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Krugman vs Krugman

Krugman vs Krugman – Editor

The following extract from a blog by J.W. Mason [1] asserts that the state could not actively manage the economy if money was neutral.

[Bank of Sweden prize winner] Paul Krugman wonders why no one listens to academic economists …

One answer is that economists don’t listen to themselves. More precisely, liberal economists like Krugman who want the state to take a more active role in managing the economy, continue to teach an economic theory that has no place for activist policy.

Let me give a concrete example. One of Krugman’s bugaboos is the persist- ence of claims that an expansionary monetary policy must lead to higher inflation … But where could someone have gotten this idea that an increase in the money supply must always lead to higher inflation? Perhaps from an undergraduate economics class? Very possibly – if that class used Krugman’s textbook International Economics. Here is what that book says about money and inflation:

“ A permanent increase in the money supply causes a proportional increase in the price level’s long-run value. … we should expect the data to show a clear- cut positive association between money supplies and price levels. If real-world data did not provide strong evidence that money supplies and price levels move together in the long run, the usefulness of the theory of money demand

we have developed would be in severe doubt …… A permanent increase in the level of a country’s money supply ultimately results in a proportional rise in its price level but has no effect on the long-run values of the interest rate or real output. “

This last sentence is simply the claim that money is neutral in the long run, which Krugman continues to affirm on his blog … The more thoroughly a student understands the discussion in Krugman’s textbook, the stronger should be their belief that sustained expansionary monetary policy must be inflationary. Because if it is not, then Krugman gives you no tools whatsoever to think about policy …

Liberal Keynesian economists made a deal with the devil decades ago, when they conceded the theoretical high ground. Paul Krugman the textbook author says authoritatively that money is neutral in the long run and that a permanent increase in the money supply can only lead to inflation. Why shouldn’t people listen to him, and ignore Paul Krugman the blogger?



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