January 31, 2009

Economic Dark Age

Paul Krugman noted that this comment to Brad's post didn't go far enough in expressing the backwardness of the wrong-way economists.

Astrophysicists might disagree on string theory, they don't argue that the universe doenn't exist...

What Fama and others do is willfully forget Keynes central insight: a money economy is totally and fundamentally different than a barter-goods-only economy.

In a barter-goods economy, you can have exchange,specialisation of labor,saving,investment,technical progress,almost anything you want. You can have a starvation causing-drought and you all die. You can have a recession if you stop working and the guy you traded with is forced to stop producing while he adjust his specialisation.

But the one thing you just can't have is a depression. The real meaning of Say's law is that saving implies producing an equivalent good which is then invested as inventory, therefore causing no fall in aggregate demand. In a goods-economy, you just can't get a race to liquidity.

An economist not knowing that difference is worse than a biologist not knowing evolution. It's a biologist not knowing the difference between an animal and a rock...and being proud of it. - Jacques René Gigučre

Perhaps we should say those economists are like astronomers who haven't learned that the Earth circles the sun, and not vis versa. Oh wait a minute, Krugman had already noted they are back in the medieval age so this analogy might be correct.

Posted by Mary at January 31, 2009 02:18 PM | Economy | Technorati links |

We certainly have people who claim to be biologists who don't understand evolution. They're supported financially by non-scientific groups with an axe to grind. I have little doubt that there are people claiming to be economists who haven't noted significant differences between money and barter economies. There certainly are plenty of organizations with an axe to grind.

Posted by: Cujo359 at February 4, 2009 03:46 PM