All That Glitters Isn’t Gold – Nor Money

My wife and I recently had dinner with Margaret Ray and Dave Anderson, the authors of an adaptation of our textbook (“Economics in Modules,” which is terrific, by the way).

Over a 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 Ms. Ray 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, and all prices would be at equilibrium.

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.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.