If we lived in a world of barter exchange, or in a world where people could use barter exchange at minimal cost, Keynesian macroeconomics would make no sense whatsoever.
That is not, of course, a criticism of Keynesian macroeconomics. We do live in a world where people use monetary exchange, not barter. And people (usually) use monetary exchange because barter is (usually) very costly.
But do Keynesians understand this?
Milton Friedman understood this. Monetarism, rather obviously, would make no sense whatsoever in a non-monetary economy. As Milton Friedman (almost) said, recessions are always and everywhere a monetary phenomenon. He (and Anna Schwartz) wrote a very large book arguing that the Depression was a monetary phenomenon.
If you drew a line, and put Real Business Cycle theory at one end of the spectrum, who would be a natural candidate to put at the other end of the spectrum? I can't think of a better candidate than Milton Friedman. At one end of the line you have people who say that money plays no role in the business cycle. And at the other end you have Milton Friedman. Keynesians are somewhere in between.
So it seems counter-intuitive for Brad DeLong to blame Milton Friedman for the rise of Real Business Cycle theory. The two are polar opposites.
You could argue that the research program called RBC theory, or Classical Macroeconomics (a strange name for something that only started in the 1980's), is an example of the Ricardian Vice. RBC theory is what happens when you insist on modelling everything formally. But who should we blame for the Ricardian Vice? Ricardo, obviously. But if we are looking for more recent culprits, you could argue that, say, James Tobin, an excellent Keynesian economist, is at least as guilty as Milton Friedman.
IIRC, one of the complaints that the Keynesians like James Tobin had against Friedman was that Friedman didn't write down his macroeconomic model in equations so they could see precisely where Friedman's Monetarism differed from their Keynesianism. "OK Milton, we've written down our model, now let's see yours! Stop waving your hands and talking!"
Friedman wouldn't, or couldn't, so Robert Lucas did it for him. And Monetarists can argue whether Lucas' model captured the essence of Friedman correctly just as Keynesians can argue whether John Hicks' ISLM model captured the essence of Keynes correctly. But Lucas set new standards for macro model-building just as Hicks had set new standards for macro model-building a generation earlier.
It makes about as much sense to blame Friedman for the consequences of the Ricardian Vice as it does to blame Keynes. Both gave the model-builders something to model, but they themselves were more talkers. Personally, I blame Tobin for Lucas, and everything that followed. Well, maybe that's a bit unfair.
Actually, you could argue (as I did here) that New Keynesian models capture the essence of Friedman about as well as the old New Classical models of Lucas. Friedman never said that all nominal prices and wages adjusted instantly. Permanent Income Hypothesis: check. Vertical Long Run Phillips curve and non-vertical Short Run Phillips curve: check. Central bank responsible for keeping inflation at the right level: check. Fiscal policy rarely mentioned: check. A Keynesian Rip Van Winkle from the late 1960's seeing a New Keynesian model would be surprised to see that Friedman's followers were now calling themselves New Keynesians, and that Friedman had obviously won his war.
The only thing missing is the k% rule for monetary policy. It gets replaced by the Taylor Rule. But the k% rule was never central to Friedman's vision. He abandoned it later, when he saw it wouldn't work very well. And it was only ever a rule of thumb anyway; something he thought might work reasonably well and better than actual historical policy.
OK, if you want to blame someone for the emphasis on monetary policy and the de-emphasis on fiscal policy, then Milton Friedman is guilty as charged. Though New Keynesian macroeconomists were willing accomplices. "But Milton Friedman made me do it; he made me forget about fiscal policy" doesn't really cut it as a defence.
And it's here I want to return to my opening theme. Do Keynesians really understand their own models? Do they understand the central role of money and monetary exchange in generating recessions? If so, why the emphasis on fiscal policy?
Take a Keynesian model. Any Keynesian model. Start in long run equilibrium. Now hit it with the sort of shock that would cause a recession. Aggregate Demand falls, which causes output and employment to fall. Unemployment increases. OK, what's really going on here?
The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut. If a 3-way barter deal were easy to arrange, they would do it, and would not be unemployed. There is a mutually advantageous exchange that is not happening. Keynesian unemployment assumes a short-run equilibrium with haircuts, massages, and manicures lying on the sidewalk going to waste. Why don't they pick them up? It's not that the unemployed don't know where to buy what they want to buy.
If barter were easy, this couldn't happen. All three would agree to the mutually-improving 3-way barter deal. Even sticky prices couldn't stop this happening. If all three women have set their prices 10% too high, their relative prices are still exactly right for the barter deal. Each sells her overpriced services in exchange for the other's overpriced services.
But barter is not easy. There is no double coincidence of wants here, and it is costly to find all three people in the Wicksellian triangle to do the barter exchange. So people use money.
The unemployed hairdresser is more than willing to give up her labour in exchange for a manicure, at the set prices, but is not willing to give up her money in exchange for a manicure. Same for the other two unemployed women. That's why they are unemployed. They won't spend their money.
Keynesian unemployment makes sense in a monetary exchange economy, where money is what Hahn calls "essential" for trade. It makes no sense whatsoever in a barter economy, or where money is inessential.
Keynesian unemployment is an excess demand for the medium of exchange. It's a coordination failure, because if all three spent the $20 to buy what they wanted, all three would find her purse is a widow's cruse. The $20 reappears as soon as it is spent. But the widow's cruse fails unless all three increase spending at once. And, in Nash Equilibrium, none of the three wants to do that. She prefers the $20 in her purse.
We buy newly-produced goods with money. A Keynesian recession is an excess supply of newly-produced goods, and a deficiency of Aggregate Demand. In a monetary exchange economy, a deficiency of Aggregate Demand, and an excess supply of goods, is an excess demand for money. Money is what we demand goods with.
[Update: as Yeager noted, there are two ways to get more money. The first is to sell more stuff; the second is to buy less stuff. And nobody can ever stop an individual from getting more money by buying less stuff. That's what makes money unique. That's what makes an excess demand for money qualitatively different from an excess demand for any other type of savings.]
Keynesian unemployment only makes sense as a monetary phenomenon. What's fiscal policy got to do with it? Fiscal policy is supposed to be about micro stuff, like providing the goods that the government is better at providing. Fiscal policy can't do that micro stuff properly if it's being asked to also do the job that monetary policy is supposed to be doing.
OK. There is a legitimate Keynesian defence. If a doctor can't fix a broken leg, he might recommend a wheelchair as a second best fix until the leg heals itself. He might argue that it will help the leg heal quicklier. OK. But he should admit that it's a second best, and be looking for a first best, and encouraging others to seek a first best. He shouldn't be selling wheelchairs.
The trouble with Keynesians is that they aren't radical enough. They need to look at their own models and see the root of the problem, and recommend policies to get at the root of the problem. The root of all Keynesian recessions is monetary.
Just like Milton Friedman said.
[Afterthought: None of us ever really understands our own models. It's one thing to write down some equations and solve them; it's another thing to really understand what's going on. And there's always an implicit assumption, hidden implication, or new interpretation waiting to be discovered. It's an occupational hazard of model-building. It comes with the territory. It's why theory is challenging.]