Smiling Dave,
I think you really need to re-think some of your arguments in your post (both substanatively and sylistically, as I think implying Krugman is the dim Watson to your insightful Holmes is probably a bit much). But I just want to respond to one part in particular.
Who said a recession is a supply shock [=an event that suddenly changes the price of a commodity or service]? A recession is when people get laid off because they had unproductive jobs. Where did you see anything different in Murphy’s article?
I think Krugman’s description is perfectly defensable. If I am correct, Krugman is referring to the fact that Austrians claim that an artificial credit expansion will distort the capital structure and result in the economy not being able to produce as much as it could before the boom. This is the essense of a supply shock.
If I wanted to flatter myself (and I do), I would argue that Paul Krugman saw and was convinced by my description of the ABCT in the post I wrote criticising his Slate article. I will repeat it below so you can have a better idea of where PK and I are comming from (PS* he asked me to call him PK from now on).
Krugman is ignoring is the impact malinvestments have on the capital structure and how this impacts total output. If you read some of Roger Garrison’s work, like this essay, you will see that Austrians believe that spending on BOTH investment and consumer goods increases during the boom and that this has a nasty consequence on the capital structure. Specifically, increased consumer spending leads capital resources to be shifted toward the late stage production of consumer goods, while at the same time, lower interest rates leads to capital resources being also shifted to earlier stages of production. Middle stages are neglected and capital there may actually depreciate without replacement.
In the end, we are left with a capital structure that is out of whack as resources are tugged to early and late stages of production. As Garrison puts it: " Outputs of earlier stages feed successively into subsequent stages. At some stage in this process, the viability of the policy-induced capital restructuring comes into question. Capital and labor resources complementary to those already committed to earlier stages are in short supply (Hayek, 1967, pp. 85-91)."
As result , we simply can’t produce as much as we used to produce until it brought back into alignment (the production possibilities frontier has contracted). As a result, the LEVEL of income falls and we have a recession. If you want to think about it another way (a way that Garrison does not use but makes sense to me), the amount of capital in the economy may have stayed the same or even increased during the inflationary boom. But because the inflationary boom led to a realignment of the entire capital structure we no longer have the right KINDS of capital to produce the same amount of goods as before the boom. This essentially represents a productivity shock that reduces aggregate output. And this productivity shock will last so long as the capital structure is out of sorts.
https://forum.freecapitalists.org/t/response-to-krugman/10724/4