Friday, July 30, 2010

The Nobel Prize of Outright Silliness

Yes, Paul Krugman calls himself a "liberal" and a "progressive," but nonetheless I have higher expectations from someone who has won the Nobel Prize in economics. Having met a number of previous winners of that prize, I can say that the people I met always had a healthy skepticism about politicians and the role of the state in economic affairs.

However, Krugman seems to be one of those True Believers who apparently really thought that Obama was the Second Coming of Hope. I remember that incredibly silly video that Obama briefly had on his campaign website in which children in Hollywood are singing songs of Obama while their parents look on adoringly. (Another woman claimed Obama would be paying her mortgage and everything else, as though suddenly the Great One would abolish the Law of Scarcity.) The man campaigned as a Messiah, complete with having his acceptance speech in a stadium with Greek columns as a backdrop, and Krugman really believed this hype?

In 1980, the leftist Catholic publication Commonweal had an "open letter" to GOP conservatives which reminded them that Ronald Reagan would disappoint them just as Lyndon Johnson had disappointed liberals, and it seems that Krugman now is at that point. Not only is Krugman utterly disappointed that this administration is not the Second Coming of FDR (not that FDR had any answers other than to help create a world war in which Americans could be "employed" by being shot, gassed, and bombed overseas), but he really seems bewildered by ANY contact at all between President Obama and anyone else Krugman doesn't like.

When most of us read George Orwell's 1984, we recognize that Goldstein is a fictional character, but to Krugman, he is real. He writes:
...Mr. Obama has delivered in important ways. Above all, he managed (with a lot of help from Nancy Pelosi) to enact a health reform that, imperfect as it is, will greatly improve Americans’ lives — unless a Republican Congress manages to sabotage its implementation.
So, if The Law of Unintended Consequences kicks in (read Mondale Act of 1974 and subsequent "child abuse" legislation that has resulted in thousands of false accusations and hundreds -- maybe thousands -- of wrongful criminal convictions), it must be the fault of Goldstein, er, Republicans. Having talked to people who actually are going to be on the front lines of implementing this legal monstrosity -- small business owners and the owner of a small accounting firm -- ObamaCare is going to force up costs to people who can least afford them.

However, to a Keynesian like Krugman, higher costs are good, because that means that people being paid will have more money in their pockets, and if the government can make them spend, the economy will blossom. That does not make real economic sense, but it makes sense to a Keynesian. Of course, why worry when the Fed can print lots of new money and directly buy government bonds, so the federal government can spread the wealth?

Obama came into office claiming that he would "revitalize" the economy by "spending our way out of the recession" and by forcing up costs to business owners, curbing trade (to keep unions happy), and generally making everything more difficult. To an economist, this is a prescription for further destruction, but to a Keynesian, it is like hearing beautiful music.

So, when the economy naturally gets worse and there is no real recovery on the horizon, Krugman concludes that the reason is that Obama did not spend enough, tax enough, borrow enough, browbeat enough, and...immediately appoint Elizabeth Warren to head the "consumer protection" agency that supposedly will be the center of All Wisdom in financial regulation.

While I have some problems with the latter part, I do recommend this essay on the modern American "ruling class," of which Krugman clearly is a part. (I also would add that the Republican establishment has attacked Ron Paul as well as Reagan and Barry Goldwater.) This portrayal is much more accurate than Krugman's claim that the Democrats represent All that is Good versus the Republicans who represent All that is Bad, or as Krugman writes, the Republicans have "taken the side of the bad guys...."

The problem is simple; Krugman really believes that state power can overcome the Law of Opportunity Cost and the Law of Scarcity. He really seems to believe that if the left-wing state orders something into being, it will be. No doubt, that must be why North Korea has the highest standard of living in the world.


sb101 said...

Whenever Prof. Anderson starts to lose the economic debate on his own blog, he shifts gears and criticizes Krugman for his political beliefs. What, since he won a Nobel Prize he should give up his progressive beliefs just so his politics match the prior winners that you respect? As an fyi, Krugman was a progressive before he won the prize.

Of course, when it’s been shown repeatedly on this blog that Prof. Anderson barely understands Keynesianism, does not understand the monetary system of the US, does not understand why rates on government securities continue to fall, and makes baseless claims of imminent bankruptcy and hyperinflation of the US, it’s probably a smart strategy to move away from economics, and focus on the politics, since there is never winning, or losing, a political debate. The reality is, and this blog post is further proof, modern ‘Austrians’ have little interest in economic thought and analysis. Like many progressives have done with Keynesians, paranoid conservatives have adopted Austrian economics to support a political agenda. Prof. Anderson is no different. At least Krugman makes an effort to support his political ideology with facts, data, graphs, charts, or history.

This is not an economics blog that critiques Krugman from the ‘Austrian’ perspective. It’s a political blog. Prof. Anderson should do his loyal readers and students a service, and change the title at the top.

And I’m sorry, but bringing North Korea into the post just shows this post deserves the prize for silliness.

Anonymous said...

Your main issue is that you think the Nobel prize means something. Mass murderers have won the Nobel Peace Prize. Both Hayek and Krugman have won the prize for economics. It's as meaningless as a Congressional Medal of Honor.

Krugman contra Hayek including a "Brief Overview of the Keynesian Liquidity Trap: From Keynes to Krugman".

Paul said...

I'm not sure how AP has determined that Prof. Anderson is "losing" an economic debate, but I am certain that there are others that point out the foolishness of Keynesianism.

Gary North offers ample evidence.

Bob Roddis said...

We need to appreciate that APLerner is a CHARTALIST. See:

"Chartalism is a monetary standard in which government issued tokens are used as the monetary unit. The name derives from the Latin charta, in the sense of a token or ticket. In such a system, fiat money is created by government spending and then taxation is employed to reclaim the money and control the total amount of fiat money in existence. The reclamation of most of this money (via taxation) is essential to maintaining its value in exchange."

I really don't know where to begin with this. And I'm not going to. Their entire view of the world is preposterous. For starters, I think that their "moral viewpoint" clashes a bit with that of libertarians like myself. As in "taxation is theft", the non-aggression principle, etc....

Whether their policies "work" or not (they don't), those policies are forbidden by morality and ethics.

William L. Anderson said...


From what I can gather, AP believes that something is called money because government says it is money. Now, here is an interesting point; I know that most Keynesians believe that monopolies (or at least private monopolies) are bad.

However, if government has a monopoly on money and can use lethal force to enforce its monopoly, why is that a good thing? Are we to assume that government monopolies are good? Just thinking out loud.

Another Anonymous said...

Bob & Prof Anderson: Well, chartalism accurately describes the system of money that we have in the USA and practically everywhere else. If someone doesn't pay taxes the government can use force against him. The demand for taxes is what makes money scarce and desirable. There is no moral viewpoint involved, just description of facts. Why not study what actually exists?

The Real Anonymous said...

I would like to distance myself from Another Anonymous as I would not want anyone to think that the Anonymous community condones the use of a logical fallacy to support an argument.

Another Anonymous said...

What logical fallacy? What statement was not true? I made no moral argument, didn't say that fiat money is good or bad, but just stated mainly common knowledge facts. Does anyone disagree that the dollar bills in your pocket are called money because the government says they are money? Does anyone think that the government does not levy taxes? When the taxman comes knocking on your door, wouldn't you want to have some dollars to give him to make him go away?

Bob Roddis said...

Another Anonomous:

Austrians do study what actually exists: 1) Acting Man, 2) Subjective Value, 3) Economic Calculation and 4) Distortion of the price and capital structure via the distortion of economic calculation due to fiat money.

Those are the four main building blocks of Austrian theory and with which no critic thereof EVER bothers to become familiar.

This Chartalist program is based upon fiat money which itself is based upon theft and fraud. The rest of its program will fail because it's clearly based upon central government planning which will suffer fom lack of economic calculation. Mises spelled this out in his book "Socialism" in 1922. It's also known as Hayek's knowledge problem. And then there is Hayek's "Road to Serfdom" problem from central planning. There's not much left to say.

Richard said...

Another Anonymous,

I think the differences chartalists have with Austrians are far more fundamental than how the gov't debt based fiat monetary system works.

Austrians, alone among every other branch of economic thinking, believe that what is used as money and how much of it is used should be determined by the free market (a system of voluntary exchanges between individuals). They do not believe this because it is what morality tells them (though the morality of a government supplied money is certainly questionable) but because of what they believe economic science teaches; namely that any centrally planned system of goods distribution (and money is a type of good) via the state will cause a constant misallocation of resources.

I expect you and AP would disagree with that. Fine. But given that Keynesians, supply siders, monetarists, socialists, etc. all agree that the state should enjoy an exclusive monopoly over the creation of fiat money, it seems to me chartalism should enjoy a wider hearing with these thinkers.

Even if you could convince Austrians that a gov't debt based fiat monetary system does work the way chartalists say it does, Austrians would reject such a system because, in their view, it would misallocate resources (assuming one's aim is to see resources allocated effictively).

It seems to me chartalists should be spending their time convincing other statists that their theory of how money works is the right one. If you want to engage Austrians, I think time would be better spent on the differences of our respective economic theories, not monetary theory.

As the real AP Lerner wrote in the concluding paragraph of his essay "Money as a Creature of the State"

" The problem of money cannot be separated from the problems of economics generally just as the problems of economics cannot be separated from the larger problems of human prosperity, peace, and survival."

Your problems with the Austrians lie more fundamentally in economic theory, not in how a state managed monetary system actually works.

Another Anonymous said...

Chartalists also "believe that what is used as money and how much of it is used should be determined by the free market". The free market is what gives what the government accepts as taxes its value. Do Austrians believe that the government should not tax at all, or should not exist?

Since all governments do tax, what you seem to be describing is an economic system which has never existed, and might not be possible.

The Lerner quote seems to me to argue against what you are saying. Understanding money, a creature of state, is the foundation of real-world economic systems and theories.

People might want to look at this from a leading chartalist / modern monetary theorist.

Bob Roddis said...

I read Mr. Wray's piece. It is from that piece that I developed my previous critiques.

"Understanding money, a creature of state, is the foundation of real-world economic systems and theories."

Money should not be a creature of the state. People in the market should select the proper form of money.

"Do Austrians believe that the government should not tax at all, or should not exist?"

Most Austrians are libertarians and believe in either no state or a minimal night-watchman state. Engaging in Wray-style spending and taxation to transfer wealth or manipulate the economy would be strictly forbidden. Not only wouldn't it work, it's immmoral.

You're barking up the wrong tree here.

The Real Anonymous said...

"What logical fallacy?"

This one...

"Well, chartalism accurately describes the system of money that we have in the USA and practically everywhere else."

It's an Appeal to Common Practice. The fact that it describes a monetary system used "everywhere" is meaningless.

Richard said...

Another Anonymous,

Austrian economists reject the theory of G.F. Knapp that money originated through state law.

Mises showed with his regression theorem of money that not only did money originate without interference from the state (by imposing taxes), but that it had to originate that way. He specifically took issue with Knapp's theory. ( Mises used economic theory to develop a theory of money. I do not see how it can work the other way. I think this what Lerner meant to).

As far as the Wray post, it certainly doesn't acknowledge Mises's (Austrian) theory. He seems to think the reader should accept as a given that the state had to have created money. Also, he mentions 'price stability' as something he and Austrians could agree on. Mises rejected 'price stability' as a necessary function of money. He said there can be no such thing as ensured 'price stability.' Furthermore any efforts by the state to maintain it by facilitating the increase of money substitutes (whether paper receipts under a gold standard or demand deposits under a fiat system) - even 0% inflation - will likely cause resource misallocation. Finally, Austrians reject central 'money management' as tool for full employment.

ToddO said...

Hello all -

Interesting discussion on money and assumptions of its use by the state here. Whenever I get involved in a monetary discussion, I always remind myself that money is merely a medium of exchange. In a simplistic world, we would not even need money; we would all work in barter directly for the commodities we wanted. But having a (one or more!) medium of exchange enables us all to specialize, and this in turn enables our prosperity. So far so good.

But when the idea of currency was instantiated, it was standardized, centralized and eventually controlled by the state. That my friends is what led to the issue. Standardization was beneficial, centralization was not so much and fiat currency has become an authoritarian tool. It is simply obnoxious. If we could all get the benefits of standardization without the obnoxiousness of government abuses of money, THEN we could actually realize the benefits of the Jeffersonian republic.

burkll13 said...

This conversation has reminded me of an article, written by an ex soldier who served in iraq.

Anonymous said...

"However, Krugman seems to be one of those True Believers who apparently really thought that Obama was the Second Coming of Hope."
Krugman supported Hillary in the primaries, not Obama. Obviously, he supposed Obama after Hillary lost because the other option would be a republican. Eitherway, this whole post is stupid. All you're doing is creating a fake narrative of what you think Krugman believes.

Another Anonymous said...

Real Anonymous: What I said had no fallacy in it. Giving an actually uncommon but correct description of a common practice is not an appeal to common practice. Attempting to describe the real world is not a meaningless activity.

Bob: No state is so speculative it is not worth thinking much about. Even a night watchman state has to have taxes. The Chartalist contention, imho airtight, correct, and entirely trivial, is that this makes whatever it demands in taxes the money that will be accepted in the free market. Historical research on the origin of money favors the chartalist side.

Richard: As far as I can see this "regression theorem" is a just so story that is so vague, it is "not even wrong." Wray recommends in his book, which has a chapter or two on historical matters, an 1913 article criticizing the conventional story of the origin of money, which seems to be shared by Austrians and textbooks like Samuelson's. Having the theory of money come first, before other almost all other economic theorizing is what chartalism / mmt is all about. Just by the title of his article, it is clear that is what Lerner meant. Also, mmt/chartalism generally frowns on the government issuing interest bearing debt, especially to match its deficits; what reason is there for it, other than to help rich people become richer?

By the way, on the issue of a minimal state, and I happen to agree with a great deal of what Professor Anderson has to say about the misuse and overuse of state power.

Richard said...

Another Anonymous,

You wrote "As far as I can see this "regression theorem" is a just so story that is so vague, it is "not even wrong." "

To buy that I guess I would have to see an actual argument from you as to why that is the case.

I only skimmed the Mosler piece you mentioned, which takes issue with the classical economists (Smith) theory of money.

The Austrian theory of money is different from the classical. Austrians do not share it (e.g. they do not say money originated by 'consent.' as Smith thought). Also, Smith did not have a theory of value to explain price, which Carl Menger developed. With that theory Austrians could to not only explain the origin of prices, but also money. In short, the Austrian theory saw the classical theory as deficient (in both economics and money). Dismissing the classical theory does not dismiss the Austrian theory.

For the sake of argument I will cede to you what Lerner actually meant. I will not cede that a theory of money comes before a theory of economics. It seems to me that an economic theory should explain all economic activity, whether it involves a single individual on an island, or a primitive barter economy, neither of which utilize money. In other words economic activity did not originate from money, money originated from economic activity.

I am glad we can both agree with Dr. Anderson and the misuse and overuse of state power.


I certainly share your thoughts on the benefits of money as a medium of exchange. You cannot have the standard of living we have today without it. However, I do not believe you need a state to 'standardize' money. This can happen and did happen on the free market throughout history (such standardization wrt to coins did not involve setting a 'value', but only a 'weight' and 'fineness' so that its holder was assured as to the quality of the coin). The word 'dollar' came for 'Thaler' which was a privately minted coin made in 16th cent. Bohemia and widely used throughout Europe.

Problems with money start when the state gets involved in setting exchange rates, interest rates, and granting special privileges to banks.

If interested see Rothbard's "What Has Government Done to Our Money" if you have not already. Google the title it is free online.

Bob Roddis said...

There have been these unfounded accusations that Prof. Anderson does not understand Keynes. In 1977, I recorded the audio of Hayek on “Firing Line”. Hayek basically said that Keynes wrote “The General Theory” to influence British monetary policy in the 1930s so as to trick highly paid workers into accepting lower wages due to government policy (inflation) without realizing it. Sounds like unethical fraud and theft to me.

This is how to understand Keynesianism: A system of intentionally complicated and surreptitious wealth transfers that the public will never be able to comprehend as mass looting.

Bob Murphy had link on his blog to a 4:55 clip from this show that I had sent him , then the link went bad.

The link is active again.

sb101 said...

“AP believes that something is called money because government says it is money”

This is 100% true. I never said I liked it, supported it, wanted it, etc. It’s the life we live in, and it’s not changing. Sure, you have every right to complain, protest, and whine about this reality, but I thought this was an economics blog? So pretending this is not true, and basing your analysis off a framework that does not exist, makes the analysis useless. Much of the commentary and analysis on this blog is based off gold standard logic. Sorry, but for better or worse, we are no longer on the gold standard, and we are not going back. Time to move on and deal with reality. The likes of Wray, Mosler, and other chartalist have dealt with this reality, which is why their analysis and explanation of the monetary system is spot on. Wray’s and Mosler’s work is not ideologically driven; their analysis focus’s on the mechanics and the operations of the monetary system. In other words, their analysis is based on logic. And this is why much of what Austrians have to say on how the monetary system works is useless. And until Austrians recognize that that taxes and government debt do not fund the government, the US government is never revenue constrained and represents zero credit risk, and until they realize there is an inverse correlation between public deficits and private savings, there contributions to monetary policy debates will only be to cause harm and wealth destruction within the economy. Personally, I prefer to spend my time analyzing reality, and the actual framework we live in since that’s the world I invest in. It would be nice if economists and policymakers did the same.

“However, if government has a monopoly on money and can use lethal force to enforce its monopoly, why is that a good thing?”

Please show me where I ever said this was a good thing. All I have ever said or implied is the government as a monopoly supplier of its currency is the reality we live in. Please don’t draw false, unsubstantiated conclusions from my posts just to fit your narrative. You do this to Krugman often, and while I’m flattered you put in the same category as Krugman, it’s not fair and annoying.

Bob Roddis said...

AP Lerner:

We've given our various Austrian responses to why this Chartalist thing won't work. We also won't tolerate it on moral grounds. It's criminal.

Nevertheless, I'm still waiting for the first point by point critique of the Austrian axioms to appear in the 37 years I've been searching for it.

Demolish acting man, subjective value, economic calculation and the distortion of the price and capital structure from fiat money. Go for it. Show your work.

Just quit with the "this is the way it is" nonsense. You are pushing an positive program that is an immoral, criminal, unworkable nightmare of a policy.

burkll13 said...

The more i think about it, the more i like chartalism. In fact, i have decided to adapt my entire life around it. I am going to print all the money i want, because i would rather do that than actually have to produce anything. and to reduce my inflationary impact, i am going to steal from my neighbors, at my discretion, put everything i get into a pile and set in on fire. yup, im going to enjoy my new life without limitations....

Bob Roddis said...


I totally agree. That's why I had asked the Chartalists to set forth their entire chain of logic point by point (we haven't heard from them since).

Chartalists believe that money is created, so that government can induce its citizens to work and pay their taxes. Government, as the issuing authority, makes use of money as a way to get its citizens to defend its borders, police its citizens, teach its children, and the various other duties that need to be done in running a state. Because money is what the government, in turn, will accept as payment for taxes, people will willingly work for money. And because everybody is subjected to taxes, money then becomes a useful medium of currency among the citizens when they trade with one another, because the recipient can also use it to pay his own taxes. In short, the starting point of Chartalism is the issuance of fiat money by government. This fiat can be anything, and need not be backed by any real commodity. The mere fact that it is backed by government, and will be accepted by government, is enough.

I'm sick of worrying about working hard, saving and trying to not steal from my neighbors and fellow citizens. Just print money and then tax it back to prevent inflation, and we will have the best health care in the world!