Garrison… Rothbard…an increase in consumption (and thus no recession).
Too bad Krugman later retracted his hangover theory criticism:
So what is the essence of this Austrian story? Basically, it says that what we call an economic boom is actually something like China’s disastrous Great Leap Forward, which led to a temporary surge in consumption but only at the expense of degradation of the country’s underlying productive capacity. And the unemployment that follows is a result of that degradation: there’s simply nothing useful for the unemployed workers to do.
I like this story, and there are probably other cases besides China 1958-1961 to which it applies.
Of course, he thinks he has found other problems, but here he has confessed that the problem that he thought in his hangover theory article annihilates ABCT is invalid.
The thing is, in the hangover theory article, he was assuming, like Student seems to be doing, that the problem that causes recessions is always and only lack of aggregate demand. So hey, if the demand shifts from investment to consumption, we’re fine. No recession. As long as the bottom line aggregate of demand, meaning spending by anyone for any reason on anything, is out there somewhere, there cannot be a recession. That’s why he thinks he has outwitted the Austrians in that hangover theory article. They have not succeeded in explaining why there is less spending. In fact, according to Austrians, Krugman thinks, there must be an equal amount of spending always no matter what happens, given Keynes’ [mistaken] understanding of what Say’s Law says, and given that Austrians accept Say’s Law.
After reading the article by Bob Murphy that somebody sent him, Krugman’s eyes were opened. He grasped that lack of aggregate demand is not the only cause of a recession. Which is a radical departure from Keynes, and which is why Krugman has a hard time accepting it as true in the real world. But he does finally get that it’s possible in theory to have other causes. In particular, wasting of precious resources on a massive scale [what Krugman calls “degradation of the country’s underlying productive capacity”] can also induce a recession, at least in theory. Which is really what ABCT has been saying all along. Looking around for what the aggregate demand is doing is barking up the wrong tree, according to Austrians. They are trying to explain why there has been massive wasting of resources. And Rothbard’s version explains that quite nicely.
Bottom line: Keynes: Only cause of recession is lack of AD. Austrians believe, though they don’t know they believe it, that lack of AD is impossible. Thus they believe, though they don’t know they believe it, that recession is impossible. In other words, those dumbos have not thought things through.
Austrians: There are many causes for a recession. In particular, massive wastage of resources is one of them. Lack of AD is not one of them, even if it happens. In theory there may be a lack of AD due to hoarding, although in the real world this has never happened. But it doesn’t really matter, because lack of AD never causes recessions, ever.
Perhaps someone can make a Venn diagram of this. The title will be “What Causes Recessions?” On the left side there will be a circle labeled What Keynes Thought Causes Recessions, and inside the circle will be the words “Lack of Aggregate Demand.” On the right side will be a circle labeled What Austrians and Classical Economists Though Causes Recessions. It will have two entires inside it. One will be “Massive Wastage of Precious Resources”. Another will be “Other Things”.
The two circles will not intersect.