Arnold Kling asks: why are mackerels different from money? Why should the M in MV=PY stand for money, and not mackerels?
Why can't an excess demand for mackerel cause a recession? Why can't an excess supply of other goods be matched by an excess demand for mackerel?
Keynesians don't know the answer to this question either*. Keynes himself never mentioned mackerels as potentially causing a violation of Say's Law, but he did mention land, which is essentially the same as mackerels.
Funnily enough, I have already answered Arnold Kling's question several times in previous blog posts. But I was talking about land, bonds, bling, or used furniture. I forgot to mention mackerels specifically.
The textbooks mention three properties of money:
1. Money is a store of value. So are mackerel (if frozen or canned). Forget that.
2. Money is a medium of account (we measure prices in money). Mackerel aren't. But so what? Prices are sticky in terms of money. But the price of mackerel is also sticky in terms of money. So prices are sticky in terms of mackerel as well, by transitivity. So no difference there between money and mackerel.
3. Money is a medium of exchange. Aha! Because (outside of US prisons) mackerel is not a medium of exchange. An excess demand for mackerel might cause a general glut and recession in US prisons, but only an excess demand for what the rest of us law-abiding folk use as money can cause a general glut and recession elsewhere.
To see why, suppose there were an excess demand for mackerel, and the price of mackerel in terms of other goods did not rise to clear the market. By Walras' Law, the excess demand for mackerel must be matched by an excess supply of other goods. But that's only true of notional demands. Frustrated by an inability to buy as much mackerel as they wanted, people would give up, and buy something else instead, like sardines, pilchards, beans, rice, furniture, land, bonds, or maybe even supply less labour (what's the point in working, when you can't buy more mackerel with your wages?). The excess constrained supply for other goods would go right back to zero, as soon as people realise they can't satisfy their excess demand for mackerel. End of general glut.
Mackerel can't stop the inexorable logic of Say's Law. If you have an excess demand for mackerel, and so does everyone else, you are stuck. Unless you are prepared to go out on a fishing boat, the only way to get more mackerel is to buy it, and you can't, because you are on the long side of the mackerel market.
Money can stop the inexorable logic of Say's Law. If you have an excess demand for money, and so does everyone else, you can't get more money by selling more goods. But you can get more money by buying less goods. Of course, in aggregate these attempts will fail, but that doesn't stop individuals buying less goods, just like confessions in Prisoner's Dilemma.
If there's an excess demand for mackerel, very few of us normally sell mackerel (and even fewer both buy and sell it), so very few of us can try to satisfy our desire for more mackerel by selling less. But everyone sells money; we do it whenever we buy something else. So every one of us can try to satisfy our desire for more money by selling less money. And that causes a general glut, a recession, and a drop in nominal and real income.
MV=PY works for money, because money really does have a velocity; it goes both into and out of our pockets. Mackerel doesn't.
*There is one exception to what I say about Keynesians, but it's an exception that proves the rule. Like a full moon to a werewolf, the mention of Say's Law turns Brad DeLong into a monetarist; he starts talking about velocity, and quoting Hume, Fisher, and Friedman.