Incentives and Monetary Policy

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Paul Krugman takes on his critics:

One quite common statement among the Austrianish horde is something along the lines of “It’s ridiculous to imagine, as Krugman does, that you can create real wealth by printing more pieces of paper.”

Well, it may be ridiculous, but it’s also true, under certain conditions — namely, when the economy is suffering from inadequate demand. And you don’t have to use highly abstruse reasoning to see this, either; all you need to do is think in terms of some kind of model, not necessarily of the mathematical kind.

In a way, things are even weirder than Krugman suggests. The hard money folks certainly believe in the real-world effects of incentives, and one way of looking at monetary policy is simply as a way of changing incentives. It changes the value of saving vs. spending money. It changes the likely value of real-world investment vs. holding government bonds. It changes inflation expectations, which in turn changes behavior. We can argue about the effect of all this—and we do!—but the proposition that printing money changes incentives, which has an effect on economic behavior and therefore an effect on wealth creation, really shouldn’t be hard to believe intuitively.

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Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

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