Any theory — including any of Paul Krugman’s Keynesian models — that neglects the distortion of the capital structure during boom periods cannot possibly hope to accurately prescribe policy solutions after a crash. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/15407/my-answer-to-krugman-on-austrian-business-cycle-theory-2/
My Reply to Krugman on Austrian Business-Cycle Theory
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Dr. Murphy,Great article — I will definitely be linking to it whenever I am embroiled in a debate with non-Austrians.But I do have one point — perhaps a suggestion for a future article. I believe that the Austrian view would have more adherents if there were Austrian ‘solutions’ to a bust other than ‘do nothing’. I fully understand that producers need to adjust to new (or real) consumer preferences, but there needs to be a set of Austrian policy prescriptions…the general public tends to dislike “do nothing” approaches — that’s why they vote for activist Keynesian policies.For example, can Austrian articulate a way to hasten the reallocation of labor and capital? Tax credits for re-training/re-location? suspend capital gains taxes…maybe negative capital gains tax rates for a limited period of time?
With the most recent bust, perhaps a pro-short sale — or pro-write-down — policy would have been effective in reducing housing prices quickly and reallocating productive forces to meet consumer preferences quickly. Maybe burden-sharing to encourage bank write-downs of underwater homes…
Perhaps a pro-immigration policy could allow us to quickly align labor to new preferences while we wait on the sushi…
Again, I think that Austrian policy solutions to the current economic situation would go a long way towards gaining adherents to Austrian views.
>I believe that the Austrian view would have more adherents if there were Austrian ‘solutions’ to a bust other than ‘do nothing’. I fully understand that producers need to adjust to new (or real) consumer preferences, but there needs to be a set of Austrian policy prescriptions…the general public tends to dislike “do nothing” approaches — that’s why they vote for activist Keynesian policies.For example, can Austrian articulate a way to hasten the reallocation of labor and capital? Tax credits for re-training/re-location? suspend capital gains taxes…maybe negative capital gains tax rates for a limited period of time?
Nick, Austrians do NOT advocate for “do nothing”. Austrians advocate for THE GOVERNMENT to “do nothing”, and for the millions and millions of individuals in the economy to be given more economic freedom and for them to “do everything”.
Your examples of “doing something”, to the extent that they are based on tax cuts, are in fact policy prescriptions for THE MARKET to “do something”, because the more of their earnings individuals can keep, the more they can do what they want in their lives. Tax cuts are a prescription for individual income earners to “do something”, and for the government to “do less”.
All of the items in your “do something” list seem to be things that the government should do. If you instead anchor your mindset on what individuals can do, then you will see that they can do more, the less the government does.
Action is ONLY done by individuals. You have to be careful not to equate action with government only.
You repeated a point I conceded up front without answering the question — the market reallocated productive forces…I get it. But are there actions the government can take to enable the market to do a better job at reallocating??? Are there pro-market government policies that Austrians can advocate to speed up the reallocation process???
You said tax cuts — that is what I am talking about. That is still the government doing something — returning stolen goods.
“But are there actions the government can take to enable the market to do a better job at reallocating??? ”
yes, it can get out of the way.
Care to elaborate on that cliche?
The problem you are ignoring by calling it a cliche’ is that it is intervention in the economy that causes the problems in the first place.
More interventions only cause more problems.
Yes, “get out of the way” includes tax cuts, regulation repeal, abolishing something (anything!) in order that the greater freedom of the individual to allocate their OWN resources, now less encumbered by govt, means faster and easier reallocation into actually productive uses.
So there is nothing MORE that govt can do. The only useful thing govt can do is LESS.
If, by some miracle, govt were to do NOTHING AT ALL, that would be the best for everyone involved except the unemployed bureaucrats.
…but then, those bureaucrats would then be freed up to reallocate themselves into lines of work that were actually productive, rather than destructive. So abolishing govt in any amount, to any degree, increases productivity.
>Are there pro-market government policies that Austrians can advocate to speed up the reallocation process???
Sarbanes-Oxley costs ONE TRILLION FREAKING DOLLARS A YEAR. Americans must get mad as hell about this Progressive attack on production. I don’t know which of the many interventions whose immediate abolition would best increase production but consider these: the Fed, Fannie Mae, Freddy Mac, FDIC, legal tender, anti-trust, EPA, Dept. of Energy and all other anti-energy laws, etc, etc. As in the dramatic improvements of the 1920s, Americans must concretely see the benefits of markets.
OK — I agree that all of those programs should be abolished.
But how much do they contribute to the reallocation/realignment process? SOX is awful, but how much does a massive accounting burden contribute to the reallocation process? There are more accountants than there should be, and money spent on compliance could be spent better elsewhere, but what else?
I also think the $1T number is high. I’ve heard its a hundred billion or so. A trillion would be 7% of GDP.
Nick,
There is very little an Austrian could say to you that would meet your criteria. Any action the government takes other than “get out of the way” will necessarily fail because they do not have the kind of distributed information necessary to get it right. Any attempt to target areas for capital reallocation will fall into the same trap as the original attempt that caused the boom/bust; the reallocation will create a new bubble elsewhere.
In general, the best advice I can think of would be to universally cut taxes and reduce regulation. For this specific bust (housing and housing-based financials) the best advice I can think of would be to remove any restrictions on bank failures, foreclosures and other fallout from businesses making bad plays so that new ownership can restructure the remaining capital as quickly as possible.
In short, things that amount to the government “getting out of the way”.
>You repeated a point I conceded up front without answering the question — the market reallocated productive forces…I get it. But are there actions the government can take to enable the market to do a better job at reallocating???
Absolutely not. Remember, everything the government does that is “governmental” is backed by guns. So when you consider government actions that “enable the market to do a better job at reallocating”, the optimal “reallocating” is that which results from individual peaceful interaction, and individual preferences being unimpeded by violence and thus free to act.
The less the government does, the more individuals can do.
>Are there pro-market government policies that Austrians can advocate to speed up the reallocation process???
The government and the market are antitheses of one another. The free market is a process of human interaction that entails peaceful exchange of private property, and the concomitant respect for individual property rights. The government is a process of compulsion and coercion that entails violent redistribution of private property, and the concomitant lack of respect for individual property rights.
A government that acted optimally would not be a government.
>You said tax cuts — that is what I am talking about. That is still the government doing something — returning stolen goods.
The government is not “returning” wealth when they cut taxes. They are in fact ceasing to take further wealth from those who earned it. They aren’t DOING anything so much as they are CEASING to do something.
If I have habitually been robbing you of 40% of every paycheck you earned, then would my cutting of this robbery down to 20%, 10%, or (optimally) 0%, entail me GIVING you anything back from the moment I cut taxes? No. What I took is already long gone. I would just cease robbing you from that moment on and start respecting your property rights.
So my cutting your taxes is not actually me DOING something so much as me CEASING to do something, which is robbing you. Once I stop, then YOU would start to “do something” with your earnings, and I would have to find a real job producing for my fellow human beings.
>Austrians do NOT advocate for “do nothing”. Austrians advocate for THE GOVERNMENT to “do nothing”, and for the millions and millions of individuals in the economy to be given more economic freedom and for them to “do everything”.
Excellent answer! The hidden statist context that has been accepted for many decades must be exposed as a power-luster’s lie.
It’s not an excellent answer — it says nothing. We all agree here that the optimal situation is one where the government does nothing.
But the status quo is that the government does a LOT…how do we get from the current situation to where we want to be?
I’m still waiting for answers…
Nick,
There is very little an Austrian could say to you that would meet your criteria. Any action the government takes other than “get out of the way” will necessarily fail because they do not have the kind of distributed information necessary to get it right. Any attempt to target areas for capital reallocation will fall into the same trap as the original attempt that caused the boom/bust; the reallocation will create a new bubble elsewhere.
In general, the best advice I can think of would be to universally cut taxes and reduce regulation. For this specific bust (housing and housing-based financials) the best advice I can think of would be to remove any restrictions on bank failures, foreclosures and other fallout from businesses making bad plays so that new ownership can restructure the remaining capital as quickly as possible.
In short, things that amount to the government “getting out of the way”.
Nick,
I just want to add my support to your view point.
“Get out the way” is not the same as saying that “get out of the way in this particular way first, then get out of this, etc.”
Nothing against Murphy, he continues to do an outstanding job. But others writing here seem to think the problem is resolved by imagining a “poof” solution where government interventions that are inconsistent with Austrian policies are just suddenly absent. End of problem.
In reality, even if Ancaps find their ultimate vision manifest, the status quo will have to be systemically and rationally unwound, one policy at a time, to if a plan of transition is to be made with minimal negative impacts, which seems like a reasonable goal.
While it is true that we can do nothing and let the whole thing collapse under its own weight, figuring out what should be done first, and describing how the transition can be managed by free market forces, seems reasonable to me. It’s at least worth thinking and talking about.
Defining a set of policy changes that start from the status quo is a lot more work, all of which is conveniently avoided by simply adopting a premise of “no government”.
That is why you have no takers on your very rational and reasonable questions.
Thank you Wildberry. I think that if we can have specific policies that can be cherry picked by the establishment, we can go a long way towards exerting some influence.
What you are forgetting is that we live in a democracy, where elected officials look out for their own constituents, families, etc. So, the chances of scaling much back are slim. This is why there is no realistic plan for “transition” – more likely is a collapse by the federal government.
Dave,
Haven’t you put your finger on an important issue?
If politicians are beholding to their constituents, and informed constituents act in their own best interests, then if they understand why they would benefit from one policy over another, don’t you think that these same constituents would drive policies along those lines? Politicians would have to follow or find another job.
Couldn’t one interpret the midterm elections has having been something along those lines?
If that is true in any sense, then doesn’t it make sense to start with a policy recommendation (see Murphy’s article cited here by Daniel below, although it should apply to any policy shift consitent with Austrian theory) and to draw the logical pathwy between that policy and a ‘better life”?
Wouldn’t it be a valuable form of popular persuasion to be able to make that kind of argument, one where the benefits were clear in popular terms, accross the board?
That seems like a worthwhile endeavor.
Then why are we on a path to insolvency? Is everybody that uninformed? I think too many people have become dependent on some sort of social service, and don’t think they can get by without it, and myriad other reasons…………..
Nick,
Let me give a software analogy.
Sometimes a computer program begins small, and then as more and more features are added it becomes so unwieldy that any new change often has unforeseen consequences that are both unexplainable and extremely difficult to fix without causing yet more problems.
In this case, most designers throw up their hands and say the only possible course is to throw everything out and start over.
I think the Federal Government has followed this course and gotten so complex that any attempt to unwind it a piece at a time would fail. And before anything can change, the people of this country must WANT it to change. Right now, people only want those things that they don’t like to change, while wanting to keep all the pieces that they do like. But there is no consensus on what people want. The Elderly want SS payments, the young want to eliminate the payroll tax. How can these 2 things be reconciled? They can’t.
I’m afraid the only way things will change for the better is if the whole economy comes to a complete collapse. Then it might be able to start over. But as with 1920′s Germany, there’s no telling if we’d end up with a better system or one much worse.
>It’s not an excellent answer — it says nothing.
It says everything.
It says that you are wrong to assert that Austrians want the solution be to “do nothing”. ACTION is done by individuals, and when the government uses less violence against individuals, then individuals are more free to act and “do something”.
Individuals do not need government to act. Individuals can act on their own.
>We all agree here that the optimal situation is one where the government does nothing.
But that isn’t “doing nothing” in general. That is SOME people ceasing to engage in further governmental violence. Everyone else can thus do more, and they will do whatever their preferences guide their actions to be.
>But the status quo is that the government does a LOT…how do we get from the current situation to where we want to be?
How can we do anything? By education and by action.
Answers? Although not complete, I believe Sam Konkin III served up a few “answers” in “An Agorist Primer” and “The New Libertarian Manifesto”. Currently, there are projects going on, like “The Free State Project”, “Charter Cities”, and “The Seasteading Institute”, to name a few. Perhaps, a little research on your part, into some of these things, could yield the answers you may, or may not be, looking for. Also, see: Voluntayryism.
See, neoclassical economics is specifically set up so that governmental actions are “non economic”, in that the market (note: this is not the actual real world market, but the intellectual construct of a static or evenly rotating, perfectly competitive, homogeneous goods market) will act in one way, and the government is insulated from those forces when it implements new “policy” for the market to digest and find a new equilibrium. If you read an intro to micro economic text, every other model is followed by “but that’s why the government steps in”.
Austrian Econ does not have this “standard model” that relies on falsely abstracted premises, and thus doesn’t set itself up to say “well the market will fail in providing X, so the government must do so.” Instead it looks directly at the action involved in the market, and doesn’t distinguish the government as being anything special, except that the actions it takes are sometimes contrary to the “private demand curves” of the individuals subject to it. This is why Austrian Econ fits with libertarianism so well: Both recognize that there is no moral superiority that separates the government as an actor or a firm from the rest of us humans. Economically this means that government policies are nearly impossible to analyze because no value information is being made objectively, and each party subject to the policy has not given an objective signal of his ends to gauge whether the result will be a cost or a benefit to each individual.
So how does an Austrian put on a normative cap and suggest a government policy prescription? Well, if we are being idealistic about what the role of government should be (treating all people with equal respect), then truly no policy can be enacted. Policy only exists as Orwellian doublespeak, as any policy used by governments today take the form of “redefining initial property rights to avoid neoclassical market failures”. Redefining property rights is fancy talk for using force to take some of your property and give it to someone else, someone with a stronger voice in the “policy-maker’s” ear (read: thief), so that the neoclassical competitive market will give the results the central planners want to see.
But still we could assume an Austrian were put into the policy making seat, and could turn the dials and pull the levers to change the whims of the entire economy. What would they do, qua economist? Well, they would need to know, objectively, each individual’s value scales to see what the society valued as “good” and “bad”. A well written letter from lobbyist groups just isn’t objective proof the the policy will do what they claim – it is merely proof that the policy is worth more to the lobbyist than the time and effort of writing the letter. How would the policy maker go about measuring each person’s willingness to pay for the goods and services they want, but by letting them go and make voluntary exchange?
So that’s the policy: less coerced payments, more freedom of exchange. Do what thou wilt. Show the world your values through taking action, and let those values be rewarded. The government should do nothing but recognize that it is a market actor bound by a constitution, and as such will only do harm to the general welfare whenever it disrupts people’s free choice.
OK, then what actions could the government take to have “less coerced payments and more freedom of exchange”? What are the best bang-for-the-buck things the government could do right now? “Bang” is economic liberty that hastens the reallocation process and “buck” is the political feasibility within a democratic system.
“what actions could the government take to have “less coerced payments and more freedom of exchange”?”
Cut something. Fire someone. Abolish a department.
“is the political feasibility within a democratic system.”
Oh, since you want to put it that way, then nothing what so ever. Leviathan will not be whittled away voluntarily.
There is no “political feasibility” to cut spending or regulation anywhere, so I guess your only answer is to stock up on ammo and go hide in the woods until it’s over.
Within our current framework, the federal government needs to work with every other countries’ government to abolish every barrier to free trade. Only problem is, the union thugs with their baseball bats would be out even if this were mentioned….
Are you afraid of a few fat guys with bats?
Is that enough to keep you at bay?
That, plus the state regs that steal from me to fund their activities…. How many union guys are on disability right now, rather than looking for a job? That’s the truly scary part to me…..
Nick,
Obviously, not putting ourselves into such a horibble predicament that there are no painless ways out is the first answer you are going to get. But since you are insistent, here you go:
“Do You Austrians Have a Better Idea?”
http://mises.org/daily/3316
Daniel,
Thank you for this, I had not seen it. This is what I am talking about. Now let’s get Murphy on the Council of Economic Advisors.
Daniel,
The link to “Do You Austrians Have a Better Idea?” was fantastic, and the comments were enlightening in and of themselves. Thanks for finding that.
Great link, Daniel. Thanks a ton
Tax credits for relocation and retraining would slow the recovery, I think. It would likely impel people to make a more hasty decision to retrain or relocate somewhere. It might impel Person A to make a hasty move and in one month switch into X industry, when without the perverse incentive Person A might take 2 months and move into Y industry.
Plus I think any tax credit to incentivize relocation/retraining would have specifications as to locations and industry, which would definitely slow recovery.
Nick here is the problem with your question about how can govt make things better by speeding things up.
The problem is government any action govt takes which is “do nothing”, will be preventing people from doing things they wanna do. Your question is “What can government do to make people do things they wanna do”, the obvious answer is “let people do the things they wanna do, that is do nothing”, then you are trying to force things out “no but still govt can prevent people from doing things in such a way that they end up doing things they wanna do faster and quicker”.
If you would only understand what you are asking, you will stop asking “what can govt do to make things better instead of do nothing”.
Its because you don’t understand what you are asking you are disappointed with the “do nothing” answer.
ja, ja, ja
Murphy is happy, because this time Krugman dont ignore Austrians like the most of the academic world ignores them, but not get too excited in a few years the Austrian mythology will return to his hole again
Yup, yup, yup
Kira is upset because this time Austrians are not getting ignored like most of the academic world used to ignore them, but don’t get excited, because in a few years, the Austrian school will be even more pronounced and the Keynesian/Monetarist theory will return to the historical dustbin of outdated paper money mythology once again.
To Kira,
Almost everything Krugman says about economics is nonsense! If the academic world agrees with this guy, what a disaster! When you talk about “the most of the academic world”, you think about those who have not seen the subprime crisis coming?
Kira, not until a Keynesian can write a complete, logical sentence about Austrian Business Cycle Theory will it ever be dismissed by rational human minds.
>Keynesians stress the primacy of demand
Keysnesian pseudo-scientific frauds mean political demand, ie, counterfeit money and counterfeit bank accounts backed up by a gun. They don’t mean Say’s demand, at the end of supply.
I always wonder how you can almost totally ignore capital while trying to explain or improve the economy. No amount of money, education, knowledge, specialization and trade will help if the capital is missing.
Krugman references the Great Leap Forward and fails to mention Mao killed 50 million people.
http://en.wikipedia.org/wiki/Great_Leap_Forward#Deaths_by_starvation
it figures.
In fairness to Krugman, that fact is not relevant to the point he was making.
Excellent.
Why is Bob the only Austrian writing such stuff?
Division of labor!
Frank Shostak has written a lot of related material.
A very good point, Greg. This is a golden opportunity for Austrians, and it’s nearly always Bob who’s doing the heavy lifting.
Wow! You nailed Krugman with this one. No wonder he is recalcitrant to debate you for charity.
Maybe he thinks Murphy won’t be charitable to a Nobel winner who wont or can’t understand theory.
Unfortunately this is the blind leading the blind.
See my ’7 Deadly Innocent Frauds of Economic Policy’ at:
http://www.moslereconomics.com/?p=8662/
to quickly gain an understanding of actual monetary operations, in easy to understand, non technical language.
Scroll down the following linked page and find various entries for “A Refutation of Mosler Economics and Mosler’s 7DIF” by Taylor Conant here:
http://tinyurl.com/48og2rv
Mosler is a “Chartalist” and they have no clue about economic calculation (among other problems). Apparently, their ideas are derived from Georg Friedrich Knapp.
Von Mises shredded Knapp’s “state theory of money” here:
http://www.econlib.org/library/Mises/msTApp.html#Appendix%20A
Mises calls this type of theory “acatallactic”.
This has to be a joke post, and not the real Warren Mosler. Of course, as Bob points out, Mosler economics IS a joke.
Ah yes. The great Warren Mosler.
He once boasted that he built the best sportscar in the USA and that it could out-perform anything. Car and Driver magazine got hold of one of his cars and tested it back to back with a bog stock, fully-Federalised, emissions compliant, mass produced Chevrolet Corvette. The Corvette out performed the Mosler. Also it was cheaper. Also it could be serviced and repaired at any Chevrolet dealership (and there are plenty of those across the USA and the rest of the world). Also it was reliable. Also it had sensible residual. Also there was a reasonable warranty…
Mosler made plenty of excuses after that comparison test. Plenty. Plenty. Plenty. Trouble was his boasting was wrong. While his cars are interesting and he did progress to making better and better versions, he never did fess up and admit he’d made a mistake with his boast. He never was quite able to admit that GM for all its trevails and worries and problems and compromises was able to manufacture a car that had the measure of his. Not only did GM manufacture it, but they made many thousands of examples that year. They still do that and the present version is a world class sprtscar (at an incredible price for the performance- likely unmatched).
In the end Mosler’s economics (which I took the time to read a while back) are about as reliable as his boasting.
Sione
Geez, what did I ever do to you guys?
such is the internet…
Warren
“What did I ever do etc?”
Promoted a coercive fraudulent economic system for one thing. More of the same rorting as been prevalent for so long is about the last thing the economy needs.
Sione
Nice defense of the ABCT! Thanks! As usual, it appears that Austrians and Krugman are talking past each other because of methodological differences. Krugman, Cowen and other mainstream economists are obsessed with historical data and very, very simple explanations. They think that by using historical data they are being scientific, like physicists. But they are exactly the opposite. Physicists apply the scientific principle of changing just one variable at a time in a controlled experiment. That’s why they can derive theory from their experiments.
But no historical economic data has just one variable changing at a time. And it’s impossible to construct such data from history. Krugman and Cowen insist that their interpretation of the data is correct because they assume that the data is a controlled experiment when it is not. Many, many variables are changing at the same time as the historical data is being recorded.
The demand curve is a good example. When we say that the demand curve has a negative slope, we assume that nothing is affecting demand but price. However, historical data often show the demand curve with a positive slope, gasoline purchases for example. Do we say that the law of demand is wrong, then? No. That would be stupid. We say that price isn’t the only thing affecting demand.
In the same way, Austrian business cycle theory is a controlled experiment in though, because real controlled experiments are impossible. The ABCT is true, all other things being equal. But in real life all other things are never equal, that’s why you can’t disprove the theory with a simple historical data series. Historical data do not result from a controlled experiment. You’re comparing apples and oranges.
Nevertheless, the Austrian theory anticipates increased spending on both consumer and production goods at the same time. As Murphy points out, this can happen when resources are scarce due to capital consumption. However, during most of the historical data series on business cycle there is no scarcity of resources. Scarcity only happens near the end of the boom. For most of the boom we employ unused resources in the form of unemployed workers and excess supplies of materials. For most of the boom, manufacturing plants have excess capacity. Scarcity doesn’t begin to kick in until the late stages of the boom.
Using the demand curve is actually a terrible example for the point you are making. Strictly speaking demand (and supply) curves are unobservable because they represent a snapshot of the combination of all individual value scales at some point in time. Historical price and money outlay data indicate that these curves are changing over time, but these data are insufficient to reconstruct what the curves were (are) at any given moment.
The example you give for gasoline does not show that a demand curve can sometimes be positively sloped. Recall that the non-positive slope for the demand curve is guaranteed by the law of marginal utility. Since gasoline tends to be an inelastic commodity (as there is no readily available alternative) it is possible for the total money outlay for gasoline to rise with price even as the quantity demanded falls (in accordance with a non-positive demand curve slope.) I think you may be confusing an increase in the monetary outlay with an increase in the quantity demanded.
A man goes in a pet shop looking for a parrot. The shop-owner shows him a nice one which costs $300 and can say a few words like: good morning, hello and good evening.
The man points to another parrot and the shop-owner tells him that it costs € 1000 and can say quite a few words and a few sentences.
The man points again to another parrot.
This one, says the shop-owner is quite expensive at $ 10,000 but is very intelligent, knows hundreds of words, can untie a knot with its beak and can practically interact and hold a regular conversation with a human.
A bit confused at the options, the customers points at yet another parrot in the corner: how much is that?
Oh, we would only sell that one for a full million dollar! Comes the answer.
Flabbergasted, the customers asks: Wow! And what does he do?
The shopkeeper looks around like being a bit surprised at the question but answers:
Well, we haven’t seen him do anything or say any words but all the other parrots call him Professor Krugman!
I think we may have discovered another type of fallacious argument, to go along with the classic fallacious argument such as “Appeal to Authority”, “ad hominem”, “The Fallacy of Equivocation”.
We have the Krugman Fallacy. This entails when some course of action fails, making the claim that any alternative action would have produced an even worse result.
This type of fallacy, by construction, is difficult to refute, since, by definition, we can have no direct observation of the outcome of of the alternative course of action.
I’m sure when QE20 is being proposed, that it will be argued that without QE19, which failed, things would have been a lot worse.
You’re far too optimistic. By that time, pumping exponential amounts of new money into the economy every month will be considered such a necessary and crucial function of the state that all who question it will be laughed off and dismissed.
Let me correct that for you:
Laughed off and beheaded.
> any alternative action would have produced an even worse result. This type of fallacy, by construction, is difficult to refute, since, by definition, we can have no direct observation of the outcome of of the alternative course of action.
Arbitrary claims have no evidence either for or against. They have no rational meaning. Its as if nothing has been said. The moon is made of green cheese. Any attempted refutation will be met with another arbitrary claim. Gremlins hide when you look for them. Do not attempt to think about an arbitrary claim. Its destructive to the mind’s function in producing knowledge for survival. Mind must be in cognitive contact w/reality. The arbitrary breaks that contact.
>[Krugman]the business cycles we actually see in market economies?
Krugman evades the repetitively and clearly stated Austrian recognition of business cycles in interventionist economies.
Again Krugman has had is ASS HANDED TO HIM. Way to go Professor Murphy! Although I am only a small business Owner, and a weekend Economist, I continue to be shocked every time I hear Kurgman espouse his liberal garbage. Even a kid running a lemonade stand understand more about business than Krugman. Just because he was elevated by left-leaning, power-grabbing, vote-buying Socialist, doesn’t make his Pro-Government/Anti-Business Theories right. Please, make him stop – before the next “Fall of Rome”.
I think that none of the Austrian critics understand the central Austrian concept of economic calculation through free market prices. Everything is based upon that concept. Malinvestment occur due to impairment of economic calculation by diluted funny money. Without understanding the basic concept of economic calculation, I suppose everything we say might appear ad hoc.
However, without understanding economic calculation, one can’t understand economics.
C’mon, Bob–be reasonable–give ‘em enough time to digest and absorb it. After all, it’s been only about 90 years.
Wow Bob, I think you may have left a hand print on Krugman’s arse!
Krugman’s beard hides the hand prints on his FACE.
This article was posted at ZeroHedge today. Tyler Durden of course adds his own “puerile insults” directed at Krugman (not to say that I disagree with Tyler).
http://www.zerohedge.com/article/robert-murphys-retort-paul-krugman-austrian-business-cycle-theory
The statistics posted by Dr. Murphy are lies drawn from the Tom Woods Wicked Free Market Statistical Bank
Increased savings tend to depress the natural rate of interest only if those accumulating the extra savings are willing to lend the extra cash. If the savers store the extra cash in a warehouse account or under their matress, and do not lend that money, the interest rate (all else being equal) won’t change.
Where the money supply remains constant, no one can accumulate savings at a constant rate in perpetuity. Any guesses, Dr. Murphy, what the natural rate might be if the money supply remained constant?
Mr. Murphy, I for one appreciate your professionalism in responding to a very subjectively written editorial with an objectively written response.
The day that Krugman can demonstrate how he can transform an automobile factory into one that produces oranges overnight without any additional capital investment is the day I start taking him seriously.
What can government do, reasonably and proactively, to assist in labor reallocation? The least noxious and potentially even useful service would be to set up “state funded” registry/blog community for the unemployed/job seekers. Here they could exchange thoughts, look for jobs, monitor hiring trends, and find resume tips. An open source, public Monster-like.
If the government did not want to be responsible for administrating it, they could contract the work out to a private company and only serve as the central collector of information to be posted. This role would be in line with the traditional role of town halls and community centers.
Let’s assume this were done on a national level, or funded at a national level with open source technology which can be deployed at little to no marginal cost. Let’s say local government were given the responsibility of overseeing local efforts, without any specificity (so as to allow for flexibility and creativity in each implementation). How much could the entire program cost? $1 billion? $10 billion?
Even if you believe this would be better done through the private sector, imagine the improvement over the $10 trillion dollar debacle we have today. The government could not be accused of “doing nothing” by demagogues, whose primary aim is to distribute tax money at far greater multitudes; it would actually be serving a socially useful purpose, in that it would accelerate labor market reallocation; and it would be done on the cheap. Call me cynical, but if I were a professional politician I’d recommend something along the lines of what I’ve described.
I wish I could remember in what Mises tract I read it, but he wrote (I paraphrase), “Government can serve the useful purpose of (market) information collection.” Markets depend on good information to function well. A freely accessible public directory for employment in a time of depression, implemented creatively at local levels, in my own opinion, is not a half bad idea.
Why would we need a state-sponsored Monster when we already have a Monster and CareerBuilder?
As I explained, since we are living in a world and in a country that demands the government “do something,” I see this as the least noxious, least expensive, least DISRUPTIVE “something” government can do. State funded employees are sitting around City and Town Halls anyway. At least this plan will distract them from implementing additional, nanny ordinances
Ideally we’d not have credit expansion and boom/bust cycles, but we do. This was my attempt to remedy the excess ($10 billion vs. $10 trillion), not present a solution that conforms with the libertarian ideal.
If the president had presented this plan and got everybody on board in both parties, who in their right mind would object? I mean, look at the alternative – just look at it. 9.4% unemployment 2 years after the crash, over 40 million in poverty, $14 trillion in debt… Now imagine if we’d spent $10 billion on a job registry, and called it a prescription. (Of course, mine is a pipe dream as much as the pure Libertarian’s, but I digress.)
Well, the thing is, when you add up all the existing state-sponsored job registries, we’re already spending well over $10 billion on that kind of service and it’s clearly not helping.
Commentary mag has a great article on why the stimuli failed:
Where Did the Stimulus Go?” by John F. Cogan and John B. Taylor”
“More than $1 trillion in federal-deficit spending did little or nothing to help the economy. Why? Because it was used to pay down debts and reduce borrowing.” http://www.commentarymagazine.com/
The implication is that if, instead, the stimulus had been spent and banks had pyramided more loans everything would be hunky-dory. It would not; we would just have more bubbles waiting to be liquidated in their turn.
There is no way around an economic recession as recovery, like a drunk having to wait out the toxic effects of last night’s binge. The stimulus ‘failed’ because all it did was fill the black hole in bank balance sheets and stop the liquidation of prior malinvestments.
Yes, the drunk going through his hangover is a good analogy. Of course, he may alleviate the pain of the hangover by sucking back another six pack and a few whiskeys in the morning and the hangover will abate some… Then he’ll need to do the same later in the day to keep the hangover away… and again that evening… and the next day… and the next. He maybe able to keep the hangover away by such means for quite some time. One day his liver or his kidneys of something else will fail. One day. But please, not today. Ah, such is the pleasure of alcoholism. Just another drink…
Kinda reminiscient of all this Keynesianism, just one more interfernce in the economy, just a little more social welfare, one little bail-out, just a little more to salve the hangover…
Sione
“Hair of the dog that bit you”!
This is the way the Federal Government thinks. They are spendaholics. The only solution is to quit cold turkey and go into detox, like Lindsay Lohan.
The Keynesian solution to our problem is to raise the debt ceiling and borrow and spend more.
If the House refuses to increase the debt limit, the strategy is to shut down those government services that will cause the most outrage, rather than those are the most wasteful. That way, the debt limit will be raised and wasteful spending will continue as usual.
Krugman and his ilk are in retreat. Keynsian economics becomes uninteresting when the ability to borrow wanes. Then we are all republicans, as before WWI, with a few socialists like Krugman living in the woods.
I was thinking some more about Krugman’s astounding concession of talking about Austrian economics by name and linking to mises.org. He may be aghast at the recent failures of the Keynesians to either improve the economy or to successfully propagandize in favor of their actions. Such as Bernanke’s bold-face (and self-contradictory) lie in his most recent 60 Minutes interview where he said, “We’re not printing money.”
I think that Krugman now thinks that the watertight bulkheads of QE will not hold, and by conceding the existence Austrianism and making a more reasonable attempt to represent some of its tenets he is attempting to edge a little bit closer to the intellectual lifeboats.
The most obvious first steps for Austrians would be to eliminate government guarantees on deposits (FDIC), close the GSAs (Fannie, Freddie, VA Loans and FHA loan guaranty programs), let the market set the rate of interest (the current interest rate policies have the credit markets in complete lockdown (Who would lend at these levels given the amount of risk in the system?), desist from bailing out failed creditors and stop advocating for debtors (foreclosure moratorium) at the expense of creditors (as in the GM bondholders). The credit expansion could never have happened without these programs. The king-making that has occurred as a result of these interventions is unconscionable. Witness the impending public offering of the “new Bank United” courtesy of a 4 billion dollar loss by the Federal Government and the enrichment of the insiders that benefitted from the government’s largess.
The minimum wage is causing permanent unemployment in the economy. Reform the tort system. Close the department of education, the department of agriculture, homeland security, etc. Cut the military in half and then halve it again. Have one level of public maintenance. Eliminate laws against victimless crimes.
I realize that is a minarchist approach and it may upset anarcho-capitalists and purists (including my son) but it is a jumping off point. Of course I used my own value system to come up with the proposed changes to the system so don’t implement them or you will make me a defacto central planner and I will have to kill myself.
John,
This was great! But don’t worry, all of your suggestions will be ignored and you can live on with a clear conscious. No need to slit your wrists just yet!
Here’s why you need deposit insurance, and what today’s banking is all about:
http://www.moslereconomics.com/?p=8968
A non convertible currency is necessarily a public monopoly so there is no choice but for the govt of issue to set at least on interest rate. In contrast, with a fixed exchange rate such as a gold standard interest rates are subject to market forces.
The bailouts were an economic blunder, but so was the policy that failed to respond to the lack of aggregate demand in Aug 08 with a full FICA tax suspension which triggered the circumstances that led to the misguided bailouts.
The sub prime credit expansion was driven by (control) fraud apart from the govt. housing agencies.
Unemployment is being caused by grossly over taxing us for the size govt we have. (The minimum wage is low enough by any standards to not be worth mentioning.)
The govt. sponsored legal system is there to promote public purpose, which it clearly doesn’t and is in need of a major overhaul that probably won’t happen due to the influence the legal professionals have over the Democrats.
See more at my website http://www.moslereconomics.com including The 7 Deadly Innocent Frauds which is a must read for all libertarians who want to understand the system that controls us.
Warren
The “system” of “economics” you promoted has long since been debunked (by Von Mises for one). As has already been pointed out by Bob Rodis, Taylor Conant demolishes it here: http://conant.economicpolicyjournal.com/search?updated-max=2010-12-05T17%3A34%3A00-05%3A00&max-results=15
A most important point to understand is that financial “sleights of hand”, legal tricks, illusions, devices, rorting (no matter how elegant and rationalised), clever book-entries, get-off-free schemes etc. are not going to work out. They are attempts to wage a war against reality. No matter how clever you think you are, you are going to lose when you try that sort of thing. The justifications you (and your mates APL and Banker) present are no better than those of Bernie Madoff (in fact, they are of the same form and rationale). In the end the whole mess is impractical and utterly immoral.
Recommendation: you need to study and learn Austrian Economics. Start with Hazlitt and progress on from there. Von Mises is fundamental so read huim. Much of the material you need to learn is available here, on this site, free of charge. Avail yourself of the opportunity.
Sione
Krugman will never go toe to toe with Robert Murphy because Krugman knows that Robert Murphy knows that Krugman doesn’t know (economics)!
I have been studying Austrian economics for the past few months and think I have developed a reasonable (if basic) understanding of the Austrian Trade Cycle Theory. To help me deepen my knowledge I am hoping someone can comment on a sentence in the article that confused me slightly.Talking of why there may be unemployment after a boom turns to bust Robert Murphy says:
“or it can be due to the fact that they have to wait on other workers to “get things ready” before the unemployed workers can resume.”
I understand that the boom has led to investment in areas that turn out to be unprofitable when the bust comes and that some of these investment are abandoned or scaled back so leading to unemployment. I also understand that “wage stickiness” (possibly encouraged by govt. policies) may cause this unemployment to be more than short term.
My question is: If there was no wage stickiness would there always (at least in theory) be a market-clearing level of wages even immediately after a bust that would remove unemployment or (as I think Robert Murphy implies) would the structural imbalances introduced by the boom mean it would in fact be impossible for all workers to find jobs until the the structure of production has adjusted to the new reality (in effect there would be “involuntary unemployment” )?
This is my first post so I hope the above makes sense.
RJRead,
Thank you for pointing this out, it’s an important point. I’m not sure I understand it yet, but this is the best explanation I’ve been able to give myself:
People can’t afford to work for free. If you are offered a job which pays less than the cost of a loaf of bread, and you’re going to use more energy than you can get from a loaf of bread, then taking that job is slow suicide – you might be better off conserving your energy, and hoping something else comes along. Economists would say that you’re then voluntarily unemployed. Therefore, when calculating the market clearing wage level, you’re excluded.
However, you’d like to work, but you can’t afford to at the current market-clearing level. Thus your unemployment can be called “involuntary” even though you turned down an employment opportunity. So, when people calculate the market-clearing wage, they exclude you because you can’t afford to work, but when they count the involuntarily unemployed people, they count you because you’d take work you could afford to take if you could get it.
In effect, what I’m saying is that the fallout from the bust will price people out of the market. In the meantime, however, those who cannot afford to work are forced to do whatever they can, such as scavenge for food.
Am I correct? Can someone more versed in such things validate me? Or shoot me down, I don’t mind
Hypothetically, if you assume a number of “perfect conditions”, one of them being perfect wage fluidity, then you wouldn’t have unemployment. Employers would reduce wages across the board, not only to prevent layoffs, but to absorb the unemployed. If we’re also assuming that capital is NOT perfectly fluid, then these laborers would be underemployed (but not unemployed) until capital could be reallocated and those laborers could accept jobs more suited to their experience and training.
Thanks.
Well done, Murph, but I would make a few additions.
Krugman pointed out that, if ABCT is right, and the boom was artificially created by non-market forces, then Austrians should be able to show how we “paid” for increases in both capital investment and consumption. For instance, the military effort in WWII was certainly artificially created by non-market forces, and we can plainly see how the civilian economy suffered in order to support the WWII bubble. If, however, the bubble was not artificial, and the bust was the result of a massive shift in consumer spending habits, then we won’t be able to find anything that “paid” for the bubble.
The sushi example suggests that ignoring capital maintenance could pay for the bubble, but evidence of that would be hard to come by. Murphy also mentioned production coming from China, which I think is a big one. The Chinese have been producing, and delaying their own consumption, in order to increase US consumption. China may not have even experienced a drop in anything to subsidize our consumption, but growth that would have been experienced by China was instead transferred to the US. The same could be said of some American growth. The bubble wasn’t formed overnight, and it could be argued that American growth that would have gone into other sectors, went into the housing market unnaturally.
Lastly, I know I’m treading on thin ice here but I think it’s possible, even for an Austrian, to acknowledge that increasing the money supply CAN, in fact, increase real production in all sectors of the economy for a limited amount of time. How many voluntarily unemployed (like moms) joined the workforce to take advantage of higher nominal wages? How many factories ran closer to capacity? How many DIYers fixed up their homes on the weekend? It’s temporary, and it’s a mis-allocation, but it’s still a real increase.
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