Alerting Bob Murphy: Krugman Is on Our Side

At least on this issue.: a reduction in the price of (certain) assets is not the destruction of wealth, and does not reduce output capacity.

This was first noted explicitly (to my limited knowledge) by the late, great Fritz Machlup. Machlup wrote:

"While it is perfectly clear that an individual capitalist or speculator may make losses on the stock exchange, it is very doubtful whether 'society' can make such losses."

Just so: if stocks decline, what has occurred is that certain people (the owners of stocks) have become poorer, and other people (for instance, those holding cash but interested in buying stocks) are now wealthier, because their cash can now buy more in the way of stocks. Bob and I, blissfully unaware of having been anticipated in our "breakthrough" by several decades, basically repeated Machlup. (I still think we wrote a fine article, just not one as original as I thought it was when we wrote it!)

And now Krugman points out the same thing. The idea that a decline in stock prices (or housing prices, etc.) is a "destruction of wealth" for the economy as a whole is special pleading for the owners of that asset. It is a fallacy to which "right-wing" economists who are torch-bearers for the stock-investor class are especially prey.


  1. Honestly, I wasn't aware that the opposing view is one that is widely held. Not to cut yourself or Murphy down, but I would have thought that this would be somewhat common sense.

  2. Joseph, you can find this view on display whenever there is a significant stock market decline, and Krugman cites people holding it in reference to the decline in housing prices.

  3. I'm not sure you and Krugman are saying the same thing. Krugman is saying that a decline in asset prices can't reduce the real productive capacity of the economy. I don't think he says it can't reduce aggregate net "wealth," depending on how you're defining that.

    Boiled down, I may be misreading you, but you may be conflating stocks and flows in a way Krugman is not. or maybe the Callahan/Murphy Machlup view assumes "money" is a constant, and a conservation law applies? This would fall foul of the problem that money is not a constant.

  4. "Krugman is saying that a decline in asset prices can't reduce the real productive capacity of the economy."

    And so did we:

    "The same farms, the same fields, the same tractors are here today as were there last year."

    "Yet nothing real has changed; the same number of factories and final products still exist."

    We were equating the "wealth" of the economy with its productive capacity.

  5. You know what, I guess you're right. For some reason the obvious eluded me. It is indeed the case that many people look to the stock market as some measure of macro-economic health (or, wealth). Then again, many people also make the mistake of associating a declining stock market with a "selloff", yet never seem to come to the logical conclusion that if stocks are being *sold* then somebody is *buying* them.

    I guess that I can somewhat forgive the general public for holding such view(s), but certainly not an economist. Is it a widely held view in the economics profession? I ask because I honestly don't know.

    What was the title of the article that you and Bob wrote? I'd like to read it.

  6. Joseph, follow the link above!

  7. Doh!

    Man, today is just not my day...

  8. The man who co-authored that article is dead to me now.

  9. Bob, Bob, don't give up on yourself! Just cause Whitney is gone, doesn't mean you have no reason left to live.


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