throwing in a synthetic blend.
Non-Exclusivity
These certainly may, and in my opinion are, significantly non-exclusive.
Summary
Real side economics can be said to derive from looking at pre-monetary economies. Not only do these economies exist--even today--in all all places at all times, but they were the predominate economies for much of human history. The first money was almost certainly a veil. No one argues that introducing money destroys the economy of goods and services. The only question is whether the effect of money is to enhance, or to change.
To my mind, it goes to far to say that money is a veil. The problem with the current monetarist focus is not that it's wrong, it just thinks too much of itself. Monetary policy isn't as important as the Fed would like. But this is not surprising as the Fed's (and any centralized body making monetary policy) raison d'être is to make monetary policy. It's clearly in there interest to portray a world in which they are more important than they really are.
