Maybe Krugman Isn’t Taking Sumner to the Prom After All
This is like watching Sam and Diane on the old Cheers. One day it’s Krugman, Sumner, and Milton Friedman versus the world, the next it’s this (HT2 a reader whose email I just lost):
Nor does focusing on nominal GDP instead of M2 or whatever really bridge the gap. The point about M2-based monetarism was that it was supposed to give the Fed a target it could clearly control — although in a liquidity trap it turns out that even that isn’t true. Whatever else it is, and whatever virtues it may have, nominal GDP isn’t that kind of target.
My broader take on this is that the quasi-monetarists are trying too hard to find a deep essence when what’s really needed is just a model. Let’s tell a story about what economic players do, and see what it says about policy options. That’s all it takes.
At least with Rothbardians, Scott knows where he stands: We’ve said from Day One that he’s nuts.
Are you a strict Rothbardian, Bob?
I eat meat on Fridays, does that still count?
I only ask because you seem to depart pretty heavily on his work on interest rate and monetary theory.
You know, the stuff that makes up 2/3rds of ABCT.
FTA, Krugman writes:
“So: an overall shortfall of demand, in which people just don’t want to buy enough goods to maintain full employment, can only happen in a monetary economy;”
This is pedestrian. Krugman is equivocating monetary demand for goods with quantity of goods demanded.
A “shortfall in demand”, meaning monetary demand for goods, can buy up everything produced provided the prices are low enough.
Employment is not based on quantity of goods demanded. It is based on the monetary demand for labor, which again can buy up all the labor that is available provided the prices of labor are low enough.
“it’s correct to say that what’s happening in such a situation is that people are trying to hoard money instead.”
Ah yes, the age old myth that allegedly explains all that is wrong in the economic world. If people are trying to hoard money, it means that want more purchasing power. They would get it, if it weren’t for the Federal Reserve System continually pumping in funny money. Krugman wants the state to overrule the market, instead of letting the market overrule the state.
Krugman reminds me of a twisted chef from hell. He cooks up slop, and then, when people are full, they no longer want to eat any more, so they start to hoard the slop given to them until the cooker of the slop stops. In response to this, Chef Krugman, instead of ceasing the production of slop and producing OTHER things like Pepto Bismal and antacids, insists that his recipes are right and cooks up even more slop so that the marginal utility of slop becomes so low, that people will start to eat the additional slop even if it means hurting themselves.
Just like the state must overrule the market, so too must the slop overrule people’s stomachs.
Would I be considered cool if if I called myself a Murphean? Or is it Murphyean? Murph?
Am I off the Austrian wagon for agreeing with Krugman when he says, “this is a situation in which the economic problems cannot be solved just by increasing the supply of money”?
Secret Agent:
You are assuming that firms have a given budget to spend on labor and then they buy as much as they can afford.
Economists instead go with profit maximization, which would be more like firms higher the amount of labor that will maximize profit given the wages they must pay and the prices they will receive.
Lower wages lower costs. With compeittion, that lowers prices. Lower prices increases the real value of money balances. Once those are larger than what people want to hold, they spend the extra on goods. Real expenditure on goods is higher. Firms sell more and produce more. They hire more labor.
And so, lower wages result in more employment.
That firms have a certain amount of money to spend on labor and lower wages means they can hire more workers with it really doesn’t fit into the picture.
You are assuming that firms have a given budget to spend on labor and then they buy as much as they can afford.
Not exactly. I am assuming that firm owners consider what prices they can expect to receive for their products, then they determine how much they are willing to pay for inputs, and then buy up as much input as they can, all else equal.
So I agree with you when you say:
Economists instead go with profit maximization, which would be more like firms higher the amount of labor that will maximize profit given the wages they must pay and the prices they will receive.
I would only add that I want to emphasize that my position is that employment is driven by monetary demand for labor, not demand for products.
Lower wages lower costs. With compeittion, that lowers prices. Lower prices increases the real value of money balances. Once those are larger than what people want to hold, they spend the extra on goods. Real expenditure on goods is higher. Firms sell more and produce more. They hire more labor.
And so, lower wages result in more employment.
Agreed.
That firms have a certain amount of money to spend on labor and lower wages means they can hire more workers with it really doesn’t fit into the picture.
I think it does. You just made an excellent case above that shows it.
I like Sumner’s idea if it means that instead of the Fed manipulating interest rates, a market did so instead based on inflation estimates. And yes, I believe that during the financial crisis, those rates could well have gone negative.