Paul Krugman never stops trying to misrepresent the Austrian position on business cycles, and especially on liquidation of malinvestments. In his blog post today, Krugman again gives us a caricature of the Austrian Theory of the Business Cycle (ATBC), claiming that once the liquidation process begins, by definition, it must go on forever.
I answer his column with my own comments on my blog, Krugman-in-Wonderland.
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I have been amused by Krugman’s obsession with Austrian Economics. In truth I believe he understand what many economists don’t understand. Austrian Economics is the greatest threat to current mainstream economic theories because it debunks them and actually has answers they do not have. They have to use terms like “exogenous” to explain why their theories do not work.
Krugman is attacking his greatest threat and he does it with the religious fervor of a true believer coming face to face with the illogic of his belief.
He does it because he gets paid good money to, as well as the “fame”
no sane person would listen to the pied piper playing “the austrians want you to lose your job” to the masses when the keynesians just doubled unemployment under both a republican and a democrat in just a handful of months. babies take longer.
yes, the austrian theory is similar to the “depression-era” calls for liquidation. so where’s the -ism? i’m pretty sure most people still subscribe to, say, “depression-era” gravity, sound, algebra. just how many theories — keynesian crackpots aside — have actually gone wrong in the past 100 years? some biology? psychiatry?
that it?
You would think that one of the essential qualifications for being considered “smart” is to actually be right once in a while.
You are are smart as long your horrible predictions is based on equations, Paul Samuelson’s style.
He called for a housing bubble in 2001. And we got a housing bubble. Does that count as being right?
No, that’s not being “right.” That’s just a case of Krugman having really powerful friends.
Actually, “friends” is probably an overstatement. I get the impression that Krugman is the prototypical friendless nerd who derives a sense of self-worth from being allowed to hang around with the cool, popular kids (who run the State). In exchange for the privilege of being admitted to the clique, he is expected to produce a constant stream of economic propaganda for their benefit.
Imagine what would happen to Krugman’s personal and professional lives if he were to reveal that he finally grasps the systemic harm that his policy recommendations cause. They would cease to exist.
Krugman is more than just persistently wrong — he’s a fraud, and I’m sure he lives every moment gripped by varying degrees of terror at the idea of being exposed.
Wayne – could you clarify where he says that liquidation will go on forever? I see that nowhere in his post.
Caricatures to a certain extent are inevitable. I’ve never read a rendition of Keynesianism on mises.org that I consider to be anything other than a caricature (Roger Garrison’s pieces perhaps come the closest). It’s not surprising that the same is true of Krugman. You’re never going to be completely satisfied with the rendition of someone that is not as steeped in a literature as you are. That’s not something to hurl insults over – it’s just something to accept humbly on all sides.
However, you don’t have to trump up what Krugman did say. So where are you suggesting that he said that ABCT says that liquidation will go on “forever”? I’m not seeing it.
“These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.”
Krugman says right there that Hayek’s recommendation to allow the markets to clear would lead to high unemployment ‘persistently’ or in other words forever. Krugman is saying here that high unemployment is a permanent feature of freer markets.
In what dictionary does “persistent” mean forever? Persisent doesn’t mean permanent it means chronic.
This is weird. Krugman may present a simplified version of Hayek, but Krugman’s rendition of Hayek is far closer to the reality than your rendition of Krugman.
Daniel, most any thesaurus says the word persistent means both, and I’d say in common vernacular that both are accepted.
From thesaurus on the word persistent:
“Existing or occurring without interruption or end: around-the-clock, ceaseless, constant, continual, continuous, endless, eternal, everlasting, incessant, interminable, nonstop, ongoing, perpetual, relentless, round-the-clock, timeless, unceasing, unending, unfailing, uninterrupted, unremitting. “
That’s how I understood “persistent” as well when I read Krugman’s piece.
What’s the big difference?
Daniel,
Krugman used the open ended term “persistent” — not a finite term such as “protracted”. Krugman’s philosophy does not follow either the reality of the present nor events of the past; to follow his logic one would have to assume “persistent high unemployment” prior to the savior Keynes’ arrival on the scene. I really do not believe that was the case…. save for the Great Depression — which resulted from the State’s interventions into the economy. Once the liquidation has occurred, wages and price levels tend to find (and have historically found) their new equilibrium. From the ashes arises a new economic order, quite possibly different than the preceding one, but, at least in theory, one more in line with the demands of the market of the day.
Actually Austrian renditions of Keynes on the whole are pretty good (at the very least what a graduate of economics would answer), when compared to the utter crap Krugman pulls out trying to interpret Hayek (to the degree that if I were marking a paper on Hayek by Krugman, I’d give him a failing mark…)
I’m not going to speak for Wayne, but Krugman did definitely portray the depression process of unemployment as persistent in the absence of government intervention–as though in the market of free choices people choose involuntary unemployment.
Krugman and many of his commenters only support the contention that these people aren’t interested in reality, but what sounds nice. No effort is made to prove Schumpeter and Hayek wrong, only that what they preach sounds uncharitable, and so they have no conscience and we shouldn’t listen to such monsters.
Oh, and they were apparently rich SOBs that were not affected by economic downturns.
It’s also hilarious to see persistent high unemployment attributed to free market policies, considering continental Europe really has persistent unemployment and a not-so-free market. To put it lightly.
Now if there was a nice illustration of Krugman dressed up like Alice in Wonderland to go with the article…that would have made my day.
I posted this comment on that article on the nytimes site.
Hayek and “Austrian Economists” predicted the great depression in the 1920′s. Hayek’s theory blames expansion of money and debt for the crash. In the gold standard days crashes averaged less than a year before people were back to work and the economy recovering. If you do not want to let people clear the wreckage, fine. But government intervention has consequences such as sustained high unemployment.
I think Keynes knew that Hayek is right. Keynes said that if you stimulate to offset an economic shock, then you have to remove that stimulus later. He neglected to mention the reason that you can’t stimulate the economy all the time, namely government stimulation is not sustainable.
Manipulating interest rates creates debt bubbles that drive the trade cycle. If we were free to use gold as money, there would be no trade cycle. Roosevelt outlawed ownership of gold (in a free country!) to force people to keep using government paper for money.
The reason we had booms and busts on the gold standard is that the US Government permitted banks to use fractional reserve banking as a way of leveraging debt. They did not understand that they were causing the trade cycle. That was discovered by the Austrians in the 1920′s. They used this theory to predict the great depression.
great you pretty much covered it
Many Austrians bring Krugman’s attack on themselves as they praise deflation and economic decline as necessary to recovery.
Here Krugman takes Hayek out of context because Hayek does acknowledge that if a deflation can be prevented it should be and if the economic decline can be minimized it should. Hayek was very sound in his prescriptions for recovery. Krugman would pour water on a drowning man.
for an example of krugmans all to eager belief in the govt spending us to utopia, i give you the current state of suppliers to the auto industry. currently i have customers that cannot get raw plastic pellets due to the sharp increase in demand from the cash for clunkers program. during the depression (YES I SAID IT!!) the plastics suppliers widdled their inventory down to nothing as did the chemical suppliers. when they ramped up in what could only be described as a viscious turn of fortune (i know, my shop suddenly surged) inventories were chewed up quick at all the moulding shops here in canada and in the US.
congratulations, NoBama, youve created a massive industrial shortage!!!!!!jackass
I don’t get the connection. Nylon 66 prices did jump a bit this past winter. What does the Cash-for Clunkers program have to do with that? Did crushing all those clunkers dry up the market somehow?
And how (and why) did plastics suppliers widdle their inventory down?
“Many Austrians bring Krugman’s attack on themselves as they praise deflation and economic decline as necessary to recovery.”
Here’s what Austrians are actually saying. They want to see the liquidation of bad investments. For example houses in the desert whose price is too high and car companies who can’t make cars at a profit. Austrians want things like houses and company shares to sell for what they are worth in the free market.
Anti-Austrians think that the market is wrong, and that houses should never go down in price and really big companies should never go bankrupt. Worse than simply believing these things, the anti-Austrians put guns to the heads of the public and force them to pay prices which they never would voluntarily. The prices are paid via taxes, forced loans, inflation, and when those fail, by conscripted service first into make-work projects and finally into war. In other words by theft, slavery and murder.
So which do you think leads to economic decline – the Austrian way of letting prices be determined in peace and freedom, or the way of violence?
I have to admit that reading Dr. Krugman’s CV is very impressive and would indicate someone of superior intellect in the field of economics. Here is a guy that has been educated at the top universities in the country, he has received the Nobel Memorial Prize in economics and teaches at one of the top schools in the country. We should be sitting on the edge of our chairs ready to gather what ever crumbs of knowledge Dr. Krugman generously throws our way. We should be thankful that someone with such prominence and importance as Dr. Krugman is willing to spend his very valuable time to write a blog that seeks to explain economics for us lay people. At least this is how Dr. Krugman probably views his public contribution of economic knowledge and what probably drives him to lash out at those of lesser standing who dare question or challenge his view points.
Unfortunately for Dr. Krugman, economics is one of those fields of study where many theories can be validated in reality and proven right or wrong. Having followed his blog for years (up to 2007), and read many of his economic explanations, predictions and solutions, I came to the conclusion that while he may be very highly lettered in his profession, his understanding of economics leads him to bad conclusions. It still baffles me today, how someone that has been wrong on so many things can be published and taken so seriously. Had I listened to Dr.Krugman’s ramblings back in 2007, instead of the Austrian school, I would be a lot poorer today. I am a business man, and the one thing that any successful business person will tell you is that you keep doing the things that work and avoid those things that don’t. Dr.Krugman’s lack of accuracy is enough for me to disregard him no matter how well regarded he is in academic circles.
It seems to me that Mr Krugman must be doing something right. Because if you take a look at any of his old crystal-ball speculations from past eras, they mostly seem to be very accurate. So if he’s full of it, how is he able to predict the direction the economy’s going to take so well?
Take a look at Peddling Prosperity or The Age of Diminished Expectations (both 1994). Or The Great Unraveling (2003). Find any claim he makes about future economic performance in these books, and tell me whether it hasn’t come to pass in much the same way he predicted it would.
But I guess that’s not the point. The guy’s just a lefty. He thinks you can just crank up the printing press and get richer and richer. Listen to this, for instance, from Milton Friedman II: Stagflation:
“Keynesian economics suggests that it is usually pretty easy to get out of a recession. Just print money, and watch the wheels of commerce start to spin again. By providing enough cash, one should be able to get the economy back to a high level of unemployment.
“But what happens if a government, for whatever reason, continues to print money in large quantities even when the economy is in full employment? (The usual reason governments do this is to finance a budget deficit.) The answer is obvious: Once there are no longer idle factories and workers to draw into production, it will simply raise prices.
“Now Keynes always understood this. [...] Keynesian economics never called for expanding the economy without limit. Instead, it called for expanding the economy up to full employment, but no further.” etc. I just opened one of those books at random to find this.
See what I mean? The man is hopeless! So not worth reading one should never, ever read him. Yet we should attribute to him ridiculous views he’s never held!
Michael,
So…. how does Krugman reconcile his previous literary works (which sound, well, sound and sane from your quoted excerpts) with his more recent NYT articles? Why does he harbor such vitriol against the Austrian school of thought?
So who are the current prominent politicians running on “Austrian School” economics?
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