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Source link: http://archive.mises.org/11982/krugman-fails-to-get-it-on-japan/

Krugman Fails to “Get It” on Japan

March 5, 2010 by

It never occurs to Krugman that the policies of high leverage and of gambling on inflated asset values would not happen systematically if government were not acting behind the scenes. FULL ARTICLE by William L. Anderson

{ 20 comments }

Bogart March 5, 2010 at 9:56 am

Krugman gives a lot of information that even a junior historian/economist like my self can easily rebut. But by far the easiest topic to ridicule Krugman is on the topic of Herbert Hoover. Herbert Hoover wrote in his biography that he was against liquidations and the fall in the money supply. In fact he was against this twice: 1920-1920 and 1929-1933. Of course that reality does not affect Krugman. But the FACT that Roosevelt campaigned on the platform that he would be more frugal that Hoover just makes it even more of a joke.

Nate March 5, 2010 at 10:28 am

“True to form, Krugman claimed several years ago that had Japan’s government not engaged in such actions, the Japanese economy would have fallen into depression — this is another of the “Heads I win, tails you lose” propositions we often see from Krugman.”

Ultimately, the problem that, without controllable experiments, macroeconomics is basically unfalsifiable makes me want to file all of it in the same bucket as intelligent design.

Mike Sandifer March 5, 2010 at 10:36 am

How much stimulus did Hoover offer during each year of the crisis, versus the GDP at the time, and what was the multiplier. Even if you think it’s less than 1, there was multiplier.

Mike Sandifer March 5, 2010 at 10:36 am

How much stimulus did Hoover offer during each year of the crisis, versus the GDP at the time, and what was the multiplier? Even if you think it’s less than 1, there was multiplier.

randolph March 5, 2010 at 10:47 am

“….macroeconomics is basically unfalsifiable makes me want to file all of it in the same bucket as intelligent design…”

I don’t know about that… but it does make me want to stop technocrats using it to plan my economic life…

J. Murray March 5, 2010 at 10:58 am

Economics is a method of observation. It observes how we did and observes to allow for reaction to the environment. It was never meant to be a system to be used for policy control, which is why it always fails. Tools must be used for their intended purposes.

Daniel Kuehn March 5, 2010 at 12:01 pm

Could you explain what you mean when you say that Keynesians think the real interest rate doesn’t mean much? That wasn’t my understanding of Keynesianism.

Daniel Kuehn March 5, 2010 at 12:05 pm

“just as Keynes advocated inflation to cut real wages as a means to increase employment”

This is actually a wide misconception – and a misconception held by Krugman too, I might add.

In Chapter 19 of the General Theory, the discussion of money wages, Keynes talks about a number of circumstances, some in which a reduction of money wages will be more effective and some in which inflation will be more effective. He explicitly says that there is “no essential point of principle” for prefering inflation to nominal wage reductions. I think Mr. Anderson is misrepresenting Keynes on this question.

Vanmind March 5, 2010 at 6:07 pm

Keep in mind that inflation causes a reduction of real money wages, so it amounts to pretty much the same thing — one just takes a nominal wage reduction approach to reducing real wages (theoretically increasing employment) while the other does likewise through a hidden-tax reduction of real wages (inflation). That to me makes the original statement stand as valid.

The notable difference is that only one approach is market-based with those affected having options to cancel voluntary arrangements and move on to other opportunities, whereas central planning is the economic equivalent of collective punishment — legalized plunder of the middle class designed to promote a verisimilitude of knowledgeable governance that can help cover the murderous incompetence of state-sponsored cronyism.

“Price increases? Bubbles? Why, we have no idea how things like that could happen.”

Donald Rowe March 6, 2010 at 11:21 am

quote
Daniel Kuehn March 5, 2010 at 12:05 pm
“just as Keynes advocated inflation to cut real wages as a means to increase employment”
This is actually a wide misconception – and a misconception held by Krugman too, I might add.
In Chapter 19 of the General Theory, the discussion of money wages, Keynes talks about a number of circumstances, some in which a reduction of money wages will be more effective and some in which inflation will be more effective. He explicitly says that there is “no essential point of principle” for prefering inflation to nominal wage reductions. I think Mr. Anderson is misrepresenting Keynes on this question.

Vanmind March 5, 2010 at 6:07 pm
Keep in mind that inflation causes a reduction of real money wages, so it amounts to pretty much the same thing — one just takes a nominal wage reduction approach to reducing real wages (theoretically increasing employment) while the other does likewise through a hidden-tax reduction of real wages (inflation). That to me makes the original statement stand as valid.
The notable difference is that only one approach is market-based with those affected having options to cancel voluntary arrangements and move on to other opportunities, whereas central planning is the economic equivalent of collective punishment — legalized plunder of the middle class designed to promote a verisimilitude of knowledgeable governance that can help cover the murderous incompetence of state-sponsored cronyism.
“Price increases? Bubbles? Why, we have no idea how things like that could happen.”
end quote

Thank you, Vanmind, for your comment. I would like to embellish that just a bit, if I may.

The notable difference is, for some of us at least, similar to the difference between night and day, to the difference between black and white, or to the difference between pleasure and pain. And for that matter to the difference between good and evil!

Furthermore, this stark difference is either obvious to you, or it is hidden from your view. If it is the case that it is hidden from your view, beware. It may bite you in the “asterisk” when you least expect it.

If you are in the (majority?) of people who cannot see the difference clearly, please allow me to attempt an explanation. The act of lending money which does not exist, (which is what all fractional reserve bankers do), increases the amount of money “in the system”. The fake money looks and acts just like real money. This is seen as “good” by almost all who are benefited, namely, those who created the fake money, the governments, the fractional reserve bankers and their friends, of course. We may think of these benefits as occurring instantaneously with the creation of the new fake money. This is easily seen even by Joe and Jane when they are approved for that mortgage or that loan. To all these people it appears to them, for certain, that this is “good”, but is that really the case.

When the loaning of that which is not real slows, as it some day must, then the amount of money in the system suddenly decreases toward its natural level, and by several times more than the drop in amount loaned. As we have all witnessed, the sale price of that house just dropped, dramatically. All this means is that the value of your dollar just jumped, in exact proportion to the decrease in the money supply. All the money, no matter who holds it, rich or poor, citizen or foreigner, just got worth more! Does this look like evil to you? After all, this is the opposite of what took place when the money supply was expanded, so if that was good then this should, logically, be evil. Correct? Perhaps all is not what it seems.

Expansion of the money supply, whether it happens during the building up to the boom or after the crash in an attempt recover the lost value “money value” of property (not money), owned, by the way, by the most successful and the most capable among us, is evil because it instantaneously impoverishes the least capable among us and it may even imperil their very survival. They are certainly not likely to view that as “good” are they! Anyone who was capable of working to provide for themselves and their families must work harder as the money supply expands, if that is even possible. Those that cannot work more may be forced to become “wards of the state” (or simply abandoned). For whom is this good?

The “good” that results from the expansion of the money supply accrues to those who already possess much and the “evil” falls, as always, to those who have the least.

I define evil as any act that improves the survival of one (or several) at the expense of the survival of others.

For those who hold steadfastly to the idea that the money supply must be controlled (that is, increased), there is a way that can occur. One that mitigates the evil of money creation, while allowing the money supply to “float” to its natural optimum.

But that is the subject for a book.

Dave B. March 5, 2010 at 2:21 pm

I just cannot stand Krugman and his manipulative arguments to parrot statist economics. Economic anti-liberal is what he is.

EIS March 5, 2010 at 2:54 pm

Daniel Kuehn,

“Could you explain what you mean when you say that Keynesians think the real interest rate doesn’t mean much? That wasn’t my understanding of Keynesianism.”

Keynes, in his Liquidity preference model, claims that the interest rate is solely a monetary phenomena, not tied to the real economy in anyway whatever (interplay of K and MS). Furthermore, Keynes’ didn’t believe that savings and investment were functions of the interest rate. The former is a function of social class and income, and the latter is dominated/controlled by the so-called “animal spirits” (the variability of investment is the cornerstone of his trade cycle theory). Basically, for Keynes, the interest rate is a barrier to growth, which serves no real economic function (he has no capital theory).

“Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.” (General Theory, p. 322)

Mike Sandifer March 5, 2010 at 4:33 pm

Daniel Kuehn,

Wow. Someone mentioning Keynes here actually read his book. I wonder how many of these critics of Keynes have done likewise. You may be the only one here you has.

dewind March 5, 2010 at 6:56 pm

I think you’d be surprised at how many are familiar with the work of the late Lord Keynes. Many of the people on this site are either A) Taking macroeconomic classes in college or B) Read the “General Theory” out of morbid curiosity.

The writers on this blog most certainly have read his body of work. Because when I listen to their lectures they properly represent Keynes and then methodically dissect the plethora of fallacies in his body of thought in economics.

Vanmind March 5, 2010 at 8:49 pm

That’s nothing. Check out what Hazlitt wrote after he read the book:

Failure of The ‘New Economics’

Ivan March 5, 2010 at 8:59 pm

Austrians know more about Keynes then the Keynesians. We’re familiar with early quasi-Wicksellian Keynes (who Hayek obliterated), and we understand later Keynes, aka, the reincarnation of Hamilton and Malthus. Tell me, what do you think you know about Keynes?

Beefcake the Mighty March 5, 2010 at 7:02 pm

Sandifer,

Last time you graced these pages you were asked (1) by me if you understood the representation theorems of neoclassical economics, in particular how they entail an ordinal (not cardinal) theory of value, just as in the Austrian school (as the neoclassicist Bryan Caplan has noted; you seem to find it unbelievable that anyone could reject cardinality, which I think you’ve confused for continuity), and (2) by newson to use your vaunted mathematical skills to provide a forecast of the SP500.

It’s been almost six weeks, I’d say; how are you coming along with these projects?

newson March 5, 2010 at 9:36 pm

sandifer’s still fine-tuning the machine. in the meantime, everyone please blindly accept that science is prediction.

Caley McKibbin March 7, 2010 at 1:01 am

Krugman fails everything.

Bill Miller March 9, 2010 at 3:47 pm

The essentially religious nature of Keynesianism is demonstrated with its treatment of the economic situation of the US in 1946. The Keynesians at the time predicted that the massive drawdown in spending from WWII would cause a second depression by lowering aggregate. When 1946 actually turned out to be a fairly prosperous year, they changed their tack and claimed that the decrease in aggregate demand from government spending had been offset by an increase spending. The problem with that, of course, is that consumer spending did not rise to the level necessary to offset the decrease in government spending until late 1947 (this is all taken from the article “The Great Depression of 1946″, and yes, the title is supposed to be ironic). Throughout 1946, there was a huge aggregate demand gap, and yet the economy prospered. Nonetheless, they still claim that Keynesian economics could correctly predict this result. So, essentially, Keynesian economics successfully predicts two polar opposite results-making it not so much a scientific theory as a religious dogma.

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