Gordon Tullock’s argument was expounded in his article “Why the Austrians Are Wrong About Depressions”. Before explaining his thesis, I’d like to copy and paste a few sentences I think are key to understanding Tullock’s argument.
First, Rothbard never explains why the inflation that is part of his theory cannot simply be continued or even accelerated.
Here, Tullock is referring to Rothbard’s Economic Depressions: Causes and Cures. Whether Rothbard left out the possible methods by which to postpone a recession is irrelevant, because any serious criticism of Austrian theory should have had more research than just Rothbard’s pamphlet. Austrians do claim that booms can be maintained by accelerating credit expansion.
Another gem:
As a personal item, I have lived through three hyperinflations and can testify that it is undeniably unpleasant, but not really a disaster.
I’m not sure what he is trying to say. Hyperinflation is OK because “it’s not that bad”? What economies recovered to the same health before hyperinflation? Argentina? Zimbabwe? Hungary?
In any case, the underlying thesis to Tullock’s criticism is:
The second nit has to do with Rothbard’s apparent belief that business people never learn.
This is, in fact, a recurring argument against the Austrian business cycle. The problem with the thesis is that entrepreneurship is something innate within the human spirit. Individuals are always looking for ways to increase wealth, and this requires investment. More often than not, investment will require an individual to borrow from the accumulated capital of another individual. If a central bank depreciates a bank to bank lending rate, or the rate at which banks can borrow from the Federal Reserve, and therefore increase the supply of credit on reserve in member banks it does not necessarily follow that the entrepreneur will be aware of this fact. An entrepreneur might, in any case, not be interested in waiting for the central bank to return to a market rate of interest, and I am certain that no entrepreneur knows what the real market rate of interest is.
But, these are just examples of how Gordon Tullock does not have a strong hold on Austrian theory, nor looks at the problem from a microeconomic perspective - that is, the perspective of the individual. Now, in continuation:
My major objection, putting it quite bluntly, is that if the process that Rothbard describes did occur, there would be many corporate bankruptcies and business people jumping out of the windows of office buildings, but there would be only minor transitional unemployment.
He elucidates his thesis near the end of the article:
Because of the size of the capital goods industries compared to the rest of the economy, however, the forcing down of prices in other industries made necessary by this unemployment would once again cause bankruptcies but not unemployment.
Gordon Tullock is absolutely correct, and in depressions which had little government intervention it took relatively little time for the labor markets to restructure. The most common Austrian example of this occurring is the depression of 1920. The massive unemployment of the Great Depression occurred because of Hoover’s labor laws, and the artificial inflexibility in wage rates, not because of the amount of malinvestment.
In general, Tullock’s critique should not be taken seriously. He shows an inadequate understanding of Austrian capital theory, even though he claims it’s Rothbard who is confused. He fails to distinguish between money and capital, and makes obvious the fact that he did not take the proper steps to completely understand what he was criticizing. On his comment on GNP, I am not sure how he comes to that conclusion. He does not talk about that later in the article.
Krugman’s argument is as follows:
Here’s the problem: 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?
Krugman, like Tullock, doesn’t really understand what he is criticizing. The Austrian theory argues that malinvestment occurred because individuals were not saving their capital. The investments were not products of increased savings, but of increases in the money supply which gave the illusion of higher savings. So, if during the boom we have a make believe consumption to savings ratio of 3:1 then it follows that if time preference does not change the ratio will remain the same after the malinvestments have been recognized as such. Usually, though, given an increase in uncertainty savings tends to increase, as individuals save to guard for the future.
In short, don’t focus too much on what Krugman and Tullock said. They should repay our attention by actually learning about what they are criticizing.