Thursday, November 18, 2010

Krugman's "Dark Ages" Demands

Paul Krugman does not simply advocate inflation; no, he worships at its very shrine. Inflation is our savior; inflation will give the economy "traction."

Furthermore, anyone who might have an argument against his illogic is doing nothing short of advocating a return to "the Dark Ages" of economics. I say, nonsense.

One of the mantras of modern Progressives is that contemporary thought always is superior to any thinking that occurred in the past (especially if that thought is espoused by Progressives). Thus, the way to "win an argument" is simply to quote whatever was written or said a while ago and to assume it has to be wrong. (The exception, of course, is anything written by J.M. Keynes, who is treated as The Great Prophet.)

So it is in the Krugman blog post I have linked in which he quotes a passage from Joseph Schumpeter's work and then assumes that because Schumpeter wrote it in the past, that it amounts to advice from "the Dark Ages." Why? Well, because Krugman says so.

However, Schumpeter in that passage is addressing the point that inflation distorts the structure of production, creating malinvestments and bringing about maladjustments which cannot be sustained over time. So, using inflation to fight any depression simply prolongs the pain, and any short-term "gains" are wiped out longer term.

Obviously, since Krugman's mantra is "we need inflation," such words from Schumpeter are heresy. Furthermore, because Schumpeter wrote them many years ago, they automatically are wrong.

But I also have another problem. Krugman has been insisting that the reason the economy is in a funk is because the Obama administration pushed through an $800 billion "stimulus" instead of a $1.2 trillion spending package. Yes, for lack of $400 billion to be spent on political pet projects, the entire economy is sinking.

Krugman also insists that inflation will give the economy "traction," as though an economy is a perpetual motion machine that just needs a push from monetary authorities to move on its own. Where does he get that? Furthermore, the only way for his plan to work is for all assets to be homogeneous and for factors of production to automatically be able to adjust when done so administratively.

Does he know nothing about what happened with such economic planning in the former U.S.S.R.? There were economic planners who were as intelligent as Paul Krugman and who had doctoral degrees from Moscow State University, where the economics curriculum was every bit as rigorous as that of MIT.

Yet, the economy was a miserable failure, as planners could not negotiate simple goods through simple processes. Why? The economy lacked real prices that reflected the relative scarcity of factors of production. Instead, they believed that administered prices and production functions would take care of things, which never happened.

So, Paul Krugman demands the same for us. Have inflation distort prices, assume that factors of production are homogeneous, ratchet up government spending, and it will give us prosperity. Hey! It worked well for the U.S.S.R.

Talk about the Dark Ages.


Bob Roddis said...

Krugman clearly has no familiarity with and no understanding of the concepts set forth in the Schumpeter quote. Thus, he can do nothing other than start the name-calling [EEK! Stuff I don't understand from the DARK AGES!]

davidhamilton said...

There is a lot of wisdom in Henry Hazlitt's book, "Economics in One Lesson." I read it again recently. It's a pity that The Krugman has not been mindful of its persuasive lessons.

Anonymous said...

Let's see how long it takes AP Lerner to come on and say that he either agrees with your assessment of Krugmans comment despite disagreeing with you on most other things, or claim that you've quoted Kruggy out of context. Then, well wait and see how king it takes the local bandit to come up with some hare-brained defense to Krugman's obvious logical fallacy complete with links to his own blog as if they counted as citations.

Lord Keynes said...

Paul Krugman does not simply advocate inflation; no, he worships at its very shrine. Inflation is our savior; inflation will give the economy "traction."

= straw man argument

In case you haven’t noticed, Krugman advocates economic stimulus, jobs for the unemployed; and useful public infrastructure. That a byproduct of economic activity is often inflation applies to both private and public spending.

Why don’t you complain about all those evil private businesses wanting to engage in economic activity and employing people: all these wicked capitalists want to do is cause inflation!!!

that inflation distorts the structure of production, creating malinvestments and bringing about maladjustments which cannot be sustained over time.

Wrong. ABCT is rubbish:

Robert L. Vienneau, “Some Capital-Theoretic Fallacies of Austrian Economics” Independent, October 2007

Robert L. Vienneau, "Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory," September 4, 2010

Even Kirzner and Ludwig Lachmann criticised ABCT:

“The first thing to keep in mind is that while [ABCT] … embodies “Austrian” characteristics it is not an official Austrian theory. What do I mean by that? Eminent Austrian economists have made important criticisms of the bare-bones theory. For example, Israel Kirzner has criticized the theory for not taking entrepreneurship seriously. Where are the alert entrepreneurs either in the boom phase or the recession phase? There are profits to be made from avoiding mistakes. Another eminent Austrian economist, Ludwig M. Lachmann — one of the main contributors of the development of the idea of capital heterogeneity which is an important constituent part of the cycle theory — criticized the ABCT for assuming that agents simply expand their investment whenever interest rates fall.

Does he know nothing about what happened with such economic planning in the former U.S.S.R.?

Yes, but unlike you he notices that America isn’t a command economy: it’s a mixed economy with a massive space for private enterprise.

Jonathan M.F. Catalán said...

Just a comment on Robert Vienneau's paper: it critiques Hayekian capital theory as formulated mostly in Prices & Production. Modern Austrian capital theory is not entirely the same (for instance, Hayek's and Böhm-Bawerk's "average period of production" was never accepted by Mises and discarded by Rothbard in his synthesis of the two).

This is not to say that in his critique Vienneau is correct. It's to say that Vienneau is both oftentimes incorrect and all the time attacking an already incomplete theory.

Ludwig Lachman's criticism was not a criticism of austrian business cycle per sé. It was a criticism of Hayek's and Böhm-Bawerk's "average period of production", which had not been accepted by Mises (Lachman was a strict Misesian). A lowering of the rate of interest does not require a lengthening of the structure of production in one particular direction.

In any case, you are better off researching yourself and coming up with a comprehensive critique, because what you are relying on are incomplete and out of context observations (which oftentimes are made in support of capital theory, or more specifically, in support of improvement in Austrian capital theory).

Lord Keynes said...

Just a comment on Robert Vienneau's paper: it critiques Hayekian capital theory as formulated mostly in Prices & Production etc

And Roger Garrison uses Hayekian capital theory!:

In applying Hayekian capital theory to the analysis of business cycles, Garrison has consciously gone back to the more tractable model of Prices and Production
Friedrich August Hayek, The pure theory of capital (ed. Lawrence Henry White), p. xxxvi.

So Vienneau’s paper (“Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4, 2010) in far as it makes criticisms of Hayekian capital theory as used in Prices and Production also applies to Garrison’s verison. Are you saying you reject Garrison ‘s version of ABCT?

And, of course, there are different forms of ABCT. Which exactly do you support? :

(1) The version of Mises (Theory of Money & Credit 1912; later expositions in Human Action: A Treatise on Economic)..

(2) Hayek’s first version of ABCT in Prices and Production (London, 1931).

(3) Hayek’s second version of ABCT in Profits, Interest and Investment (London, 1939).

(4) Rothnard's version (which you state is a synthesis)

(5) M. Skousen’s interpretation in The Structure of Production (New York, 1990).

(6) Gerald P. O’Driscoll and Mario J. Rizzo in The Economics of Time and Ignorance (Oxford, UK, 1985), pp. 198–213.

(7) Roger Garrison’s version of ABCT in Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000).

Bob Roddis said...

Herr Krugman graciously allowed two of my comments to appear back to back.

I have to admit to a certain fascination with Austrian critics who simultaneously combine purposeful cemented-headed ignorance with extreme arrogance (comment #159, for example, is typical).

Just to be clear, I don’t include our own LK in the category of the purposeful cemented-headed ignorant. He just may be the most knowledgeable Austrian critic on the planet. And with all that effort and energy, he meticulously avoids laying a hand on the basic Austrian concepts. Money dilution is going to screw up economic calculation, and thus the price and investment structure and thus the capital structure. People can quibble about how, when, and where that is going to happen or did happen but the basic Austrian insights remain unchallenged.

Jonathan M.F. Catalán said...

Lord Keynes,

I suggest you actually read Roger Garrison's book (Time and Money), and then compare it to Prices and Production. Hayek made invaluable contributions, but it doesn't mean they all have been accepted (including, again, the "average period of production").

Most capital theorists, including Garrison, have followed Rothbard in the synthesis (others have made further contributions, such as Reisman). Skousen also follows Rothbard in dumping a number of Hayek's insights (mainly the "average period of production").

By the way, ABCT does not translate into capital theory. ABCT is Austrian business cycle theory, which is a unison of all economic theory (interest, monetary, capital, et cetera)... this was a positive insight in the first lecture of Hayek's Prices and Production.

Lord Keynes said...

Jonathan M.F. Catalán,

You never answered the question:
Which form of ABCT exactly do you support?

Lord Keynes said...

By the way, ABCT does not translate into capital theory etc

ABCT uses capital theory as part of its assumptions about the real world.

If that capital theory is false, then it is unlikely a theory with false assumptions will make true inferences.

You are also, incidentally, wrong that Vienneau's paper just "critiques Hayekian capital theory as formulated mostly in Prices & Production": Vienneau goes into detailed criticisms of ABCT in many other aspects.

Bogart said...

I am always amazed that people would have the opinion that the whole world is just waiting for some bureaucrat to give permission to start working. Like the folks who were touting "Green Energy" because Obama said it was a good idea, as if they needed Obama's permission.

I am also amazed at central bankers and the like think that just by creating money that this will create stuff. It does nothing of the sort. It might get people into a frenzy that will always end in disaster.

Bala said...

Hey bandit,

"Robert L. Vienneau, "Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory," September 4, 2010"

The abstract was quite clear. I request you to give me a link to the entire paper as well. I would need to study it before responding. Would you be in a position to do so?

Lord Keynes said...

The paper ought to be downloadable, if you register with the SSRN.

Bala said...

Downloaded it without registering. Thanks.

Bob Roddis said...

Libertarian hero Walter Block has big problems with Hayek’s triangles too:

On Hayekian Triangles by William Barnett II and Walter Block


The triangle is an integral part of the history of economic thought. It has been used by writers such as Jevons (1871), Taussig (1896), Wicksell (1934, 1969) to illustrate and to help us understand capital theory. Since Hayek (1931) this geometrical figure has been used as a basic pedagogical device to explain the Austrian Business Cycle Theory (ABCT). The purpose of the present paper is to argue that the triangle is highly problematic, if not fatally flawed, and that if ABCT is to be made intelligible this tool of analysis must be either completely jettisoned, or heavily supplemented with a list (see below) of its shortcomings. Moreover in some ways the triangle has been responsible for the relative lack of development of ABCT for over a half century.

So what? I don’t see how these critiques of Hayek help the Keynesians. This is no justification for the Keynesian Hoax of fraud and theft through money dilution. Prof. Anderson keeps pointing out the absurd Krugmanite insistence that the “economy” needs “traction”, a point his critics keeps ignoring. Krugman states that:

Keynesian economics is primarily a theory designed to explain how market economies can remain persistently depressed.

Market economies don’t remain persistently depressed without statist interference and they are invariably going to get all screwed up from Keynesian policies. Disputes regarding exactly how, when, where and why won’t change that undeniable fact.

frediano said...

Fighting deflation with inflation is like fighting starvation with obesity.

Both deflation and inflation are perversions of the value-for-value economies.

Our government voodoo priests focus way too much on value-proxies and the water in the pipes/credit tanks, not enough on the human energy/engines that drive the pumps and circulate value in our economies.

Their focus is on the water in the pipes and tanks, the value proxies. 'Water' is not the energy that drives the pumps that circulate value by way of value proxies.

Their political focus on spending, funded by accelerated de-investment of future economies(by borrowing from them) is focusing on the wrong thing. Spending is a downhill human effort. Credit based spending is a running downhill human effort. Public credit based OPM spending is flying downhill on rocket propelled roller skates. We borrowed from the future, we poured water into the tanks and pipes, and the water drained out. because, few of the right kind of credit worthy folks, those who were not over-leveraged and drunk on credit, want anything to do with the current tribal free-for-some, and are taking a giant time out while the tribal insanity passes, and the government sorts out its GM 50B in subsidy plus 45B in atypical tax write-off winners from its Ford you're on your owns.

Where is the incentive to run uphill? They are piling on nothing but de-incentive. They are counting on the left wing shibboleth, "The greedy fools can't help themselves but struggle to make money no matter what nonsense we pull, so the rains will someday come again..."

Like all voodoo priests over the centuries, they 'do something.' They know the rains will come again, like they always do. In the meantime, they dance, which in this case is spend OPM like drunken sailors and hand out payola to unions. If the rains come again, they take credit. If not, they blame the purity of last years sacrifices, and demand more. Lather, rinse, repeat -- can't lose.

Only this time, the tribe saw behind the curtain, and got way too good a look at the sausage not being made. The voodoo priests are in a panic, are in danger of losing the centuries old gig. It is obvious to more of the tribe these days that they are controlling nothing.

Certainly not 'the economies' in our post fall of the Iron Curtain/Berlin wall, non centrally planned, non command-control world.