Initially when I read Nick Rowe’s seminal blog post on daylight savings time and the non-neutrality of money I thought at last I had found an intuitive way to teach why the doctrine of the neutrality of money was flawed. Today I went back to Nick’s post, and realized that in fact daylight savings time is analogous to the neutrality of money doctrine. Why today? Well tomorrow I have to teach the neutrality doctrine as part of broader exposition of neo-liberalism and the revenge of Says Law. I think Nick Rowe and PK (hey win a faux noble and I will call you NR) are probably two of the five practising neoclassical economists who understand why in a monetized economy (fiat / credit) Say’s law does not necessarily hold.
The neutrality of money doctrine holds that changing the monetary base can only impact nominal / current but not real / constant magnitudes in price or value terms.* In value terms we want to know what X is worth relative Y not what the nominal price of X is. That is we want to know know if X has really increased in value or if its increase is just a chimera created by a general absolute increase in X and Y.
Ok let me transpose this: you get a salary increase of 2% but all the goods and services you consume cost 2% more. In nominal terms you are 2 % better off, in real terms you are no better off. Yes workers do suffer under the money illusion. What does this have to do with Daylight savings time, the neutrality of money, and Say’s law?
Imagine a bucolic time when there was no money. Supply creates its own demand. All the producers know that what they are producing must be consumed directly by exchanging for the production of others. To simply all producers are consumers and consumers producers. The market will naturally clear. Money makes among other things abstinence possible and credit money makes folly probable. Money allows for a separation in real significant delayed time between production and consumption and between being a producer and a consumer. But crucially it also makes possible that there is a prolonged period in which the equilibrium between what is produced and what is consumed perturbed.
The long run version of the neutrality of money says this is right. In the Long run relative prices will clear those markets so in effect over the long run Says Law holds.
Using daylight savings time as an analogue to refute this works neither n the short or long term. Changing the clock merely shifts the hours in which we wok but it does not change efficiency at which we work and thus not the output. In nominal terms we have shifted our output in real terms we are producing just a much. That is to say our behaviour has changed in a trivial way but our real actions (output) have not changed at all. This then is a direct analogue to the neutrality of money doctrine not a quizzing puzzle to get students to step outside the box.
Pedagogically I am screwed . Yesterday I thought I had short-cut. Now, I have fourteen hours to find an analogue for the non-neutrality of money.
*Actually that is a good reason to retain the word value as opposed to price in the economic lexicon.