The video is of Hayek discussing Milton Friedman, but what should be noted is that is it is Hayek promoting the idea of competing currencies, a concept that Congressman Paul has adopted and mentions frequently during interviews. Congressman Paul clearly respects Hayek's thinking.
On page 51 of End the Fed, Congressman Paul writes:
I had the pleasure of hearing Hayek lecture in Washington, D.C., around 1980. Following that meeting, we had a private dinner together and spent several hours visiting. This dinner, which I remember well, further solidified my interest and confidence in Austrian economics.When Krugman writes:
It’s kind of terrifying, in a way, to realize that the politically dominant faction in America right now has a view of money, what it is, and how it works that hasn’t been true since the early 19th century, if it ever was.He is attacking not only Paul but a line of thinkers from the 19th century, but also such 20th century thinkers as Ludwig von Mises, Murray Rothbard and Friedrich Hayek. And it is through this Krugman linkage that Krugman's attack on Paul can be seen to be even more absurd than if he was only attacking Paul. While Hayek, Rothbard and Mises would most assuredly understand that the monetary base was not the money supply, in the clip below, Hayek specifically says he doesn't know what the money supply is AT ALL, meaning that money depends upon how people use various financial instruments and that to attempt to define a very concrete money supply is bound for failure. In other words, Ron Paul, as an Austrian, is not going to hold to a specific hardcore definition of money supply, certainly not the monetary base. Note also that Hayek specifically attacks Friedman for seeing a very strict correlation between money supply and price inflation. Thus, he slaps Krugman, once again, for attempting to put a bizarre monetary base-price inflation correlation view on Congressman Paul.
By pointing out the lineage of Congressman Paul's thinking, Krugman has dug himself into an even deeper whole, which clearly shows that he does not understand economic history, or is an evil bastard who chooses to ignore it.
Here's Hayek:
Here's what bothers me. Austrians are always quick to jump on Krugman like a shark whenever he defines inflation as a rise in prices instead of rise in the money supply. But when Ron Paul calls the monetary base the money supply, nobody bats an eye? I understand that money supply is vague and the various measurements (m1,m2,m3,mzm) are kind of arbitrary, but if there's one thing that isn't the money supply it's the monetary base. Why does Ron Paul get a free pass? In fact Ron Paul did what I'm talking about two months ago in one of those quotes I posted in the other thread.
ReplyDelete"Yeah, I think so. People know the prices are going up. But you know, that emphasizes the difference between the Keynesian definition of inflation versus an Austrian. Keynesians say, “When the prices rise,” but the prices go up as a consequence of inflation. Inflation is when you increase the money supply. So, we’ve had inflation when Greenspan had interest rate of 1%. He did that through inflating the money supply. And just think, with what Bernanke has done since then, doubled the money supply. There again, he spent $2 trillion bailing out his buddies. That’s unauthorization and appropriation and it’s off the books. We can’t even find out what they did."
First he criticizes the Keynesian definition and then defines inflation as a rise in the money supply. Fine so far. Then he goes on to say that Ben Bernanke doubled the money supply. How can anyone possibly interpret this in any other way than that Ron Paul thinks the money supply is the monetary base? Why doesn't Ron Paul talk about how m2, the most widely used money supply measure, has practically been stagnant the past two years? Why does he focus on the monetary base, which like you said, is practically meaningless in these times?
I'll give Ron Paul the benefit of the doubt that he does understand the difference and made an honest mistake. He generally does seem well versed on economics from what I've see so I won't assume the worst. But how can you find fault in Krugman (and call him evil) for interpreting it the same way that Ron Paul said it himself? Like I said, Krugman isn't a mind reader.
Also, to be clear, I'm not criticizing Ron Paul's beliefs. I'm criticizingly his sloppy language and wording.
I'll give you that Krugmann is wrong in implying that Ron Paul thinks the monetary base will correlate with inflation. I don't think that's his main point though. The reason why Krugman focuses on cpi over any measure of the supply is a money supply doesn't say anything interesting to the average joe in these times. Why does it matter to Joe Schmo that the monetary base has doubled? If it isn't affecting prices, Joe Schmo doesn't care.
@Thisguy
ReplyDeleteFirst of all I am really impressed with the amount of time you have to write these screeds. I think you spend more time at EPJ than I do.
Second, we can go around forever as to what Ron Paul understands and doesn't. The point is it's a cheap shot to take the most vicious interpretation of Ron Paul's understanding and plaster it as his hardcore belief.
Finally, since this post discussed Krugman's linkage to other economists such as Hayek, it is interesting that your screed does not mention Hayek's clarifications on what Krugman posted.
It appears to me you know when you are defeated.
" vicious interpretation "
ReplyDeleteThere's nothing vicious about it. It's a fair interpretation based on Ron Paul's sloppy wording. Why can't you at least acknowledge that Ron Paul's has made a huge mistake in telling people that Ben Bernanke doubled the money supply?
"interesting that your screed does not mention Hayek's clarifications on what Krugman posted."
What are you talking about? I just said Krugman was wrong in that point.
LOL
ReplyDeleteThe Hayek clip goes beyond correcting one "point" in Krugman's argument. I count at least three.
I Agree with Wenzel. Also, as Mish rightly points out here: http://www.favstocks.com/asininity-from-paul-krugman-regarding-money-supply-and-ron-paul/1930112/
ReplyDeleteit's not even clear that Krugman's (or your own) assesment of Paul's supposedly improper word ussage is accurate. Given that what we're all talking about here is what Krugman has accused Paul of improperly doing, and that such an accusation is baseless where do you get off claiming there's been a "huge mistake"? Your usage of the word huge to describe a non-mistake clearly shows off your own bias.
P.S. Hayek > Krugman.
One other point: you don't have to know what the money supply is or even be able to measure it to know the FED is adding to it. I might not know how much water is in a lake, but I know how much water I pour in it.
ReplyDelete@Thisguy
ReplyDeleteWhen Ron Paul says "doubled the money supply" is he making a firm calculation in an academic paper or is he making an illustration in a general and open forum?
It seems to me as if he isn't presenting, here, a solid calculation but a political and economic point for the masses. I'm pretty sure that if you were to review Paul's body of knowledge on the matter you will find that he has a fairly good grasp on the various definitions of the "money supply", especially compared to any of his collegues who feel justified in ruling over us and making economic decisions of which they are not qualified.
Robert Murphy, a professional economist with similar ideas to Paul (Austrian School), has offered to debate Krugman but that has been soundly ignored. Instead Krugman is sniping at what I'm sure he would consider his significant inferiors, those without the "expert understanding" of economics that he has displayed.
And, he still loses.
No wonder he won't debate Murphy.
In my estimation, upwards of 90% of US voters will never care about the difference between the monetary base and the money supply. That doesn't mean the distinction is irrelevant, just that it is only relevant in certain contexts but not so much in others.
ReplyDeleteAll the layman needs to know is that Fed policies of targeting inflation result in continuous price increases and that reactionary monumental over application of that inflation targeting mechanism results in asset bubbles.
Continuous price increases, by policy, amount to nothing more than theft of purchasing power; which undermines the incentive to save. The incentive to save is the primary fuel for the rise of civilization yet Krugman and his ilk think that is an unnecessary component of their Utopian future of unlimited government growth and Imperial aggression. How can anyone take the guy seriously?
Jahfre Fire Eater
Ron Paul certainly knows the difference between monetary base and the money supply. He knows what the M2 is. He even criticizes the fed for ceasing to publish M3 numbers. Krugman knows this too. You can't really believe anything that Krugman says, he openly lies about just about everything.
ReplyDeleteI think thisguy raises a good point. We do need to be more careful with the language that is used, not because we don't know better, but because others who listen may not.
ReplyDeleteRon Paul saying that the doubling of the monetary base is a bad thing is ok, but saying it's the same as increasing the money supply hurts our argument rather than helps it.
The fact the actual supply of money hasn't increased explains the lack of immediate inflation of prices (ther things explain this as well, since it doesn't have to increase prices of consumer products, it can also increase stock prices, etc.)
thisguy,
ReplyDeleteI think we should forget about the appropriate measurement of the money supply for a minute. No one seems to agree on that anyway.
I think the implication of Paul's comment was that by doubling the monetary base the Fed "will ultimately" double the money supply because no one expects all those excess reserves to remain idle forever and few are naive enough to think the Fed is going to blow up the economy by reversing the process.
You can argue that the Fed has not technically doubled the money supply "yet" and Paul should have been clearer, but I'd bet dollars against donuts (actually I'd bet dollars against anything because dollars are going to become worthless eventually lol), that the money supply WILL BE DOUBLED in time because of recent Fed actions. Paul is correct.
Maybe we should just throw in the towel and recognize that the popular definition of 'inflation' is a rise in prices. So what do we call an expansion of the money supply? How about, 'expansion of the money supply.'
ReplyDeleteThere we go: "Monetary expansion promotes price inflation." Everyone gets that, and Krugman can't play word games anymore.
Thisguy,
ReplyDeleteYou make a good point, but I believe the quote you site merely represents a bit of carelessness on the part of Dr. Paul. He is fully aware of the various measures of the supply of money. I've heard him complain numerous times that the Fed has stopped reporting M3, which he believes is more relevant than M1 and M2. In the quote you site I believe he merely oversimplified things a bit. That's understandable given that he must get his point across quickly in the soundbyte format that's required for the news.
This all a canard.
ReplyDeleteYou know doggone well, that the Federal Reserve, has taken 100s of billions of dollars on to its balance sheet. And the Wall Street banks parked those funds right back into the Fed, getting paid a little bit of interest for their troubles. Better yet for them they have also been able to loan this ill gotten booty to the US FED Gov't, and get returns of 3%, while the common everyday working man, that Krugman says he champions, but really despises. Gets less then 1 pt at the local thrift and loan. Good work if you're a Corzine, a Blankfeld, a Geithner, and can slurp even butts to get it.
Meanwhile the fat bastard Krugman must have to eat, get his nails done, and get to the den of Vipers from Princeton now, and then. Is he that disassociated that he doesn't notice prices are rising? He truly is Bernanke's Goebbels. Someday soon though, the banks are going to start a massive plastic push, and the Chinamen are going to stop buying Federal Debt. Disguy even you will put down the pompoms then.
I found just found this on Google and was cracking up at the title.. lol
ReplyDelete