L.A. Liberty

Krugman and Money

“[D]o you really think people use dollar bills because the federal government isn’t allowing them to use other stuff? That seems like a very strange point of view…You can do barter with all kinds of stuff…”

- Paul Krugman, in his recent televised discussion (hardly a “debate”) with Ron Paul.

For starters, of course the government “isn’t allowing [people] to use other stuff,” if we understand “stuff” to be what Ron Paul was arguing (and Krugman was immediately responding to): money. We need only look at the recent Bernard von NotHaus conviction for minting “Liberty Dollars,” both coins and gold and silver certificates. Further, as Ron Paul stipulated, there are taxes on gold and silver that make using it as a medium of exchange artificially more prohibitive and costly.

But this isn’t quite what Krugman was getting at. He explicitly conflated money/currency, which is what Ron Paul was discussing, with barter. This is such a fundamentally flawed proposition that it almost shocks me how little push-back the media has given Krugman.

As Bob Murphy explains in his economics book for middle-schoolers, Lessons for the Young Economist, “direct exchange, or what is also called barter, [are] exchanges that do not involve money”:

We only leave a state of barter and enter the realm of indirect exchange when people receive an item during a trade that they don’t plan on using themselves, whether for consumption or production. What happens in this case is that they plan on trading the item away to somebody else in the future. This is actually what happens in every trade involving money. When you sell a few hours of your leisure cutting your neighbor’s lawn for $20, you are engaged in indirect exchange. You don’t plan on eating the $20 bill, and you don’t intend to combine it with other materials in order to build something. The reason you value it, is that you expect to be able to find somebody else (in the future) who will sell you something you do directly value, in exchange for the money.

It’s pretty basic stuff. But Krugman was probably hoping the unthinking masses wouldn’t notice his deflection.

Posted May 2, 2012 at 10:59am in ∆ krugman keynesian economics Keynesian Keynesianism Ron Paul | comments || home