----------------- HES POSTING ----------------- 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 ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]