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Is there a clear recognition that even when demand is equal to supply, trade may not
occur? This is a serious matter, because this recognition points to a whole new direction
in which one can arrive at a unified model of the economy, without any separation between
micro and macro.
Consider a three-agent three-good case of indirect exchange. In step one, suppose that
agent A sells some food to agent C, and gets $1 for it. Next, A gives $1 to agent B, and
buys $1 worth of cloth. Lastly, agent B gives $1 to C and buys $1 worth of medicine.
Nobody can argue that trade is not possible here. Each agent has a demand for something
valued at $1, and each agent has a supply of something else also worth $1. Demand is equal
to supply in every case.
The bomb falls if we take the money away. Agent A is a producer of food and not a producer
of money. Where does he get the money from in the first place? Suppose that A has the
food, but has no money. The buyer of food is C, who has no money either, but has medicine.
The trouble is that C cannot pay with medicine in barter against food, because A wants
cloth, not medicine. Again, the buyer of medicine is agent B, who cannot pay with cloth,
because C wants food, not cloth. Lastly, the seller of cloth wants medicine, not food and
hence the buyer of the cloth cannot pay with food. In short, no barter is possible in this
scenario.
It seems that William S. Jevons used the term 'double coincidence of wants' in his 'Money
and the Mechanism of Exchange' (1875 edition) to indicate that barter requires it. Then
Jevons makes the mistake of supposing that money somehow makes double coincidence
unnecessary. The problem is that double coincidence is necessary even when money is used.
In the example, notice that if C wants to pay money for food, A must agree to take money
rather than the real good (medicine). That is, C cannot pay for food with medicine, but
can pay for food with money. This is because A does not want medicine against food, but
wants cloth, and the money is a device to permit A to get cloth from B who will deliver
the cloth to A without getting any real good from A. That is, money is a device to
transfer the obligation to deliver a real payment. The seller of food must get a real
payment which the buyer of food cannot deliver directly, but can deliver indirectly. The
food's buyer's real good (medicine) goes to someone who has the right kind of good the
seller of food wants. Thus B compensates A on behalf of C.
The key point is that money is necessary for indirect trade to occur. This would settle
the most crucial issue in macroeconomics, namely, whether money affects the volume of what
it pays for.
My sense is that macroeconomics arose out of desperation to explain involuntary
unemployment and instability of output. One must somehow find a way to explain how
equality of demand and supply could not assure trade,
though the question was raised in a very twisted way. The debate over whether it is
possible for aggregate demand to be deficient compared to aggregate supply would not arise
at its macro incarnation if one saw the problem at its micro roots. Keynes struggled to
make sense of <effective demand> that could be unequal to aggregate supply, but he thought
of money as a store of value, and hence tried to connect it to savings and investment. It
would have been much simpler if he could distinguish between two different conditions for
trade. The first is that the buyer must have
the ability to buy, as given by the value of the real good which the buyer delivers in
order to earn the income (or in barter, pays directly in kind). Thus if the buyer of $1 of
cloth has food worth $1, the buyer has the ability to buy. However, the double coincidence
requires the ability to pay, which is to have the right kind of payment, in this case
money. Agent A cannot pay for cloth with food, but can pay with money (which indirectly is
to pay with medicine). That is demand=supply fulfills the requirement that the buyer must
have the ability to buy. The further equirement is that the buyer must have the right
kind of payment, not just of the right value. If this would have been recognized, one
would not need macroeconomics.
It seems to be an illusion that macroeconomics is about aggregates. Indeed, there is no
problem with studying aggregates. The problem is with the use of money as a device to make
demand effective. I have found that if we
impose both conditions of trade ( namely that demand must be equal to supply, and that the
payment must be of the right kind), then an input-output table of the economy at once
answers all questions of economics, without any need to worry about either micro or
macro. In that case, every good has both a buyer and a seller, so that the micro is
anchored in its macro context, and all aggregates are directly connected to their micro
origins at individual levels. A special case occurs when the buyer is identical with the
seller to give what may be seen as a purely micro affair of allocation.
The issue of whether to be or not to be mainstream may get a new type of answer. The
mainstream seems to be the legitimate heir of the indisputable core of allocation theory,
which is what Lionel Robbins defined as economics. My suggestion is that economics ought
to be a study of exchange, as Whately would wish it to be back in 1832. I see allocation
as a special degenerate case of exchange where the buyer is identical with the seller. We
can think of Walrasian general equilibrium model as an analysis of
allocation by one individual (who produces and also consumes all different goods). Genuine
exchange requires the presence of a payment, and of intermediation (especially in indirect
exchange), none of which can be
handled by the tool of optimization as used in allocation models. I have found that if we
study payments, we do not need any macroeconomics.
Mohammad Gani
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