Austrians, on the other hand, believe inflation is destructive, and that it does not spur growth, but rather unsustainable booms that inevitably end in busts. Therefore, there is no way the ideas can meet.
In this blog post, Krugman includes a chapter from his latest textbook (co-authored with his wife, Robin Wells) in which he "explains" the difference between "moderate inflation" and what we have seen in Zimbabwe. Not everything in this chapter is bad, and at times, Krugman can be an interesting writer, and I can see why this book is popular. However, page 867 has this "gem" that exposes his viewpoints:
...policies that produce a booming economy also tend to lead to higher inflation, and policies that reduce inflation tend to depress the economy.Well, that is only partly true, but Krugman has a real causality problem. (One remembers the opening line in Carl Menger's Principles of Economics (a much better book than what we see with Krugman and Wells) in which he states: "All things are subject to the Law of Cause and Effect."
It is easy to see where Krugman gets his causality. In the early stages of inflation, we see an economic boom, while in the early stages of "disinflation" or deflation, we see a bust. Therefore, Krugman takes the simple approach: inflation good, deflation bad.
There is an alternative view, and Menger and others in the Austrian camp have led the way. As I read through Krugman's chapter on inflation, I realize that the guy is stuck on aggregates. In that way of thinking, all assets are homogeneous, so when new money is pumped into the economy, people begin spending, inventories are cleared, and the economy has "traction." (In Krugman's view, this becomes a problem only when money growth occurs after the economy has reached its "capacity" to produce.)
Austrians believe that assets are heterogeneous, and that inflation changes the relative values of these assets. Ultimately, the push of new money into certain booming sectors runs out of steam, as the asset values in the inflation-led structure of production clearly do not reflect the actual desires and choices of consumers. At that point, the inflated assets lose their value, and the crisis is at hand.
During a recession, the assets come back to their original and proper relationships, and then the recovery can begin. Unfortunately, since the government continues to try to prop up the assets that the markets already have devalued, there really can be no meaningful recovery.
This is a very brief description of our differences on inflation. Nonetheless, I do think this blog can be useful if only to get the points of Austrian economists out there, as they certainly are not going to be portrayed accurately in the mainstream media.