America's suspended animation
Published 7:20 AM, 1 Oct 2012
Money, we are told, is unimportant to the economy: what matters are relative prices, not absolute ones.
This delusion has been part of economic mythology for centuries, but as is so often the case, the person responsible for reviving this zombie idea in modern times was Milton Friedman.
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That seems to be about as far as most economists read, which is a pity – since immediately after it, Milton throws in a little qualification which makes a mockery of the whole “money neutrality” proposition:
"Provided that all other nominal magnitudes (prices of goods and services, and quantities of other assets and liabilities that are expressed in nominal terms) are also multiplied by 100."
Ahem. Since your debts are not increased by 10 per cent when the CPI rises 10 per cent, Milton’s logic proves the opposite of what he asserts: the nominal amount of moneydoes matter, because of its relation to the outstanding level of debts. Economists who ignore the monetary data in the Flow of Funds are not being wise by avoiding “Money Illusion”, but are acting under the “Barter Illusion” that capitalism can be best understood by ignoring banks, debt and money – three things which most non-economists actually think economists are experts about because to non-economists, economics is “about money”.
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