Sunday, April 14, 2013

Paul Krugman Hates Money

I used to think that Paul Krugman just misunderstood money, but now I realize that he really hates the stuff. Hates it.

His recent blog post on Adam Smith and Bitcoin pretty much says it all:
There have been many good pieces written on the dubious economics of Bitcoin; I especially liked this one by Neil Irwin. One thing I haven’t seen emphasized, however, is the extent to which the whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression — a retrogression that Adam Smith would have scorned.

Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which — as he pointed out — serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency....
This is not so much a defense of Bitcoin, given I have not followed it and most likely will not be following it, but I do find that his post demonstrates his disdain for money itself. Why do I say that? I say it because he actually believes that mining for gold and silver which were used as money (and for other uses, too) was foolish and wasteful.

Money is a productive asset contra Krugman, for it enables exchanges to occur that would not have happened under a pure barter system. No one things it foolish to dig for silica or for copper or to expend resources to create capital. Yet, money being productive means that one can apply a marginal cost/marginal benefit analysis to it.

Krugman, quoting Smith, argues that paper money is better because one uses fewer resources to create it, but he fails to admit that it is much easier to inflate paper money than it is gold or silver. Yes, yes, all of the Keynesians will point out the Wonder and Majesty of Inflation, and how the Inflation Fairy will save our economy if we just crank out enough dollars.

Yet, inflation lowers the value of the marginal unit of money, and enough of that will lead to the demise of money altogether. (Zimbabwean dollar, anyone?) So, Krugman is saying that in order for money to be useful, governments need to print a lot of it and debase the whole thing, and if governments debase it enough, then the Inflation Fairy will wave her magic wand and make our economy whole again.

Update: Krugman continues his Bitcoin rant in his latest column. Paper money is superior to gold or anything else:
...paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes.
In other words, according to Krugman, things have value because government declares they have value. Furthermore, Krugman declares that Ben Bernanke's money printing is not "irresponsible" because we have not yet had hyperinflation. While it is true that the USA has not become Bolivia in the 1980s, nonetheless we are seeing big increases in the prices of food and fuel, two things that are sensitive to monetary changes, and we are witnessing what seem to be twin bubbles in housing and the stock market.

Once again, we are seeing the Krugman insistence that the Inflation Fairy is all we need. Just print money, borrow, and spend ourselves into prosperity. So far, it hasn't worked very well.


Pulverized Concepts said...

Neil Irwin, like Krugman, has a fear and loathing of deflation. Detlev Schlichter punctures that balloon in his :

Those commentators who tell us that this ‘crippling deflation’ is hurting the economy because people postpone spending decisions in anticipation of lower prices, want us to believe that Mr. and Mrs. Watanabe don’t buy a new popup toaster for ¥3,930 this year because – at a 0.6 percent p.a. deflation rate – they can reasonably assume that it will only cost ¥3,906 to buy the same toaster next year. And they won’t even buy it next year at ¥3,906 because the year after that it will only cost ¥3,883. The Watanabes would thus be able to save ¥47 over two years by not eating any toast (and it goes without saying that they may save considerably more by never eating toast!). This is a saving of – wait for it! – $0.47 or £0.31 (at present exchange rates) for postponing the purchase of a standard consumption item for two years – 730 mornings without toast! The notion that this ‘crippling’ deflation is holding back Japanese growth is simply beyond ridiculous, yet you can hardly open a newspaper these days without seeing such nonsense presented as economic analysis. (I would recommend that these experts on consumer psychology call the people at Apple, Samsung and other providers of tablets, smartphones and various consumer technology items and tell them that they are missing a trick: it is evidently rising prices that get people buying, not falling prices!)

Cato said...

A logistical analysis of the "power of the state" would by itself debunk most of Krugman's theses.

The power of the state is the power to compel individuals, including the power to surrender their wealth.

As used by Krugman, the "power of the state" is a mystical power implicitly able to create value. Hence its ability to make money valuable.

Rationally define the "power of the state" and Krugmanism evaporates.

Bob Roddis said...

A main reason it is advantageous for people to use the government's brand of funny money is because the government deems other forms of money to be non-money assets for purposes of taxation.

We've gone around and around with these Keynesians for decades and they still cannot seem to locate that original market failure that requires their services to repair. And they still can't explain how funny money and government spending and debt are supposed to repair the non-existent market failure.

Anonymous said...

From Bogart:
You should learn more about Bitcoin because Krugman and his ilk are terrified of it. And Krugman should be worried and have to badmouth Bitcoin. Outside of precious metals every other asset is the debt of someone else. But unlike PK's favorite currency the digital US Dollar, the digital Bitcoin does not have a central authority issuing it. No central authority means no ability to steal purchasing power of the currency.

Look at a place like Cyprus, Bitcoin is the only mechanism these poor folks have to transfer money into and out of the country.

Unknown said...

The joy of the elitist Keynesian economic theory. Why is it so hard to accept inflation is BAD? No need for extensive technical analysis, It cripples individual real savings and makes future planning impossible. Keynesian money policy just makes us a proverbial indentured servants to the Federal Government. The only question is - when? You want limited government? Keynesian policies will make sure you can't survive without the Federal Governments' teat

Cato said...

TechCrunch just published a roundup of "How Five Real Economists Think About Bitcoin’s Future."

Could be Krugman's mystical rant hadn't been published yet, or maybe they're taking the phrase "Real Economist" to mean someone not seated on his only laurels.

Anonymous said...

Money is a productive asset contra Krugman, for it enables exchanges to occur that would not have happened under a pure barter system. "

Well not contra Krugman at all. His point is clearly that paper money is just as much a productive asset as gold money, the only difference is that the latter consumes resources.

Why do you have to willfully misread everything in order to make a point?

William L. Anderson said...

And the former is easier to inflate. There are no free lunches no matter what Krugman might claim.

Anonymous said...

Why do you think there hasn't been an economic collapse yet with all this inflated currency?

William L. Anderson said...

The central banks for the main three currencies, the yen, euro, and USD, all have been engaged in a "race to the bottom" regarding inflation, and all are playing the same game of chicken.

Also, much of the newly-printed money has gone to prop up worthless securities held by large banks and financial outfits and the Fed is the largest holder of U.S. bonds, but most are purchased in the secondary market and the money is sitting in bank reserves.

To put it another way, the stock of money has increased much more than the amount of money actually in circulation. Now, this inflation is not helping the economies so much as it helps certain institutions, and if there is any collapse, it is happening slowly.

Most people have the quantity theory of money picture in their minds of MV = PY, so an increase in M, holding V and Y constant increases P. This hardly is a realistic picture of what is happening.

Here is the problem as I see it: the U.S. economy is a very complex mixture of heterogeneous assets, and the more the Fed and the government try to "cure" the economy with injections of money to create "aggregate demand," the more they weaken the foundations. But the foundations are still pretty strong, at least for now.

Dinero said...

I agree
MV=PY is not a realistic picture if the picture of M includes bigger bank reserves due to the actions of the central bank. Those influence the interest rate but the amount of currency in circulation depends on borrowers and commerce.

Lord Keynes said...

"Here is the problem as I see it: the U.S. economy is a very complex mixture of heterogeneous assets, and the more the Fed and the government try to "cure" the economy with injections of money to create "aggregate demand," the more they weaken the foundations."

If that were true, the WHOLE history of modern capitalism -- including all the gold standard era -- must be a failure because
there have always been substantial injections of money, mainly bank money/deposit money, from the beginning:

Austrians like Anderson are clueless about the nature of money in capitalism.

Capitalism requires an endogenous or elastic money supply and the Austrian prescription of a near inflexible 100% commodity money system would result in collapse of credit and grinding debt deflation.

Mike said...

A little clarification on the statement MV=PY not being realistic for what is happening now.

Accepting the fact that there are distortions everywhere because of the Fed actions, does not MV=PY still have some relevancy to today if one accepts the following:

M = money in circulation. Yet money locked up in bank reserves is not in circulation and as you say the stock has increased but remained in the system. This new stock is the product of an incestuous relationship between the Fed and the banks.

V=Velocity. For a host reasons domestic velocity has decreased or is stagnant in the present environment. Yet we see evidence of of foreign velocity of the USD increasing as key holders deploy those USD reserves for other assets.

P=Price. A mixed bag domestically. Things we need to live have increased but things we want or credit dependent have not. Human beings across the planet require the same basic needs. Perhaps foreign velocity is partially accountable for the increase in needs costs.

Y= Real GDP. The key here is "real." If the price deflater in the GDP calculation is understated, then GDP is overstated.

All that said, I don't believe economics can be completely explained by mathematical formulas, unless you think you can explain all human behavior by such math. It provides an interesting reference and discussion for understanding. Especially in the unprecedented environment we find ourselves in.

Just a thought for noodling.

Dinero said...

The idea of a fixed stock gives the wrong picture.
Once the Fed has an interest rate target it must be varying the stock of money or price of new base money accordingly.

Bala said...

"Capitalism requires an endogenous or elastic money supply and the Austrian prescription of a near inflexible 100% commodity money system would result in collapse of credit and grinding debt deflation."

Leave it to LK to spew unadulterated nonsense all the time. What Capitalism requires, my dear genius, is not an "endogenous" or "elastic" (whatever that means) money but a market-determined money subject to market forces. The Austrian prescription is NOT near inflexible but a market determined money. And it takes a real genius to claim that without FRB, credit will grind to a halt. Yes. Many people who would get loans under FRB would not get loans under a market determined system of money and credit, but I guess dyed-in-the-wool statists cannot accept the point that this is just the market determining what is in line with consumer preferences and what is not.

Mike said...

Dinero, I concur. In addition, in the present system we have, who says the definition of M is accurate.

Dinero said...

yes, and at any time borrowing can rase it , so it is really a concept with which to visualise price changes rather than a predictive economic metric.

Dinero said...

If everyone at Auction A has more money in their pockets than auction B I think we can safely say that the prices will be higher at auction A than auction B. But once you have Credit in the analysis you have a different picture.

Bob Roddis said...

Pursuant to that monstrous liar “Lord Keynes”, a 100% reserve banking system cannot work because historically, people always tended towards an FRB system as in the US in the 1800s.

This is LK’s “historical anecdotes as destiny” theory of economics. Similarly, because there was plenty of wife beating in the 1800s, and there is still plenty of murder in Detroit, it’s nothing more than ROTHBARDIAN UTOPIANISM to even suggest that such practices are wrong and should/could be effectively proscribed.

John said...

Id love to know how the guys and this blog are taking the gold crash

Is it a bernanke conspiracy? :-)

Edward said...


Joe Weisenthal in Business insider wrote an article on gold you might like

Mike said...

500 tons of paper gold sold Friday. Margin calculation and reconciliations over the weekend produced massive follow through on Monday. Margins then raised on Monday in the face of a declining paper price.

The Paper market and the physical market are two different things.

The two will be eventually reconciled.

Anonymous said...

"Pursuant to that monstrous liar “Lord Keynes”, a 100% reserve banking system cannot work because historically, people always tended towards an FRB system as in the US in the 1800s."

Bob, how long are you going to have to keep playing this cat and mouse game with LK? People are free to come to their own conclusions about economic science. Why is Austrian school economics any more valid than Keynesianism?

Tyler said...

Bob Roddis is an utter buffoon,
and worse, an incessantly whining one.

"So and so STILL hasn't engaged in Autrian concepts"

we have bob. Dozens of times. ABCT has been refuted just as often. You just ignore the evidence, like all mindless Rothbardian fanatics.

And Anderson, youre worse. I call you Anderson because a man who repeatedly distorts the positions of the one he attacks with laughable straw men doesn't deserve the title "professor'

just to give you an example, you accuse Krugmanand Keynesians in general of ignoring the law of scarcity whenever they recommend printing money or deficit spending in DEPRESSIONS. (and only in depressions) Krugamn isn't saying real resources are infinite. He's saying real resources are more abundant than the supply of money in circulation. AND ONLY IN CERTAIN CIRCUMSTANCES, like the liquidity trap do we have a free lunch. (A better word here would be "cheap" lunch or "high value" lunch)

Anonymous said...

Bob isn't a buffoon, but he can be pretty dogmatic sometimes and I also think you go a bit too far with the attack on Anderson's credentials. Let's stick to discussing the economics and leave personal attacks out of this.

Bob Roddis said...

Definition of DOGMATIC

1: characterized by or given to the expression of OPINIONS very strongly or positively as if they were facts

I’m sorry, but it’s a FACT that no Keynesian in the galaxy ever demonstrates an understanding of the related concepts of economic calculation, prices as information, Keynesian policy and funny money disrupting that information process and its effects on the price, investment and capital structure leading to malinvestments.

Questions about what Austrians might think about the price of gold dropping is evidence that the questioner believes that Austrian analysis is primarily concerned with precisely predicting when and the amount of CPI and asset inflation. It isn't.

Bob Roddis said...

Speaking of denying the law of scarcity, one need only read the Modern Monetary Theory loons who are a variety of Keynesians.

Peter lied about Social Security while working for Obama's handlers, now he's lying even more. He claims that cutting Social Security "modestly" while raising FICA taxes is a "progressive" thing to do, since it solves a minor (but in his words "real") budget solvency issue.

Lord have mercy! If we can't run out of fiat, SocSec can't run out of fiat. Haven't the foggiest what he's imagining, but it's all so out of paradigm that's it's irrelevant to reality. It's so bad that it's not even wrong. It's just irrelevant.

William L. Anderson said...

Gee, Tyler, next time tell us what you really are thinking.

Anonymous said...

Bob, by dogmatic, I really meant to say that you tend to have really strong convictions about your ideology and I wasn't saying that Austrian economics was right or wrong. Any one of the various worldviews of economics could be correct or not. There is a reason that economics is often called a dismal science. You can't go just go into a laboratory, shrink the entire world and conduct economic experiments. You have to rely on other sorts of evidence to back up your claims.

Bob Roddis said...

Also, it's fact, not opinion, that Keynesians do not and cannot understand Austrian concepts but almost immediately resort to vicious name-calling when challenged. And I didn't even have to pay Tyler a commission to again prove my point.

Lord Keynes said...

"Also, it's fact, not opinion, that Keynesians do not and cannot understand Austrian concepts"

No, in fact Roddis himself doesn't understand Austrian concepts -- like the notion of flexible wages and prices moving towards their market clearing values, which at heart is just the same concept as held in Walrasian/neo-Walrasian and mainstream neoclassical theory.

For ages, Roddis peddled a Hayek quote, and then denied that it anything whatsoever to do with mainstream neoclassical theory.

Then he recanted and said it had *something* to do with neoclassical theory, but that convergence to market-clearing has nothing to do with it!

Bob roddis - ignorant of basic Austrian concepts.

Bob Roddis said...

We've been over LK's endless misrepresentation of the "Walrasian/neo-Walrasian" nonsense and the "has nothing to do with" nonsense 27 times.

This is just LK's desperation showing.

SteveDoc22 said...

It's too bad Krugman leaves out Adam Smith's very next sentences:

"The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel about upon the solid ground of gold and silver. "

"Over and above the accidents to which they are exposed from the unskillfulness [sic] of the conductors of this paper money, they are liable to several others, from which no prudence or skill of those conductors can guard them. "

But this is typical Krugman. Selective quotes taken out of context to buttress a political view.

Pulverized Concepts said...

If gold is inferior as a medium of exchange to state-endorsed paper why do those states retain ownership of large amounts of gold? If the "barbarous relic" can't cut it as money why are they paying to store it? Why do the Germans want theirs' back? Wouldn't some other, more useful commodity be a better repository of wealth? Instead of ranks of gold bars at Fort Knox how about cases of peanut butter or expensive merlot or Mickey Mantle rookie cards or frozen semen from the very best dairy bulls (or maybe major league hitters)? Is there just the slightest possibility that the fiatinados are hedging their bets, just in case they might be wrong, as they always have been since the dawn of time?

John said...

How do you guys like the Ritholtz piece on gold?
Its at this post linked from Krugman's blog, heres the date and time: April 16, 2013, 7:38 pm

have fun

:-) :-) :-)

Mike said...


I read it. It's a shallow sarcastic piece on a serious topic.

Why do you find it funny.

John said...

Mike, how can you NOT find it funny?

Mike said...

I guess I don’t understand your point, which is a inherent issues with blogs as nuance and context can be missed.

If you are agreeing with his analysis and find it funny in some kind of schadenfreude manner, well all I can say is you don’t understand the subject matter and you should reexamine how you derive pleasure.

If you think he is funny because you disagree with his perspective, well I don’t find that funny either as people will actually think he is providing educated insight on the subject matter.

Anonymous said...

"Yet, inflation lowers the value of the marginal unit of money, and enough of that will lead to the demise of money altogether. "

I hate to be picking a nit.But the marginal utility of money actually
increases in the final stages of a hyperinflation. Observe the weimar
workers demanding to be paid twice a day then rushing out to spend it.

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