Back to the Socialist Calculation Debates

This week, Paul Krugman has been arguing that in some circumstances, the mysterious path of at least some capital investment can lead to lower wages, unemployment, and general misery. Furthermore, if the economy is not in "perfect competition," then a lot of the advantages of capital development are lost.

Likewise, he is arguing, at least some capital development can lead to monopoly in which capital is receiving large rents at the expense of workers and everyone else. There are a few things to remember as one goes through these two Krugman posts that he is not pointing out, yet do have significance.

These are interesting arguments, and they bring us back to the Socialist Calculation Debates that took place in the 1930s and 40s between socialists like Oskar Lange and Ludwig von Mises and Friedrich A. Hayek.

The first is that there is no such thing as an "aggregate production function." I remember several years ago attending a Paul Craig Roberts lecture in which he was arguing that if capital could move beyond national borders, then factors would revert to "absolute advantage," and one country would produce everything and make everyone else poorer. The disappearance of comparative advantage, of course, would mean that the Law of Opportunity Cost would also disappear, since comparative advantage is built upon the idea that there always is opportunity cost in producing anything.

He "proved" his point by using aggregate production functions, i.e. "Britain has this production function" and "China has THIS production function," and so on. That is nonsense. An attempt to aggregate something like numerous productions functions within an economy into One Big Function truly has no meaning; it is a fictitious concept like "aggregate demand" or "aggregate supply." In reality, one cannot reproduce any of these things. (Yeah, I know. This last statement will send the Keynesians into a frenzy.)

The second thing is Krugman's idea of "perfect competition" being some sort of Holy Condition. Remember that the assumptions necessary for "perfect competition" include perfect homogeneity of goods produced within an industry and small-scale capital, not to mention all firms being tiny and having no effect upon the overall supply of goods within a particular market.

Even the idea of homogeneity being the necessary ingredient for "competition" is laughable on its face. This kind of perfect homogeneity is not a basis for competition at all, but rather a basis for no competition, for if every good is exactly the same, an important mechanism for choice disappears and an economy then simply becomes little more than an exercise in randomness.

More important, socialists have argued that heterogeneity of goods then leads to inefficiency and "spatial monopolies" (to quote Joan Robinson). However, the concept of "efficiency" that Robinson and others were promoting (and I suppose Krugman believes it, too) is mathematical, not economic. The entire platform upon which these ideas are built is that everything discussed follows functions that are smooth, continuous, and twice-differentiable. While I have no problem with creating mathematical functions to use in parallel models to explain some aspects of an economy, the idea that an economy MUST follow exactly the constructs of mathematical models or it is creating great harm and must be smashed by the state is ludicrous.

It is obvious, then, that the entrepreneur in this whole Brave New Economy is a parasite, someone who disturbs the Holy Production Function, and creates heterogeneity, which then takes the economy down the Path of Perdition. There is a problem here that Krugman and others cannot answer: Why were the socialist economies of the U.S.S.R. and its satellites much more primitive than the economies of the "monopolistic" capitalists when the Soviet Union collapsed in 1991?

After all, the aggregate planning mechanism of the socialist world followed what Robinson, Lange, and others claimed would create "efficiency." Lange argued that if planners had access to (1) production functions and (2) prices of goods (which could be found on financial pages in western newspapers), then planning an economy was as easy as solving a whole slew of simultaneous equations.

In fact, the Soviets were very good at solving these equations. As my math econ professor in grad school put it, the Soviets created a number of advancements in using matrices to solve these equations. However, he added, "It didn't do the economies any good."

Krugman, in trying to explain why corporate profits might be high at a time of high unemployment, simply reverts to the arguments used by Lange and Robinson and others: the U.S. economy is not in "perfect competition," monopolies abound everywhere, and the capitalists have managed to create aggregate production functions that don't benefit the workers, only the capitalists.

Salvation, in this view, lies in the omniscience of the monopolistic state. Yes, that huge monopoly known as government also contains the Very Secrets of how to create the perfectly-competitive economy that always operates at the point of efficiency. Bureaucrats and elite academic economists can collaborate to impose efficiency because they know exactly where the points of efficiency exist and they have the wisdom and foresight to move us to that point of Nirvana.

Krugman always is lambasting "faith-based" economics. I would contend that the economics of Paul Krugman requires the kind of religious faith that is not found in even the most fundamentalistic aspects of any religion. In the end, we get Faith-Based Keynesianism.

(To further demonstrate the whole idiocy of the Soviet economy, here is the link to a video on some of the automotive masterpieces produced by the Soviets back in the days when Paradise ruled.)

The Capitalists are Coming! The Capitalists are Coming!

There is a new specter on the horizon, a blood-sucking monster that will destroy the lives of people even as it makes goods that improves their lives! Yes, the capitalists are coming, but Paul Krugman is ever vigilant against these evil ones!

According to Krugman, the evil robber barons have made a comeback, benefiting from monopolies, and it is up to the government to save us -- and make the economy more "efficient" at the same time. He asks how it is that the economy can be depressed even while corporate profits are at high levels. Is the old Marxist "capital versus labor" argument back in play?

Krugman, apparently not wanting to go quite as far as his forebears like John Kenneth Galbraith, says that maybe a different explanation is needed, writing:

Why is this happening? As best as I can tell, there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power. Think of these two stories as emphasizing robots on one side, robber barons on the other.

First, the attack language is the type of thing that one has come to expect from Krugman whenever he speaks of private enterprise. He cannot explain how it might be that people who cannot coerce anyone into making an exchange are engaging in acts of theft, but if the government forces someone to do something at the point of a gun, that is "community" or "caring for the poor."

Second, his overall explanation of why we have higher rates of unemployment among college-educated workers harkens back to the days of FDR when the government was claiming that "automation" or "capital" was the cause of the employment problems. He continues:

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

Still, can innovation and progress really hurt large numbers of workers, maybe even workers in general? I often encounter assertions that this can’t happen. But the truth is that it can, and serious economists have been aware of this possibility for almost two centuries. The early-19th-century economist David Ricardo is best known for the theory of comparative advantage, which makes the case for free trade; but the same 1817 book in which he presented that theory also included a chapter on how the new, capital-intensive technologies of the Industrial Revolution could actually make workers worse off, at least for a while — which modern scholarship suggests may indeed have happened for several decades.

This reminds me of the Paul Craig Roberts's claim that if capital is mobile across international borders, the Law of Opportunity Cost no longer applies (which is a way of saying that mobile capital eliminates the Law of Scarcity). Actually, the actual "law" is the Law of Comparative Advantage, but in truth, comparative advantage is just a restatement and application of opportunity cost.

However, what Krugman does not say is that government regulation -- and especially the spate of regulation that has come about through the Obama administration -- also results in stratification of the workplace. The reason is that regulations tend to try to classify and formalize everything and force requirements of specific areas of formal education for any number of jobs that really should not require that much education.

Furthermore, government regulations tend to make hiring much more bureaucratic and formalized, which makes it more costly to hire workers. Yes, the government says it is trying to keep employers from engaging in certain kinds of discrimination, but the end result is that the regulatory state forces up real costs of production and hiring, and that those costs ultimately are borne by workers.

When one adds the real costs that governments at all levels impose upon people wanting to start up even small businesses, it should not be surprising that the very kinds of laws of which people like Krugman approve are making the entrepreneurial transitions very costly. (Oh, I forgot. When governments effectively mandate higher business costs, that also is a good thing, since higher costs supposedly mean more spending, and everyone knows that more spending brings back recovery.)

There is another problem, and that is that government regulations that pertain to labor also make the addition of capital more attractive than it otherwise might be in a free market. Yes, I know it might be shocking to admit that government regulations just might change the terms of opportunity cost.

But Krugman is not satisfied there. No, the evil capitalists not only are using robots and permanently displacing workers, but they also are engaging in creating monopolies:

What about robber barons? We don’t talk much about monopoly power these days; antitrust enforcement largely collapsed during the Reagan years and has never really recovered. Yet Barry Lynn and Phillip Longman of the New America Foundation argue, persuasively in my view, that increasing business concentration could be an important factor in stagnating demand for labor, as corporations use their growing monopoly power to raise prices without passing the gains on to their employees.

Earth to Krugman: every academic economist should know that wages and salaries are not "passed on" by employers; they are payments to owners of the factor of production known as labor. Second, while economists like Krugman (and, of course, the usual places like the leftist Daily Kos) make the assumption that profits exist at the expense of workers, the truth is that in a free market, profits are what an entrepreneur will earn if he or she makes the correct assumption regarding present prices for factors of production versus perceived future prices for final goods. Without the possibility of profits, those jobs and, more important, the quality of the goods people can purchase, would not exist.

Investor and writer Kel Kelly notes that at the present time, the inflationary policies of the Federal Reserve System have more to do with the present state of corporate profits than any entrepreneurial success of many of these firms. When one adds that the Obama administration actively has promoted what essentially is crony capitalism, or corporatism, we should not be surprised if politically-favored firms tend to do better.

On a larger point, it would seem that high corporate profits would invite more entrepreneurial activity and more competition, but that clearly is not happening. In a free market, there would be nothing out of the ordinary that would would block entrepreneurs and entrepreneurial firms from pursing those opportunities and, in the process, compete for those profits. However, given the overt hostility of the Obama administration to entrepreneurs in general (or at least entrepreneurs that seek to compete in real markets rather than the government's crony markets) and the fact that every year or so, there is a huge political tug-of-war regarding business and individual tax rates, we should not be surprised that there is not more long-term business investment.

Of course, Krugman holds that the best way to deal with this problem is through government coercion and specifically through anti-trust litigation and higher taxes. Now, someone will have to explain to me how we can revitalize the business sector by unleashing regulators, federal prosecutors, and the IRS on business owners and investors, but I guess that since those people drive up costs, we will assume that they will "spend" their largess and make the economy stronger.

The Forgotten "Millions" (and Billions and Trillions) of Government Spending

Yes, millions of people are out of work, and Paul Krugman takes note. Anyone who has lost a job is in the position of losing income, and if a head of household loses a job, the income losses can be a crisis.

In advocating for a new "jobs program," Krugman first gives his pat answer for funding the whole affair:

(D)espite years of warnings from the usual suspects about the dangers of deficits and debt, our government can borrow at incredibly low interest rates — interest rates on inflation-protected U.S. bonds are actually negative, so investors are paying our government to make use of their money. And don’t tell me that markets may suddenly turn on us. Remember, the U.S. government can’t run out of cash (it prints the stuff), so the worst that could happen would be a fall in the dollar, which wouldn’t be a terrible thing and might actually help the economy. 

 In other words, we should not worry about it, as the government can inflate away the debt, and that is a good thing. But there is another issue that Krugman ignores, and that is why there would be the need for a "job" at all. (In other words, just borrow the money and give it directly to anyone who is unemployed.) Hear me out on this.

Krugman writes:

(L)ong-term unemployment remains at levels not seen since the Great Depression: as of October, 4.9 million Americans had been unemployed for more than six months, and 3.6 million had been out of work for more than a year.

When you see numbers like those, bear in mind that we’re looking at millions of human tragedies: at individuals and families whose lives are falling apart because they can’t find work, at savings consumed, homes lost and dreams destroyed. And the longer this goes on, the bigger the tragedy.

There are also huge dollars-and-cents costs to our unmet jobs crisis. When willing workers endure forced idleness society as a whole suffers from the waste of their efforts and talents. The Congressional Budget Office estimates that what we are actually producing falls short of what we could and should be producing by around 6 percent of G.D.P., or $900 billion a year.

He is correct in his assessment of the human tragedy, but simple spending with government "creating new jobs" is pretty meaningless. First and most important, to a Keynesian, a "job" is important because it is a source of income. People work in order to earn money so that they can consume. Yet, in the real world, a job is a mechanism through which someone produces something that meets the needs of others, and for which that person is compensated.

Keynesian theory separates production and consumption, as though they were two separate and unrelated things. Goods are randomly produced and then one only can hope there is enough money floating around to allow people to purchase those goods and clear the shelves so the circular process can continue. There is nothing purposeful about it; this is just a description of a big production/consumption circle with the chief end of consumption being the creation of an opportunity for more production (so that people can earn incomes and buy more goods so they can support their jobs).

Second, a real economy (as opposed to what Peter Schiff calls our "phony economy") creates employment opportunities out of the natural progression of economic growth. People in a real economy do not have to implore politicians to borrow a few hundred billion dollars to employ people in a new bureaucracy and call it "job creation" or "putting America back to work."

If Krugman is going to write about the "forgotten millions," perhaps he needs to recall those millions of tax-and-borrowed dollars that were spent yesterday to employ people for a while so that the president could be seen as enabling a fake recovery. For that matter, the mirage of recovery continues. At the present time, the government is borrowing 46 cents of every dollar spent (according to the Congressional  Budget Office), and the upshot has been a huge increase in...government jobs.

What Krugman apparently wants is for that rate of borrowing to increase so that we can turn more and more Americans into bureaucrats. Not that bureaucrats produce anything, but I guess they can spend and spend. So, if this is going to be our "employment" future, why not just print a bunch of money, load it into helicopters and dump it. The effect on the economy would be about the same as "creating" fake government occupations.

Is Government a Bottomless Well of Wealth Creation?

Having essentially adopted the MMT position on "endogenous" monetary creation by the U.S. Government, Paul Krugman goes whole hog in claiming that economies themselves are near-totally dependent upon government spending. To put it another way, government spending (in Krugman's view) is the source of wealth creation.

Now, Krugman does not use terms like "wealth" because, in his view, an economy is a mechanism by which people have jobs, spend money and buy things. Those "things" simply appear on store shelves put there by people who are employed, and as long as people are employed, they will have money to buy those things and clear the shelves so that they can make more things for people to buy in the future.

While macroeconomists might call this the "Circular-Flow" model, I would say it more resembles circular reasoning. As long as people continue to spend, then the model can flow freely, but if people stop spending, then the economy breaks down. So, the argument goes as follows: (1) People quit spending which then causes the economy to slow down, and people then lose their jobs; (2) Why did they quit spending? (3) Because they either lost their jobs or were afraid they would lose their jobs, so they needed to save money.

The reasoning problem here is obvious, but let us move on. When people stop spending, and when the "animal spirits" of investors turn investors from tigers to pussycats, then it is government to the rescue. Government reaches into its own currency well (as in the case of the USA, where its official money is monopolized by the government) and spends (we call it "fiscal policy") until people have jobs again and start spending confidently.

As Krugman and other Keynesians note, this is "counter-cyclical" policy. Government spends a lot when the economy is in the tank and adopts more "austerity" when the economy is doing well.

A lot of Keynesians and fellow-travelers have told me that the real problem is that when times are good, governments still continue free-spending habits. Hey, no joke! When the economy is good, tax takes are higher, and the prospect of more revenue then feeds the spending habits of politicians. Why is this such a surprise?

So the government then is supposed to resort to what essentially are gimmicks, such as "Operation Twist" or QEWhatever, in which the Federal Reserve System purchases assets that the market already has declared worthless in order to try to prop up their prices. The idea is that if the government can prevent prices from adjusting downward (or should I say, correcting downward) the economy won't go bad, since everyone knows that falling prices are not an effect of a downturn, but a cause. (More interesting causal logic from the Keynesians.)

Out of all this comes Krugman's view that government wealth creation is endogenous, that is, economies grow because government spend money. (Because people save money, i.e., don't spend all of their income immediately, Keynesians believe market economies are always in peril of imploding, so the only thing that can keep that from happening is for governments to spend, and that is how economies grow.)

The problem with Krugman's view is that in reality, economies grow when entrepreneurs over a wide scale have the freedom to bring resources from lower-valued uses to higher-valued uses as ultimately determined by consumers. During that process, other resources can be applied to those uses that previously were being neglected.

In the Keynesian view, governments flood the markets with new money (or new spending) and stuff just appears out of thin air. Capital just happens. Investment just happens. All it takes is a new injection of money.

As I read Krugman over and over again, I see that there are three things he clearly does not understand: (1) Opportunity Cost, (2) Capital, and (3) Entrepreneurship. To Krugman, an entrepreneur is someone who makes something in a garage, and his or her actions have little to do with the economy. He already has noted that to him, the real value of capital is the spending required to create it, and anyone who believes governments can create prosperity by printing money does not understand opportunity cost.

So, from where I sit, it seems that Krugman is saying that government endogenously can reignite an entire economy by spending on those things that, frankly, are tied to political connections, such as "green energy," which is nothing more than an industry on federal life supports. Yet, Krugman insists that by draining profitable ventures and redirecting resources into failing industries, the entire economy can be reborn!

One Size Fits All "Cost Reduction"

When I recently spoke at a college in Michigan, I met a couple of women from Canada who told me that whenever they need serious medical care, they come across the border to the USA. In fact, they said there are clinics in this country that specialize in treating Canadians who either are denied care in their own country or must wait in long lines.

The reason is simple: in the name of "controlling costs," the Canadian government through its "single-payer" plan simply withholds care through a "one-size-fits-all" system -- and that is what Paul Krugman claims we need to do here. (When he confidently asked an audience of Canadians if they believed they had a great system, he got responses that truly puzzled him, and certainly were not what he expected.)

(After the speech, a woman in the audience whose husband is a doctor told me that her husband spends about six hours a day doing paperwork in order to satisfy the government requirements. Please explain to me how this is any kind of positive change, especially considering that ObamaCare is going to pile on even more bureaucratic procedures into medical care.)

In a recent post, he claims that the way to get budget savings is for the government to withhold care. He doesn't put it that way, of course. Only a Keynesian and fellow-traveling statist could believe that when governments pile administrative procedures in medical care, such actions actually reduce real costs.

Like most statists, Krugman believes that costs are administrative numbers and the way that one reduces real costs is simply to order them to fall. So we get things like:

And the truth is that we know a lot about how to do that — after all, every other advanced country has much lower health costs than we do, and even within the US, the VHA and even Medicaid are much better at controlling costs than Medicare, and even more so relative to private insurance.

The key is having a health insurance system that can say no — no, we won’t pay premium prices for drugs that are little if any better, we won’t pay for medical procedures that yield little or no benefit.

Sorry, but this isn't economics. It is babble. Krugman really does believe that markets behave exactly like bureaucracies, and that one can substitute bureaucracy for market exchanges and actually get superior results.

Every "market" in which government involves itself with massive "oversight" or outright running things is going to have increasing real costs, as careerist bureaucrats find ways to pile on procedures and paperwork. However, in American medical care, we often find that those procedures that neither are covered by insurance or government payments are marked by falling prices. Yes, why is it that things like lasik surgery have been becoming increasingly affordable despite the lack of third-party payments? (Or, maybe I should add that it is because of the lack of third-party payments.)

Like all good Keynesians, Krugman believes that markets over time drive up real costs, and the only way to make things affordable is for government to order costs to fall. That is not the real record of capitalism, of course, but Keynesians ignore that hard fact. Instead, they want us to believe that if government just could provide everything administratively, that we would be able to live in splendor and wealth. Just like they did in the U.S.S.R. WHERE THEY HAD FREE HEALTHCARE!

The "Full Faith and Credit of the United States"? Right!

I remember watching advertisements 30 years ago for U.S. securities in which the narrator asks the prospective buyer, "What stands behind your investment? Why the full faith and credit of these United States!" with a picture of the U.S. Capitol standing behind him.

Even then, I thought that to be a bit excessive, given that he was not speaking of the USA as a collection of people, but rather the federal government, which he was equating to all of us, as though the sum total of our entire lives is the majesty of the American state. In other words, he was saying, "The U.S. Government will extract the money from others in one way or another to pay back these 'investments'."

Unfortunately, Paul Krugman uses the same language, and as an economist, he should know better. Furthermore, he is being knowingly deceptive, for a term like "full faith and credit" means that the borrower will pay back according to the terms of the agreement.

However, that is not what the U.S. Government does or has been doing for decades. When it pays back its loans, it does so with purposely-debased money and also by robbing Peter to pay Paul, an act in which it purchases bonds to pay repay bonds that were issued to pay back previously-issued bonds -- and so on. (This kind of borrowing, by the way, is illegal in the private sector and in municipal trading, although I am sure that states and cities do it more often than they ever will admit.)

Krugman writes: "John Boehner has just declared that he’s going to hold the full faith and credit of the United States hostage every time we hit the debt limit."You see, there can be no discussion at all of where all of this is heading. Instead, we are supposed to simply trust Washington to spend wisely, as though that already were happening.

This is not an endorsement of Boehner, by any means. Boehner cannot even stand debate within his own party, let alone a larger political arena. Instead, we get posturing by President Obama and Boehner as though they really were serious about getting things under control, with Krugman's answer is for the debt ceiling to be removed so that the U.S. Government can continue the delusion that it is creating wealth when, in fact, the government is transferring and destroying it.Yes, Congress and the president have no self-control, so the answer is to pretend that they do. Amazing.

That Krugman actually buys into the notion that the U.S. Government can borrow and print its way into the future without serious consequences is amazing, given his stature within the economics profession. Debasing the currency, crony capitalism (which he endorses via "green energy" subsidies), and preventing the creation of wealth through monopolistic regulation is not an economic plan; it is a plan for destruction.

So, there is no "full faith and credit of these United States" by any means. Krugman may want us to believe that paying back bonds with depreciating currency has only good effects, but rhetoric and financial trickery is no replacement for the Law of Opportunity Cost.

Is Rejection of the Liquidity Trap Doctrine an Act of Willful Blindness?

A number of posters write that this blog does not engage in any economic analysis, and while I might disagree with that claim, nonetheless this blog is not as analytical as some others, including Bob Murphy's Free Advice and Robert Wenzel's Economic Policy Journal, both of which are excellent blogs and well worth reading. (Both of them take on Paul Krugman and do it quite well. Murphy's latest devastating salvo is found here.)

Instead of going after Krugman's Monday NYT column, instead I want to deal -- using economic analysis -- with a recent Krugman blog post entitled: "Against Willful Denseness, The Gods Themselves Contend In Vain," in which he declares:

From the very beginning of the Lesser Depression, the central principle for understanding macroeconomic policy has been that everything is different when you’re in a liquidity trap. In particular, the whole case for fiscal stimulus and against austerity rests on the proposition that with interest rates up against the zero lower bound, the central bank can neither achieve full employment on its own nor offset the contractionary effect of spending cuts or tax hikes.

This isn’t hard, folks; it’s just Macro 101. Yet a large number of economists — never mind politicians or policy makers — seems to have a very hard time grasping this basic concept.

He adds:

We’re not talking about stupid people here; clearly, there’s something about the notion that the rules for policy depend on the situation that some economists just don’t want to understand.

In other words, Krugman has explained it, so it must be true, and anyone who might disagree with him either is hopelessly ignorant or, frankly, evil. There can be no honest disagreement, since to disagree with Krugman on this point is dishonest.

Understand, I am taking his words and, I believe, interpreting them fairly.This is what I learned in Logic 101 as the "appeal to authority," which here means that since the term "liquidity trap" is taught in macroeconomics, then there can be no argument against it, any more than one is permitted to claim that FDR's New Deal extended the Great Depression or that high tax rates just might squelch capital investment.

Moreover, just because Krugman appeals to the "liquidity trap" does not mean it is a legitimate economic concept. Murray N. Rothbard 50 years ago took on this doctrine and had a number of criticisms, writing:

The ultimate weapon in the Keynesian arsenal of explanations of depressions is the "liquidity trap." This is not precisely a critique of the Mises theory, but it is the last line of Keynesian defense of their own inflationary "cures" for depression. Keynesians claim that "liquidity preference" (demand for money) may be so persistently high that the rate of interest could not fall low enough to stimulate investment sufficiently to raise the economy out of the depression. This statement assumes that the rate of interest is determined by "liquidity preference" instead of by time preference; and it also assumes again that the link between savings and investment is very tenuous indeed, only tentatively exerting itself through the rate of interest. But, on the contrary, it is not a question of saving and investment each being acted upon by the rate of interest; in fact, saving, investment, and the rate of interest are each and all simultaneously determined by individual time preferences on the market. Liquidity preference has nothing to do with this matter.

Furthermore, interest rates are not low because people's time preferences have changed and they are saving more. No, they are low because the Federal Reserve System has pushed them down to artificially-low levels, while at the same time, the Fed is trying to prop up malinvestments not only  here but also across the globe.

I would add the the "liquidity trap" doctrine also is based upon the economic fallacy that government essentially can do away with the Law of Scarcity by pushing down interest rates and by printing money. If one were to ask Krugman how this is possible, he would counter that there are "idle resources" (including lots of unemployed labor) that are sitting fallow because of a "lack of demand."

If one were to continue the questioning with, "What caused the 'lack of demand'?" he would answer, "Because people stopped spending." And if one asked, "Why did people stop spending," he most likely would answer, "Because of the financial crisis."

Yet, what caused the financial crisis? Malinvestments. That's right, malinvestments, those very things that Keynesians claim can be turned profitable with just a little more "stimulus" money, created the crisis in the first place. (Kind of like the housing market, which the government unsuccessfully has tried to reflate since its collapse in 2008.)

Now, that is interesting, given that malinvestment is an Austrian term, and Austrians are not supposed to know anything about economics. The idea behind "stimulus" and ratcheting up spending is that if the government spends enough money on lots of things, somehow those malinvested items will be resurrected and become profitable again. Now, why these things would supernaturally become profitable is another question, but Krugman and the Keynesians seem to believe that as long as the government is throwing money at something, sooner or later it will become a winner. (Krugman's insistence that massive government subsidies of "green energy" some day will magically transform that industry into something genuinely profitable is an example of the wishful thinking that accompanies Keynesianism.)

I also would add that the "liquidity trap" doctrine assumes that even though mutually-beneficial exchanges would be possible, individuals will act irrationally refuse to act on those opportunities. Why? "Because we are in a liquidity trap," and everyone knows that the liquidity trap overturns logic, the Law of Opportunity Cost, and probably the Law of Gravity.

My larger point is that Austrians really do have a basis for disagreeing with the Keynesian viewpoints, and the basis is grounded in logic and fundamental laws of economics. That Krugman interprets this disagreement as nothing more than yahoos wallowing in their willfulness says much more about Krugman than it does the Austrians.