Comments on economics, mystery fiction, drama, and art.

Monday, October 24, 2011

The new European Gold Standard

Seems to be having consequences very much like the old European Gold Standard, according to Paul Krugman:

"The story of postwar Europe is deeply inspiring. Out of the ruins of war, Europeans built a system of peace and democracy, constructing along the way societies that, while imperfect — what society isn’t? — are arguably the most decent in human history.

"Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap."

Saturday, October 08, 2011

Re-reading "On Keynesian Economics and the Economics of Keynes"

I am re-reading Axel Leijonhufvud's On Keynesian Economics and the Economics of Keynes, for the first time in some years.  I continue to find passages that provide significant insights into the theoretical debates of today.  As, for example, this, on pp. 79-80

"Much of modern monetary theory deals with money as just one of the goods in a general  equilibrium model.  It is now clear that in general competitive equilibrium all goods are perfectly liquid.  All transactors face perfectly elastic demand functions; the full value of any good can be instantly realized.  Money has no special status [my emphasis], and in a model which deals only with situations characterized by exchange equilibrium, money is (at most) "just another good."  In the present work, we deal with short-run disequilibrium processes.  In the analysys of such processes, money--and "liquidity" generally--is of particular interest.  (The Keynesian problem, after all, is to show how it can be that all of the "false quantities" produced are too small.)  Hence our emphasis on aggregate demand in money terms.  Most Keynesians prefer to deal with income-expenditure models in real terms, i.e., with nominal magnitudes entirely absent from the so-called "real sector" and, correspondingly, with the excess demand for moeny stated in terms of real balances.  This procedure of dividing through "on both sides" with the GDP-deflator is usually regarded as purely a matter of convenience, to be justified by reference to accepted postulates of "rational behavior," i.e., "absence of money illusion."  When communication is far from perfect, however, it is not at all clear that individual "rationality" implies the kind of invariance propositions for the system as a whole that these models imply.  "Absence of money illusion" has become one of the great fudge-phrases of economic theory--a "real veil," in effect, behind which some of the most basic and subtel issues of monetary theory lie concealed."

(In a footnote, he refers to adjusting to real terms using a price index as, in effect, "cancelling...the means of payment function of money..."

The entire work is amazing, and still extremely relevant.