Wednesday, April 7, 2010

No Paul, Austrian Economists are Not Self-Hating Keynesians

In a follow-up to his earlier anti-Austrian missive, Paul Krugman gets it wrong again (and again, and again...). First, Krugman's own words:
As predicted, many of the comments to my Austrian economics post are of the form “Well, of course employment rises when investment is expanding, and falls when the investment is falling — in the first case the economy is booming while in the second it’s slumping.”

As I tried to explain, however, that’s assuming the conclusion; there’s no “of course” about it. Why do periods when the economy is investing more correspond to booms, while periods when it’s investing less correspond to slumps? That’s easy to understand in Keynesian terms — but the whole Austrian claim is that they’re an alternative to Keynesianism. Yet I have never seen a clear explanation of this central point.
Actually, Austrians have explained this issue, but Krugman is not going to listen, and his way to argue is to create a straw man and then claim it is the real thing. The thing to keep in mind is that during a boom, there is malinvestment going on, not "more investment." There is a huge difference.

Austrians are saying that when government artificially holds down interest rates (something Krugman supports), investments are moved into areas that correspond well to the change in time preferences that are reflected when interest rates fall in a free market, due to increases in savings. However, when the government engages in artificially lowering the rates, then the investments do not match the spending patterns of consumers, and ultimately a crisis occurs, followed by a bust.

Krugman, on the other hand, believes that it is good for government to hold down the rates, but then apply regulation to stop potential bubbles. Here he is in his own words:
But did I call for low interest rates? Yes. In my view, that’s not what the Fed did wrong. We needed better regulation to curb the bubble — not a policy that sacrificed output and employment in order to limit irrational exuberance.
This is more telling -- and more contradictory to the Keynesian arguments than what Krugman will admit, for he is hinting that low interest rates can lead to a bubble, which is what Austrians would call malinvestments (or maybe malinvestments on steroids). However, he believes that government can head off such malinvestments through regulation.

This is very interesting, for on one hand, he claims that it is all aggregate demand, but on the other hand, he is saying that forcing down interest rates can have consequences if government does not try to regulate away the excesses. However, he cannot have it both ways. Indeed, he is accusing us of employing back-door Keynesianism, but then tries to do the same with Austrian theory.


ed_infidel said...

I saw the following on which seems relevant to your comments, though perhaps it is somewhat simplistic.

Keynesian: Cheap money causes booms.
Austrian: Cheap money causes unsustainable booms.

mpeino said...

It would be nice if Krugman would actually agree to debate someone publicly. If not that, it would be more honest of him to at least provide direct quotations from those he is arguing against, rather than putting words in their mouth. I don't recall ever reading anything from him where he even names an Austrian economist.

Anonymous said...

I think the comment from ed infidel is right on point.

Keynesian: Cheap money causes booms.
Austrian: Cheap money causes unsustainable booms.

However, Krugman is essentially agreeing with the Austrians that funny money causes mis-directed booms (malinvestments anyone?). Being totalitarians at heart, the Keynesians want Mary Poppins, I mean THE ALL KNOWING BENEVOLENT GOVERNMENT, to redirect the boom with wise REGULATION. That argument just goes back to the Austrian argument about free market prices as essential to disclosing the value of various factors.

Further, if Krugman wants to know what it is that is driving EMPLOYMENT during the boom, it is entrepreneurs who are hiring people to facilitate their malinvestments. Think about the housing boom and all the related fields of employment stimulated by that. Isn't that beyond obvious?

I really don't see Krugman's point as serious. He's just trying to confuse and confound and drive his minions away from learning Austrian truths.

William L. Anderson said...

I do appreciate the intelligent comments here. It is refreshing after seeing Krugman's less-than-intelligent stuff!

Terry Thorsen said...

I just want to say that I think yours is the most important blog on the Internet right now.

Sebastian said...

Krugman's blogs on the subject are almost too painful for me to read. I run the danger of getting concussed from repeatedly banging my head on the desk in sheer frustration.

On the other hand, I think it is marvellous that Krugman actually feels pressured to comment on the criminally-neglected Austrian Business Cycle Theory at all. Would this have even been happening several years ago ?