I believe that Krugman, in this blog post ("The Economic Narrative"), does all of us a favor by explaining his position and unwittingly laying out the real differences between the Keynesians and Austrians. If I can reduce it to one sentence, it would be: Keynesians ignore the fact that human beings engage in purposeful economic behavior. Krugman writes:
A straight Keynesian analysis implied the need for a much bigger program, more oriented toward spending, than the administration proposed. And people like me said that at the time — we’re not talking about hindsight.If, indeed, an economy were a mechanistic operation in which we robotically put inventory on the shelves and then "spend" so we can clear the shelves (so we can put more stuff on the shelves again), then Krugman would be correct. A government program to encourage spending would do the trick.
However, because what Krugman calls spending actually involves purposeful behavior by individuals, we are dealing with different perspectives on the matter. Krugman implies that an economy is made up of two detached arms, one that produces and the other that spends. They are disassociated from one another, and if spending does not occur in large enough amounts or quickly enough, then the other side breaks down.
Austrians, on the other hand, believe that the economy is a very complex web in which producers look to meet the needs of consumers, needs that consumers will meet by purchasing goods. This process is not mechanistic, by any means. Moreover, the processes are related; more production means more consumption, as the base of our "purchasing power" is not how much money government can put into the economy, but rather our ability to produce those goods that people want.
Although Krugman (as we saw in an earlier post) has recognized the presence of asset bubbles, he then turns around and denies that the boom produces systematic malinvestments. However, what does he think a bubble is, anyway? It is the creation of malinvestments.