Walrasian general equilibrium theory models the economy as a system of demand and supply equations. The quantities of goods traded, and the prices at which they are traded, are the solution to that system of equations.
Who solves those equations? A fictional Walrasian auctioneer, who calls out prices at random, asks people their demands and supplies at those prices, and then adjusts the prices if demands do not equal supplies. That's the Walrasian "tatonnement", or groping by trial and error towards the equilibrium.
The Walrasian auction happens outside of real time. All offers to buy and sell are nullified until the auctioneer has found the equilibrium price vector. Real time does not begin, and trade does not take place, until the Walrasian auctioneer has solved the system of equations.
Arnold Kling rejects the Walrasian auctioneer. He's obviously right. The groping towards equilibrium takes time. Real people are solving those equations. Or trying to, because the equations are changing as fast as they grope towards the solution.
But Arnold is not quite right when he says this:
"In both standard and Austrian economics, the price system is supposed to take care of the process of adjusting to technological change. This is what we would expect if the instant that a technological change took place, the Walrasian auctioneer quickly tested thousands of different price vectors to find one that induces full employment. In the real world, adjustment is a lot messier."
(I will let the Austrians speak for themselves, but my reading of Austrian economics says that they are among the least likely to accept the Walrasian auctioneer.)
Monetarists (and Keynesians) reject the Walrasian auctioneer too. If the Walrasian auctioneer existed, money would be (approximately) neutral. It would have no effect on real variables. A change in monetary policy changes one variable in the whole system of equations. We model-builders can see precisely what effects that has on the solution to our model. All nominal variables change in proportion, and no real variables change at all. We built the model, so it's easy for us to see the solution to the system of equations. We play the role of Walrasian auctioneer. But the real people facing a change in monetary policy in the real world have to grope towards that solution themselves. Nobody tells them the answer. And it takes them time to solve the equations. And if one of them gets the answer wrong, that changes the question all the others must answer.
That's why monetary policy has real effects, in the "short run".
Real people take time to solve the equations. And so trade takes place at disequilibrium prices. There is "false trading". In that respect, there is no difference whatsoever between Arnold Kling and Monetarists (or Keynesians).
Many shocks hit the economy that have nothing to do with money. And adjusting Arnold's Patterns of Sustainable Specialisation and Trade to those shocks is a non-trivial problem, which takes real entrepreneurs (or ordinary people acting in an entrepreneurial capacity) time to resolve. In that respect, there is also no difference between Arnold Kling and Monetarists (or Keynesians).
But when I hear the word "recession" I reach for my monetary disequilibrium. A recession isn't just a decline in the overall volume of trade. In a recession, it becomes much harder to sell things and easier to buy things. We buy things with money, and we sell things for money. I can't even talk about it being harder to buy things and easier to sell things without talking about money. In a recession it's easier to sell money, and harder to buy money. That sure looks like a monetary phenomenon to me.
Now part of the economy is not a monetary exchange economy. The whole household sector, and the Patterns of Sustainable Specialisation and Trade that take place between family members, friends, and neighbours, is not a monetary system. And that non-monetary PSST sector may actually expand during a recession. It takes up part of the slack to compensate for the recession in the monetary economy. The unemployed worker grows and eats his own vegetables, and neigbours fix each other's cars and houses, because they can't spare the cash to "pay" someone to do it. They pay in kind. They resort to barter. Or DIY autarky. The growth in the non-monetary sector makes recessions sure look like a monetary phenomenon to me.
Money exists precisely because there is no one big Walrasian market where all goods can be exchanged against all goods simultaneously. People hold stocks of money and carry it from market to market, exchanging money for goods at each market. We couldn't be Monetarists and Walrasians at the same time.
The clock stops during the Walrasian auction. It doesn't matter how the Walrasian auctioneer solves the system of equations. He has an infinite amount of time to do the job. He doesn't even need to grope in the right direction. He can just keep on guessing at random until he hits on the solution by sheer luck. Do a grid search of the n-dimensional price vector and solve it by brute force. Who cares. But it does matter if real people are solving the equations in real time. Because the economy we see is the economy created by their repeated attempts to solve those equations.
Here's Arnold again:
"I wish I could say more. In subsequent chapters I will say more, proposing some crude models. But doing away with the fiction of a Walrasian auctioneer puts me at a disadvantage."
Welcome to the club, Arnold!
Actually modelling how people solve those equations is hard. We aren't smarter than the people solving the equations. We aren't more knowledgeable than the people solving the equations. If it were easy for us to model how they solve the equations, and what happens while they are solving them, the equations themselves would be easy to solve. And they aren't. It's a bit like Karl Popper on predicting inventions. If we could predict inventions, we could already have invented the inventions we predicted.
We can make some sort of broad general statements. New PSST's will be more likely to appear in areas that are the most profitable. Prices will be more likely to rise in markets of excess demand. Expectations of what other people will be doing will tend to matter. Quantities traded in a market will be the lesser of demand and supply in that market. If people are constrained in their purchases or sales because of disequilbrium in one market that will generally affect their demands and supplies in other markets. We can even write those broad general statements in equations.
But who solves those new equations?
My hopes of actually modelling this whole process formally aren't that great.
There is a point at which all models must stop.