cporter,
thanks for the link to murphy’s response to krugman’s article.
I know Krugman’s a professional idiot, but his criticisms in the Slate article are so simplistic and easily defeated that I feel like there’s some technical detail I’m missing that makes them not so trivial. Am I being too hopeful here or can someone point out what I’m missing?
i don’t think you’re giving krugman enough credit. there was a thread earlier last month that indicated (from an unofficial source) that krugman had actually read rothbard’s america’s great depression. and i think krugman’s complaints hit very directly to the way abct is presented by rothbard. here is a particuarly relevant passage from agd.
What, specifically, are the essential features of the depression-recovery phase? Wasteful projects, as we have said, must either be abandoned or used as best they can be. Inefficient firms, buoyed up by the artificial boom, must be liquidated or have their debts scaled down or be turned over to their creditors. Prices of producers’ goods must fall, particularly in the higher orders of production — this includes capital goods, lands, and wage rates. Just as the boom was marked by a fall in the rate of interest, i.e., of price differentials between stages of production (the “natural rate” or going rate of profit) as well as the loan rate, so the depression-recovery consists of a rise in this interest differential. In practice, this means a fall in the prices of the higher-order goods relative to prices in the consumer goods industries. Not only prices of particular machines must fall, but also the prices of whole aggregates of capital, e.g., stock market and real estate values. In fact, these values must fall more than the earnings from the assets, through reflecting the general rise in the rate of interest return.
Since factors must shift from the higher to the lower orders of production, there is inevitable “frictional” unemployment in a depression, but it need not be greater than unemployment attending any other large shift in production. In practice, unemployment will be aggravated by the numerous bankruptcies, and the large errors revealed, but it still need only be temporary.
http://mises.org/daily/1905
Here rothbard is clearly talking about resources shifting from higher order goods industries to consumer goods industries. and i think it is perfectly reasonable for krugman voice concerns with rothbard’s logic here. in fact, re-reading it now i wonder if he didn’t have this exact passage in mind.
As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Most modern hangover theorists probably don’t even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods…But in that case, why doesn’t the investment boom…also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.
http://www.slate.com/id/9593/
and let’s be clear that this critique isn’t singular to krugman. a few years later when bryan caplan (who everyone here seems to agree is a better critic of austrian econ than krugman) wrote his essay on why he was not an austrian economist, he made the exact same criticisms himself.
The Austrian theory also suffers from serious internal inconsistencies. If, as in the Austrian theory, initial consumption/investment preferences “re-assert themselves,” why don’t the consumption goods industries enjoy a huge boom during depressions? After all, if the prices of the capital goods factors are too high, are not the prices of the consumption goods factors too low? Wage workers in capital goods industries are unhappy when old time preferences re-assert themselves. But wage workers in consumer goods industries should be overjoyed. The Austrian theory predicts a decline in employment in some sectors, but an increase in others; thus, it does nothing to explain why unemployment is high during the “bust” and low during the “boom.”
http://econfaculty.gmu.edu/bcaplan/whyaust.htm
now, that doesn’t mean i think this critique sticks for every incarnation of the ABCT (i think garrison’s treatment is more subtle and bipasses this particular critique). but i don’t think it is fair to say krugman is totally off base.