Commentary on Political Economy

Monday 11 July 2011

Krugman (Not) On (The) "Money"

You will forgive the reminder that Joseph Belbruno had been "vaticinating" about the recent "developments" in the world economy for a while - his ostensible, if ostentatious, aim being to invite us all to greater understanding - a "theory" - with which to transform our world. So I know that Davies will not mind if we indulge in short "theoretical excursus" pro-voked by Krugman's latest entry in his own Blog. (You can follow other "leads and hints" at

Please read very carefully below from Krugman

"July 11, 2011, 8:33 am - Monetary Rage

We had dinner last night with Margaret Ray and Dave Anderson, the authors of the AP adaptation of our textbook (which is terrific, by the way). Over our $350 $22 bottle of wine, we talked about various issues involved in trying to explain economics — and everyone agreed that monetary economics is where people are most likely to get not only confused, but furious.

There’s something about money, it turns out, that sends many people into blind rage — usually of the kind Margaret described as “Ron Paul plus”, but there are other versions too, some of them coming from the left.

So what is it about money? I don’t have a full explanation, but here’s a thought: monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections; thus floating exchange rates may be a good idea (and how sensible Milton Friedman now looks!) to deal with the reality that it’s hard to change nominal prices.

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply. They want to believe in perfect markets, delivering perfect outcomes if only the government would stay out of the way. And so they want to believe that money too can be perfect if only we take it out of human hands, and make it good as gold, literally.

And when you point out that it doesn’t work that way, that money is a social convention meant to deal with an imperfect world, and that dealing with that imperfect world sometimes means that central banks need to take exceptional action, they fly into a rage.”

Of course, you and I know that this pathetic imbecility must be unequivocally wrong! Because it is precisely during a “crisis” – that is when economic “activity” is at its lowest and therefore, according to Krugman, money would be needed least “to facilitate transactions” – it is precisely in times of economic “crisis” that economic agents need “money” (or “cash”) the most!!! “In God we trust, everyone else pay cash!” goes the saying: for the simple reason that “money” (whether in banknotes or bonds or bank credits) is the most “liquid” form of “value”, even though it has no other “use value” whatsoever (unless it is gold or silver that have limited uses in production).

Krugman stupidly (perhaps stupefyingly) confuses "money" as a means of exchange as the only or predominant reason for the existence of "money" - and totally forgets that "money" is above all else A STORE OF VALUE!!

If Krugman were right, “money” or “cash” would be needed LEAST at times of deflation and economic “crisis” when economic “activity” was at its lowest!! Yet the OPPOSITE is the case!! Because it is precisely at times of economic “crisis” that all economic agents are most in need of “cash” – of “money” as a STORE OF VALUE! According to Krugman, instead, this should be the time when capitalists renounced “money” more than the devil – because they would not need it for “transactions” in a “liquidity trap”!!

This is yet another example of how the bourgeoisie avoids the notion of “value” – the real political social relations behind all capitalist production and institutions – like the Black Plague!

So next time you think of Nobel Prize winners in bourgeois “economics” – just think of stupidity personified! Ciao.

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