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Paul Krugman: What Is It About "Money"?

Paul Krugman:

Monetary Rage: We had dinner last night with Margaret Ray and Dave Anderson, the authors of the AP adaptation of our textbook (which is terrific, by the way). Over our $350 $22 bottle of wine, we talked about various issues involved in trying to explain economics — and everyone agreed that monetary economics is where people are most likely to get not only confused, but furious....

So what is it about money? I don’t have a full explanation, but here’s a thought: monetary economics is inherently about market imperfections. In a frictionless, perfect-information, costless-calculation world we wouldn’t need money, and it wouldn’t matter how prices were listed. We’d just have Arrow-Debreu complete markets in everything.

Monetary theory — and monetary policy — are, then, all about dealing with an imperfect, frictional world. As a consequence, sensible policy is based around trying to figure how to reduce the costs of these frictions and imperfections; thus floating exchange rates may be a good idea (and how sensible Milton Friedman now looks!) to deal with the reality that it’s hard to change nominal prices.

So why the rage? I suspect that it’s because a certain sort of person wants more purity than the real world is willing to supply.... [W]hen you point out that it doesn’t work that way, that money is a social convention meant to deal with an imperfect world, and that dealing with that imperfect world sometimes means that central banks need to take exceptional action, they fly into a rage.