Monday, July 11, 2011

Krugman on money

Paul Krugman makes a good point about money. Monetary Rage
Monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections. ...

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply.

It's a blog post, so we can forgive the good doctor for not going into more detail, but I want to.

Money is not just about dealing with an "imperfect, frictional world." It's also about managing computational intractability. We cannot actually compute Arrow-Debreu complete markets in real time. So in much the same sense that we use probability to estimate quantum mechanics, we use money to to estimate a distribution problem that would require probably 1012 differential equations to compute from first principles.

I think people get enraged about macroeconomic policy for two primary reasons. The first is simply a "deserts" theory of morality. The rich are rich because, on the whole, they deserve to be rich. The poor are poor because they deserve to be poor. They see any sort of government intervention as acting contrary to the fundamental moral principle that people ought to get what they deserve. A utilitarian macroeconomic policy, i.e. a policy that tries to maximize social benefit, is repugnant at a very fundamental level, because it requires that we make very little effort to make sure that people do not receive benefits that they do not deserve.

(I think there are a lot of problems with "desert" (deontological) moral theories. First, I think deontological moral theories require supernatural assumptions to be non-circular. Second, many proponents of deontological moral theories seem to pretend to be utilitarians, but their utilitarian arguments are at best poor and at worst patently dishonest. But that's a topic for another day.)

Second, I think people get enraged because they're applying individual, microeconomic thinking to whole-economy, macroeconomic issues, but macroeconomics is fundamentally different from microeconomics. In microeconomics, money looks real: it's a commodity you can run out of, and when you run out, you die. In macroeconomics, money is just something you can create and destroy ex nihilo. A whole economy (an economic unit that defines its own money, such as the United States or the Eurozone) cannot run out of money any more than it can run out of words or inches. In microeconomics, money is something that can be saved, i.e. stored for later use. In macroeconomics, it makes no sense to save money, since money itself can be freely created and destroyed. To assume that because macroeconomics is composed of microeconomics entails that our microeconomic thinking necessarily applies to macroeconomics is a textbook case of the composition fallacy.

Individuals think microeconomically: when an individual runs out of money, he or she dies. People get very upset about things that they believe — even in the abstract — threaten their survival. If you think the government is running out of money, and you have a strong emotional association between running out of money and dying (rational at the microeconomic level), then you're going to view "excess" government spending as survival-threatening. But of course the government — the collection of institutions that manage the macroeconomy — cannot run out of money, nor can they save it in case they run out later.

Of course, there are real-world constraints on what the government can do with money; just because the government can create and destroy money at will does not mean that how much money the government creates or destroys at any given time has no effect. It's just that the way individuals must think microeconomically about money and constrain their money-using behavior in a market environment is substantively and fundamentally different from how government must think about money and constrain its behavior.


  1. I wish more people would take the time to at least consider the points you are making about macro and micro econ. But instead they keep thinking about global economics in terms of individual and household econ.

  2. I have often scratched my head in confusion when I see poor republicans crying out for the elimination of social welfare (essentially a safety net provided at the microeconomic level by the macroeconomic government). They are told it is wasteful and socialist. It is also required to create a nation in which running out of money does not equate to death.

  3. It is also required to create a nation in which running out of money does not equate to death.

    Strictly speaking, we're still a nation in which running out of money equals death. Social welfare programs just ensure that people don't actually run out of money.

    Fundamentally, though, the popularity of the Republican position comes, I think, from people who take a deontological ("deserts") ethical stance. Not necessarily because they think that poor and old people actually deserve to die, but rather they believe that social welfare programs encourage behavior that deontologically deserves to be discouraged.

  4. The deontological position is at its most sinister and hilarious when you hear some assclown fundie douchebag proudly announcing that they would indeed tell the Nazis that he was hiding Jews in the attack....because lying is wrong!
    Outstanding stuff.

    I have heard that perfectly obnoxious windbag Rush Limbaugh trying to make a case that everyone has the same oppertunity. More or less claiming that unemployed people are lazy. If they were just a little more.....American, they would get jobs and could afford healthcare, etc. etc.
    The notion of equal oppertunity is, of course, false and most often espoused by golden spoon toting objectivist asshats. The bullshit position that negative freedom equals even playing field. Even the notion that everyone has negative freedom is not true. I suppose I just find it endlessly facinating that poor people fall for this kind of rhetoric. They listen to bloated rich pricks complaining about the government trying to help the poor and even manage to convince poor people that giving the richest people tax breaks is a good idea!


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