Sunday, April 1, 2007

Krugman against 'real adjustments' (amv)

Paul Krugman is known for his staunch critique of "blind faith" in the free market and for his distaste for "dogmatic" laissez-faire advocates. Indeed, no reasonable person can accept "blind faith" and "dogma", the antonyms of science and Enlightment. But in a recent comment, Krugman sinlges out one economist, who is known for his laissez-faire attitude, as having shown "himself much less doctrinaire and much more realistic than many of his acolytes." It is Milton Friedman, the Nobel laureate, who unfortunately died a few months ago. For Krugman, the case is clear: those who advocate fixed exchange rates under a regime of gold standard are diehard heirs of King Midas. From his point of view, these outdated 'believers' fail to realize that a shift in nominal exchange rates can prevent the national economy from real adjustments. Krugman claims that
"achieving international adjustment by changing the exchange rate, rather than by depending on thousands of firms to change their prices, is like shifting to daylight savings time, rather than depending on thousands of firms to change their working hours."
And since Friedman is a supporter of flexible exchange rates, that is, since he shares Krugman's view on this particular topic, he cannot be a unrealistic and dogmatic doctrinaire, at least in this respect, can he?

The truth is more complicated, of course. Friedman advocated flexible exchange rates, because he believed that this policy would lead to more exchange rate stability. For him, exchange rate pegging is a government intervention and as such detoriates the supreme outcome of the unhampered market economy. Krugman, in contrast, wants the government to interfere on foreign exchange markets exactly to annul the market process, that is, the reallocation of resources to satisfy consumer preferences based on the profit motive. Krugman has once again proven that a good 'modl'-builder (to say it with Leijonhuvfud) is neither necessarily a good historian of economic thought, nor in any case 'value-free'. Once again, Krugman has shown that he is first and foremost a dogmatic believer in government intervention. Or is there any other reason to vilify the market process, i.e. the thousands of firms setting their prices as to maximise their profits while serving the needs of the consumer?