Monday, March 28, 2011
A Grain of Salt
According to Paul Krugman, Nobel prizewinning economist and columnist for the New York Times, there is a divide among the nation's economists.
The economists who reside in the center of the country, known as the freshwater economists, firmly believe in the "invisible hand of the market," the ability of the market to self-regulate. They believe that goods and services will always find their correct price. They are against government regulation and have limited tolerance even for using monetary policy (like when the Fed decreases interest rates, or increases the money supply) to address contractions in the economy.
Economists who reside along the coasts, the saltwater economists, believe that while this is generally true, sometimes people are irrational, and because of that, things (like, say, houses, or internet companies) achieve prices that don't have actual value to back them up. And that, when the emperor notices that his glass house doesn't actually have any walls, there'd better be something (like, say, monetary policy or even (horrors!) government spending) to smooth things out while we're waiting for the market to stabilize itself.
There have been two bubbles in the past ten years, bubbles that apparently occurred while the invisible hand of the market was busy doing something else (possibly playing with the invisible penis of the market).
I don't know much about economics. I studied it for three quarters at a community college thirty years ago, and even then I kept confusing elasticity (which is an economics term) with flexibility (which is more about yoga), but any school of thought that simply ignores the bubbles that put me out of work, consumed a healthy bite of my retirement savings and flooded the streets of Madison, Wisconsin with protesters for longer than it took to effect regime-change in Egypt seems to be overlooking something pretty important.
I think I'll take my macro-economics like I take my Margaritas: with a grain of salt.