Nick Rowe Gives Us the Difference Between Keynesianism and Monetarism

     This is how he seems to differentiate. Nick doesn't spell it out in so many words but it seems to come down to this: general gluts. How do you explain them? What Keynesianism and Monetarism have in common is that they both acknowledge that general gluts happen as opposed to Austrian Business Cycle Theory or Lucas and Cochrane-the New Classicals, RBCers, et. al. 

     Nick thinks that you can only explain a general glut if you understand that money is different. What the ABCT and RBC theories claim is that a general gut is impossible-you can have sectoral gluts-gluts within certain sectors but not in every industry. 

      Now, Nick doesn't say it in so many words but it seems that when he criticizes 'whack a mole' theories or approaches, this is directed also at the Keynesians-whether 'New' or 'Old' or 'Post.'   

      http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/walras-law-vs-monetary-disequilibrium-theory.html

       He describes this as a battle between Walras's Law and 'Monetary Disequilibrium Theory.' However, clearly by this definition, Keynesians stand accused of being proponents of WL that he says works only in a non-monetary economy. 

      "Walras' Law says that a general glut (excess supply) of newly-produced goods (and services) has to be matched by an excess demand for some other good. But it could be matched by an excess demand of anything that is not a newly-produced good. It could be an excess demand for money. Or it could be an excess demand for: bonds; land; old masters; used furniture; unobtainium; whatever."

      "Daniel Kuehn calls this the "Whack-a-mole" theory of general gluts. The excess demand that matches the excess supply of newly-produced goods could pop up anywhere."

       "Monetary Disequilibrium Theory says that a general glut of newly-produced goods can only be matched by an excess demand for money. There's only one mole to whack. Money is special. A general glut is always and everywhere a monetary phenomenon."

        "In a monetary exchange economy, Walras' Law is wrong; Monetary Disequilibrium Theory is right. We live in a monetary exchange economy. Walras' Law is the worst fallacy currently taught in economics as gospel truth."

       http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/04/walras-law-vs-monetary-disequilibrium-theory.html

       At least it's clear why Nick always denigrates fiscal policy as such a distant second to monetary policy in terms of dealing with demand stabilization policy-if you follow him here than fiscal stimulus is still directed at just certain sectors-ie, whack-a-mole-whereas only a monetary solution truly gets at the root of the policy. I'm not saying his argument here is brand new, just that I wasn't aware of it before and at least I get the basis of why Monetarists of any stripe like him and Sumner always denigrate fiscal stimulus. 

        On the subject of general gluts I find this essay very interesting:

       "In 1954, in the History of Economic Analysis, Schumpeter (1954: 617) wrote that ‘Say’s law is 
obviously true. Nevertheless, it is neither trivial nor unimportant’. 

         "From the point of view of studies in the history of economic thought, this was an important 
turning point. Paradoxically, in Schumpeter’s interpretation, Say becomes a precursor of Keynes and of
macroeconomic analysis."

        "According to Schumpeter (1954: 617) the law is the direct result of the interrelations between the 
producers who act in an economy distinguished by the vertical division of labour. The perception that 
production determines the generation of income flows would have permitted a triumph of logic against the 
simplistic and irrational underconsumption thesis diffuse among non-economists. Schumpeter’s argument 
was subsequently taken up by Blaug (1962: 149)"

       "Production increases not only the supply of goods, but, by virtue of the requisite cost payments to 
the factors of production, also creates the demand to purchase these goods (...) The demand for the 
output of any one industry must increase in real terms when the supplies of all industries increase, 
since these are precisely what generates demand for that industry’s products. Say’s law, therefore, 
warns us not to apply to macroeconomic variables propositions derived from microeconomic 
analysis."

      "There could be no greater irony than the transformation of Say into the pioneer of criticism of the fallacies of composition (Schumpeter, 1954: 623-624). The privileged object of Keynesian demonology is converted
into the patron saint of macroeconomic theory! 

      http://www.iececon.net/arquivos/publicacoes_47_887530739.pdf