DYNAMIC STOCHASTIC GENERAL EQUILIbRIUM85account of Say, the demand associated with workers�willingness to supply labor is not effective and does not actually influence the decisions of firms. So unsold goods and unemployed labor can coexist. Such failures of coordination can develop in various ways, but in a modern economy, they arise through the operation of the monetary system. Keynes showed how the standard classical interpretation of Say law depended on the assumption that economic transactions could be analyzed as if they were part of a barter system, in which goods were exchanged directly for other goods. In an economy where money serves both as the medium of exchange and as a store of value, the analysis works differently. In the classical analysis, expenditure, consisting of consumption and investment, must be equal to income for every household and for the economy as a whole, and so, by the arithmetic of accounting, savings (the difference between income and consumption) must equal investment. This equality always holds true, as you can check by looking at any good set of accounts, including the national accounts drawn up for the economy as a whole. National accounts were in fact first drawn up by Keynes student Colin Clark,6 shortly followed by Simon Kuznets, a leading analyst of the U.S. business cycle.7 But, as Keynes observed, savings initially take the form of money. If lots of people want to save, and few want to invest, total demand in the economy will fall below the level required for full employment. Actual savings will equal investment, as they must by the arithmetic of accounting, but people plans for consumption and investment may not be realized. A simple and homely illustration is provided by Paul Krugman description of a babysitting cooperative in Washington, DC, where babysitting credits worked as a kind of money. When members of the group tried to build up their savings by babysitting more and going out less, the result6 7I work in a building named for him. In a global economy, savings in one country, such as China, can finance investment in another, such as the United States. The arguments between Keynes and the classical economists mostly focused on the losed economy�case where international trade was relatively unimportant.
