Thursday, November 22, 2018

22 Days in Paul Krugman's Masterclass (Day 5) (His Worst Class Yet But One Good Joke)

Lesson 5 in Paul Krugman's Masterclass is 11 minutes and 45 seconds long.

It is by far the worst class so far.

He remarkably states in this video that "money is a useful fiction created by the government."

This means that Krugman has no common sense understanding of how money started and evolved and is totally clueless as to the advanced scientific discussion by Ludwig von Mises in Human Action of the regression theorem which explains how money develops.

Percy Greaves in Mises Made Easier informs:
Mises explains the origin of the objective-use value of money by tracing it back step by step from the point at which it is being valued to the point where the monetary good served only non-monetary uses, an essential point preceding the first use of anything as money.
In typical monetarist Keynesian fashion, he also makes the absurd claim that the Federal Reserve "has a license to perform magic," implying that through printing money the Fed somehow magically improves economic growth.

Oh and, by the way, his brief mention of how the Fed creates money leads me to believe that he doesn't understand the technicalities of how the New York Federal Reserve Bank trading desk (where the money creation starts) operates and interfaces with the primary dealers.

He then spends considerable time discussing the IS-LM curve, a curve which is shaky on many grounds.

George Reisman even wrote a letter to Krugman in May 2009 pointing out the contradiction that exists in Keynes' General Theory concerning IS-LM:
[Y]ou can learn of the profound contradiction that exists between Keynes’ statement of the basis of the IS-LM analysis on p. 261 of The General Theory and his statement of the basis of the declining mec doctrine on p. 136 of The General Theory
It should further be noted that Krugman correctly cites John Hicks, influenced by Keynes, as the developer of the IS-LM curve but what Krugman fails to mention is that Hicks later admitted the model's flaws were fatal.

Krugman also discusses the Federal Reserve target price inflation rate of 2% and admits it is pretty much arbitrary based on that target rate first adopted by the central bank of New Zealand.

He notes the shallowness of such a method of choosing a target by stating, "New Zealand, a country of 2 million people and 15 million sheep."

Of course, there should be no target price inflation, central banks shouldn't be manipulating the money supply at all. But given this passable joke by Krugman, I am going to give him a D- on this lesson, though pretty much everything else he said in the 11 minutes and 45 seconds is a disaster.


Links to discussions of all Krugman's Masterclass lessons are here.


  1. You're going soft, Wenzel. That joke isn't original. Therefore, an "F" for plagiarism!

  2. I don't think 2% inflation is arbitrary. But if I am correct about why it was chosen then it is best for people like Krugman to say it is arbitrary. 2% inflation IMO is a very good rule of thumb for raking off the year over year productivity increases and sending that benefit to those at the top of the pyramid that get to use the new money first. If they took more people would notice their declining buying power but if they match productivity increases people more or less see constant buying power.

    The evidence of this working is how wages have decoupled from productivity in the USA since Nixon closed the gold window. Wages tread water or very slowly decline while wealth concentrates at the top.

    Simply better off saying its arbitrary than to give critics ammunition.