Charting Fun with Krugman

By Robert P. Murphy

In a few recent blog posts, Paul Krugman used bar graphs and tables to (allegedly) prove the superiority of his views over those of the Austrians. Yet, as I'll show in this article, I can use Krugman's own data to demonstrate the exact opposite.

Krugman on the Fed and Banking Panics

Perhaps spurred by his Bloomberg debate with Ron Paul, Krugman posted the following regarding financial panics and the US central bank:

There's a very widespread belief on the right that banking crises only happen because either the Fed or Barney Frank cause them; go back to a gold standard, and there would be no need for financial regulation or anything like that.

This is, of course, nonsense; Walter Bagehot knew all about financial crises, which have been a constant feature of modern economies since at least the early 19th century. Just to drive the point home, I thought it might be worth posting Gary Gorton's chart of "panics" before the Fed went into operation:

Panics will happen; the question is how they are contained. (emphasis added)

Now although Krugman doesn't explicitly say "Ron Paul" or "Austrian economists," I think he has to have them in mind here. After all, before the Austrians rose in popularity, hardly anybody talked about the gold standard, let alone abolishing the central bank. It was the Austrians, and most notably Ron Paul, who put those ideas back into the limelight so that Paul Krugman feels the need to address the issue.

In that light, Krugman is simply making stuff up when he says such people think banking panics never happened before the Fed. Murray Rothbard's doctoral dissertation was The Panic of 1819, and Rothbard also wrote on the history of the Fed, so I'm pretty sure he wouldn't be shocked by Krugman's table.

But besides the cheap debating ploy — setting up his opponents as believing something obviously ridiculous — Krugman leaves open the door to his own demise in his final sentence, after the chart, when he writes, "Panics will happen; the question is how they are contained."

Fortunately, Krugman himself provides the answer in a… (Read more)

Source: Mises.org

Understanding the Price of Money

By Robert P. Murphy

 

In a money economy, the money commodity is on one side of every transaction, and hence reduces the number of relevant prices. The direct exchange ratio between any two commodities can easily be computed from their respective money prices. The "price" or purchasing power of money is the array of goods and services for which a unit of money can be exchanged.

 

Individual supply and demand schedules in a money economy are determined by the same principles applicable to a barter economy. An individual's value scale contains units of the money commodity as well as all other commodities and services, and the individual will engage in market exchanges to achieve the bundle of goods (including units of the money commodity) that he or she believes will yield the greatest utility. There have been various attempts to gauge the total "surplus" that individuals enjoy from the existence of markets, but these procedures suffer from methodological errors. Individuals benefit from voluntary exchanges, but it is nonsensical to ask how much they benefit, because utility is not a cardinal magnitude.

 

The utility from selling a good for money is the value of the most highly ranked use to which the additional money can be devoted (whether to… (Read more)

 

Source: Mises.org

Fiat Money and the Euro Crisis

By Robert P. Murphy

 

 

In September I participated in the amazing Supporters Summit, held at the prestigious National Academy of Sciences in Vienna, where Eugen von Böhm-Bawerk once lectured. After my visit to Austria, I piggybacked an excursion to adjacent Slovakia where I was surprised to discover a large number of fans of the Mises Institute and Ron Paul.

 

 

Peter Gonda, working through the Conservative Economic Quarterly Lecture Series, had arranged for me to give a lecture, "Money and Banking: the State vs. Market," to two different audiences. (The videos of the lecture and Q&A period are here.) My lecture itself was quite theoretical, discussing the Mengerian/Misesian perspective on the development of money and banking, as well as the Rothbardian perspective on the dangers of central banking and fiat money.

 

 

In the Q&A period of the lecture, and during my interviews with local journalists, however, most people wanted to discuss the Greek debt crisis and the fate of the euro. Yet even here I showed the relevance of the Austrian insights: Germany, Slovakia, and the other frugal countries were only in this mess because the euro was a fiat currency. Had it been backed 100 percent by a commodity such as gold, then the… (Read on)

Source: Mises.org

The Fed’s Long Shot

By Robert P. Murphy

Last week the Fed announced "Operation Twist," in which the central bank will buy $400 billion of longer-dated Treasury securities while selling the same amount of shorter-dated Treasuries. This episode epitomizes everything that is wrong with the modern, statist view of money.

The Goofy Name

Just the fact that it's an "operation" is disturbing. Ever since the crisis began, officials have deployed the military metaphor since their only solution to social problems is to start blowing things up. We have a war on poverty, a war on drugs, a war on terrorism, and (since 2008) we've had an undeclared war on the recession.

The military metaphor is crystal clear whenever analysts discuss the Fed's options to "help" the economy, since interest rates are already at zero. Typically these analysts reassure their readers or viewers by declaring, "The Fed still has plenty of ammunition." Don't worry kids, we won't end Operation Enduring Inflation until every last unemployed person is eliminated.

Central Planning

It continues to amaze me that Austrian economists are apparently the only ones who think market prices mean something. In general, when we're just discussing the generic "interest rate," Austrians explain that it helps coordinate production and consumption activities over time. When the central bank gives us an artificially low interest rate, things get messed up — consumers don't… (Read on)

Source: Mises.org

An Economist Goes to the Grocery Store

By Robert P. Murphy

As most people know, economists are a strange lot. We view the world from an unusual perspective. This allows us to see things that others miss — such as the obvious fact that Superman needs an agent — but alas, it renders us oddballs.

On a recent trip to the grocery store, it occurred to me that much of what I see during a typical outing differs from what carpenters, lawyers, and schoolteachers see.  As someone who worked in a grocery store for several years as a teenager, I am particularly qualified to write such an article, which will be either fascinating or tedious, depending on the taste of the reader.

What's So Super about This Market?

The first thing we should discuss is that the very notion of a "supermarket" is an innovation, reflecting the private sector's response to changing conditions. A century ago it made sense — especially in a densely populated city — for housewives to… (Read the full article)

Source: Mises.org

Is Social Security a Ponzi Scheme?

By Robert P. Murphy

Ever since Rick Perry derided Social Security as a Ponzi scheme, economists and other pundits have jumped into the fray. Progressive blogger Matt Yglesias says it's "nuts" for anyone to talk like this, because Social Security merely relies on future economic growth — just like a private pension plan. Free-market economist Alex Tabarrok responded to Yglesias with links to arch-Keynesians (and Nobel laureates) Paul Samuelson and Paul Krugman, both comparing Social Security to a "Ponzi game."

In the present article I have three aims: First, I will point out that the critics are right; to the extent that Social Security "worked," it was because of its resemblance to a classic Ponzi scheme. Second, I will show how private-sector retirement planning operates nothing like this. Third, I will defend the good name of Charles Ponzi from the scurrilous comparisons — what he did was nothing like the racket known as Social Security.

Social Security's "Ponzi Game Aspects"

Paul Krugman is a famous guy with a long record of strong opinions. It's to be expected that periodically these will come back to bite him. His usual tack is to deny that… (Read the full article)

Source: Mises.org

Why Are Gold Prices So High?

By Robert P. Murphy

Ever since Ben Bernanke began flooding the banking system with trillions of new dollars in the fall of 2008, economists and other pundits have disagreed on whether the US is in store for a grinding deflation or an accelerating inflation. Part of the disagreement stems from some people using the terms to refer to prices, whereas others refer to changes in the total quantity of money and credit.

However, even if we restrict ourselves to movements in the prices that average households face in the marketplace, there is still widespread disagreement. Although the overlap isn't perfect, typically the Keynesians warn that with high unemployment, the US runs the risk of a Japanese "lost decade" of flat consumer prices and stagnant economic growth. Many Austrians, in contrast, warn of a different decade: namely the United States during the 1970s, when Americans suffered high unemployment and price inflation.

To bolster their position, the Keynesians confidently point at the low yields on various government bonds, signaling that "the market" expects modest price increases over the coming years. In contrast, soaring gold and silver prices have been the trump cards for those Austrians predicting skyrocketing prices in general.

For a while the Keynesians had no adequate response to this. They suggested that… (Read the full article)

Source: Mises.org