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PrestoPundit -- fisked by Brad DeLong:

Give Credit Where Credit Is Due

Greg Ransom raves against what he sees as a Federal Reserve devoted to "reducing the value of money":

PrestoPundit.com: The Fed moves to continue its ongoing devaluation of the currency, voting to keep interest rates artificially low. The major worry of the Fed is that there may be some slowing in its highly successful policy of reducing the value of money. Behind all this is the Krugman/ "Keynes" theory of "deflation".... Further evidence in my view that the Fed -- and the economics profession generally -- is overrun by witch doctors and astrologists, not scientists or even competent dentists (reference here to a famous line from Keynes).

Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover.

Focus, instead, on the fact that it is definitely not the "Krugman/'Keynes' theory of deflation." The theory is Irving Fisher's (analyzing the impact of a falling price level on the real interest rate and investment), Milton Friedman and Anna Schwartz's (analyzing the effect of a falling price level on the banking system and the money multiplier), and Ben Bernanke and Mark Gertler's (analyzing the effect of a falling price level on interest rate spreads).

Bernanke and Gertler may well get Nobel Prize's someday for their work on deflation and the "credit channel." Paul Krugman won't--he'll get his Nobel Prize for his work on imperfect competition and international trade. He's been pushing the line that deflation is greatly to be feared in his columns, yes. But this is the first time I've ever seen anyone say that it is his theory.

Why slight Bernanke and Gertler--and Fisher, and Anna J. Schwartz, and Milton Friedman? Is it because Ransom doesn't want to explicitly call Ben Bernanke and Milton Friedman "witch doctors"? Is it because his core audience knows little economics and less about the history of economic thought, but breaks into hives at the mention of "Paul Krugman"?

Whatever the reason, a bad move: it is good to give credit where credit is due.

I'd meant all day to remove my rhetorical drive-by-shotting of Krugman and "pop" Keynesian econ -- too late! Among other issues involved in all this is the fact that productivity has been going up at a brisk pace -- a fixed supply of money chasing an increasing pile of goods means lower prices. I'll add some helpful articles on the multi-dimensional issue of "deflation" when I get the time.

UPDATE: Let me begin with a little reminder from Lionel Robbins on the topic of deflation .. "the belief that there is nothing detrimental to the smooth working of the economic machinery in the changes which result in a consumers' goods price index falling with increased productivity, is not the esoteric creed of a handful of 'sadistic deflationists'as is sometimes suggested nowadays. It is the view which has been held by the majority of the men who have made modern monetary theory in English-speaking countries what it is -- Marshall, Edgeworth, Taussig, Hawtrey, Robertson, Pigou. That a belief that prices cannot fall without causing depression should be able to co-exist with the overwhelmingly convincing demonstration of the contrary proposition in nearly all the standard works on the subject is a most disquieting revelation of the gulf which still exists between scientific knowledge and popular opinion."

And let me recommend the following: "Deflation" by George Selgin; "Hayek versus Keynes on How the Price Level Ought to Behave" by George Selgin (PDF); Two Cheers for Deflation by Joe Salerno (PDF); Deflation: The Biggest Myths by J.G. Hülsmann; Learning to Love Deflation by Ramesh Ponnuru; A little bit of deflation can be a good thing by Kathleen Pender