The recession as a "recalculation"

Forget the money multipler, C+I+G, and monetary velocity. According to Arnold Kling, economic activity is not about spending, it's about "sustainable patterns of specialization and trade." He explains:

Here is a simple pattern of specialization and trade: Suppose that all of us eat grain and fruit, which we could grow for ourselves. If some of us have land better for fruit trees, while others have land better for growing grain, then specialization and trading can pay off. It is inefficient to waste good tree land by growing grain on it and to waste good grain land by planting trees on it. Instead, economic activity gives all of us more to eat

So if economic activity is not about spending, then a recession is not about a lack of spending. So what is this recession really about?

The economy was suddenly caught in an unsustainable pattern of production, which involved too much housing construction in the “sand states” of Florida, Nevada, and California as well as too much financial activity related to mortgages and mortgage securities. The market needs to undertake a recalculation in order to deploy workers in a new, sustainable pattern of specialization and trade.... The process involves gradual, decentralized trial and error. Firms need to be launched by entrepreneurs, who will make risky investments in employees. The failure rate will be high, but eventually the successes will have a cumulative effect that brings about more economic activity.

And the policy implications?

If anything, it seems likely that government support for unsustainable patterns of production would probably make the market's recalculation problem more confusing.....On the whole, the best way to help the process of market recalculation and the creation of sustainable patterns of specialization and trade may be for government to get out of the way.

Please, read the whole thing here.