Just Who Is Ignorant About Money?

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Gee, hoodathunkitt?
Paul
Krugman hates Ron Paul
. It is not enough for Dr. Paul to want
to leave abortion to state legislatures (where the U.S. Constitution
would place it), but the very fact that Dr. Paul is personally opposed
to abortion and would not perform one is enough to send Krugman
into a rage.

Furthermore,
Krugman attacks Dr. Paul on the matter of civil rights. Now, keep
in mind that Dr. Paul is not against civil rights per se, given
that no other person on the scene, Democrat or Republican, that
is running for president that openly opposes the police state that
both parties have created. (Sorry, Krugman. One cannot support both
civil rights AND a police state. So, who is against civil rights?)

Anyway, Krugman
is not referring to Dr. Paul’s views on race, but rather Dr. Paul’s
view of the 1964 Civil Rights Act. Like all Progressives, Krugman
holds that any law or regulation that is created in the name of
something like civil rights is in itself the very essence of
those rights. As Frederic Bastiat wrote in The
Law
in 1848, socialists (and I should add, Progressives)
always couched beliefs within a specific government action:

Socialism,
like the ancient ideas from which it springs, confuses the distinction
between government and society. As a result of this, every time
we object to a thing being done by government, the socialists
conclude that we object to its being done at all.

We disapprove
of state education. Then the socialists say that we are opposed
to any education. We object to a state religion. Then the socialists
say that we want no religion at all. We object to a state-enforced
equality. Then they say that we are against equality. And so on,
and so on. It is as if the socialists were to accuse us of not
wanting persons to eat because we do not want the state to raise
grain.

Likewise, according
to Krugman, the only reason one could oppose sections of the Civil
Rights Act which give government huge swaths of control over private
property is racism. (Likewise, if one thinks that ANY environmental
regulation is bad or unnecessary, then one is in favor of having
feces wash up on beaches, to paraphrase Anthony Lewis, who also
wrote his columns at the NYT.)

But Krugman
was only getting warmed up when he accused Ron Paul of being a racist
and a misogynist. (And why else would one be opposed to abortion
than out of hatred for women? Gloria Steinem has declared such,
and so it is an established truth, at least at Princeton University
and the NYT.)

Ron Paul, writes
Krugman:

…(ignores)
reality, clinging to his ideology even as the facts have demonstrated
that ideology's wrongness. And, even more unfortunately, Paulist
ideology now dominates a Republican Party that used to know better.

Given the open
opposition that Republican stalwarts have exhibited toward Dr. Paul,
the idea that his “ideology” is dominating the GOP is a very sick
joke, but Krugman seems to be full of humor these days. Unfortunately,
he totally misstates the position that Austrians have on money,
and he further writes that all Austrians believe that the monetary
base is exactly the same as money that is circulating.

First,
as he points out in the article, the Fed massively increased the
monetary base and some Austrians have said that sooner or later
if that base is turned into large-scale lending, we are going to
have inflation. That is a no-brainer. However, because some Austrians
have said that maybe inflation will occur sooner rather than later,
according to Krugman, that means that all Austrian theory on money
is wrong. (This is what the ancients once called a non sequitur,
but without the non sequitur, Krugman would not have any
columns.)

Second, Krugman
continues in that insistence:

Austrians,
and for that matter many right-leaning economists, were sure about
what would happen as a result: There would be devastating inflation.
One popular Austrian commentator who has advised Mr. Paul, Peter
Schiff, even warned (on Glenn Beck's TV show) of the possibility
of Zimbabwe-style hyperinflation in the near future.

So here we
are, three years later. How's it going? Inflation has fluctuated,
but, at the end of the day, consumer prices have risen just 4.5
percent, meaning an average annual inflation rate of only 1.5
percent. Who could have predicted that printing so much money
would cause so little inflation? Well, I could. And did. And so
did others who understood the Keynesian economics Mr. Paul reviles.
But Mr. Paul's supporters continue to claim, somehow, that he
has been right about everything.

Austrians are
not shocked at what has transpired. The economy, thanks to the bailouts,
explosion of regulations, and incendiary rhetoric from the White
House, is mired in depression, just as Austrians predicted it
would be if the policies of the past four years were followed.
As long as the monetary base remains just that – a base –
and the money does not circulate, the official rate of inflation
will be low. What I do find interesting, however, is Krugman’s insistence
that commodity prices have nothing to do with inflation, that the
only reason they rise and fall is because of demand from “emerging
economies” and “volatility.” (Of course, “volatility” is an effect,
not a cause, but since Keynesians regularly confuse cause and effect,
we should not be surprised at Krugman’s conclusions.)

You see, if
Austrians are wrong in their belief that an expansion of money in
circulation will force up prices (and that is what Krugman insinuates),
then all of monetary theory is turned upside down. For that matter,
Krugman already is on the record in calling for the Fed to directly
purchase U.S. Government securities on the primary market, which
in essence would be financing government via the printing press.
Does Krugman also believe that such an action would not have a huge
effect upon prices of goods, or does he want us to believe that
any predictions of inflation here would be wrong?

Krugman’s insistence
that Austrians are ignorant about money is, well, ignorant. Austrians
say that money is a secondary good which has a primary use to facilitate
exchanges, and its productivity exists in the fact that it allows
exchanges to occur that would not happen in a barter economy. Austrians
further hold that money is subject to all of the laws of economics,
including the Law of Marginal Utility (no, we don’t hold that it
simply is a quantity variable).

However, one
of the most important aspects of Austrian thinking on money is that
Austrians emphasize the transmission mechanism of new money being
injected into the economy, and that transmission is non-neutral,
for those receiving the new money first will be able to pay for
goods at the old prices, but with new incomes. This view contrasts
with the Keynesian viewpoint that monetary transmission is neutral,
and that the only thing which matters is that money get put into
the economy so that someone can spend it.

Moreover,
Austrians also point out that the injection of new money into the
economy also will have an effect upon the relative prices of goods,
and that the relations will change as more money pours in. This
contrasts with Krugman’s view that new money has no such effect,
and that everyone benefits equally from monetary injections. (In
Krugman’s view, while inflation benefits debtors at the expense
of creditors, that is OK because he falsely assumes that all creditors
are the “one percent” and that all debtors are in the other category.)

So, because
hyperinflation has not hit, Austrians are totally ignorant about
money, and that includes Ron Paul. We are dealing with timing, not
monetary theory, and Krugman by confusing the former and latter,
demonstrates his own ignorance about monetary matters.

December
17, 2011

William
L. Anderson, Ph.D. [send him
mail
], teaches economics at Frostburg State University in Maryland,
and is an adjunct scholar of the Ludwig
von Mises Institute
. He
also is a consultant with American Economic Services. Visit
his blog.

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Best of William Anderson

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