View Full Version : The riddle of money, finally solved

11-15-2013, 10:35 AM

For nearly a century the progress of macroeconomics has been stalled by a single error, an error so silly that generations to come will scarcely believe that it could have persisted for as long as it has done. It is an error that has been committed by John Maynard Keynes and Milton Friedman, John Hicks and James Tobin, Franco Modigliani and Ludwig von Mises, Murray Rothbard and Paul Krugman, and continues to be taught to every economics undergraduate today.

The error has blinded economists so that, like the seven men of Hindostan, they have mistaken the partial reality that has come within their groping grasp for the whole of reality. And this in turn has divided them into warring sects, looking very little like practitioners of a science and a lot like religious fundamentalists. Keynesian has poked fun at monetarist. Monetarist has ridiculed Keynesian. And both have mocked Austrian and been mocked in return.

Thanks to the error Keynesians have been unable to appreciate the importance of money, monetarists have arrived at a wholly misconceived notion of money, and Austrian economists, although they have occasionally stumbled towards the truth, have fallen far short of it. Worst of all, central banks have been forced to direct monetary policy without a measure of money to guide them, a situation one would have thought hilarious if it had not had such terrible consequences. Were an energy authority to attempt to control energy without having some way to measure energy, it would have been laughed out of town. But modern economists seem perfectly comfortable with the idea of a monetary policy without money.