Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!

First they ignore you, then they laugh at you, then they fight you, then you win. (Mahatma Gandhi)

Final victory draws ever nearer for Austrian economics.  Over the weekend, the New York Times–with its intellectual cachet rapidly waning and its finances in parlous straits–ran a tedious and rambling hit piece on Rand Paul.  The article  went out of its way to target the Mises Institute–the long-time home of mainline Austrian economics.  Lew Rockwell wrote a response graciously accepting the honor associated with being recognized as a leading intellectual threat to establishment economics and the American Welfare-Warfare State by the leading media mouthpiece for the regime.  Hard on the heels of this article comes another attack on Austrian economics in the Times.  This one  appears in an op ed by house Keynesian Paul Krugman whose one-note diatribes have long ceased  to outrage or amuse.  Even Krugman’s title, “Soup Kitchens Caused the Great Depression,” has been recycled.  And it is not rendered any less tired by the addition of “the AFF Edition,”  an idiosyncratic acronym which,  as Krugman is forced to explain in the first sentence of the text, means “Austrian Founding Fathers.” 

486px-Paul_Krugman-press_conference_Dec_07th,_2008-8The Austrian that Krugman attacks is Ludwig von Mises, the originator of the Austrian theory of the business cycle. Actually, our jaded scribe could not be bothered to train his sights on Mises’s actual views but rather rests content to attack a caricature of Mises’s position as presented in a pseudonymous post by an individual calling himself “Lord Keynes” on the blog Social Democracy for the 21st Century: A Post Keynesian Perspective. Blithely accepting “Lord Keynes’s” claims at face value, Krugman declares “von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.” What theory did Mises substitute, then? According to Krugman, Mises adopted the view that

it was excessive wages — trade unions were demanding too much, and unemployment benefits were leaving workers insufficiently desperate. . . . [I]t is, essentially, the current Republican story, in which unemployment is high because we’re being too nice to the unemployed — that, as I like to say, soup kitchens caused the Great Depression.

But why does Krugman think that the explanation of the sequence of complex historical phenomena that we have come to call the “Great Depression” must be uni-causal? Surely the Nobel-prize winning Krugman recalls from his basic micro that wage rates held above market equilibrium bring about excess supply of labor and that unemployment insurance impedes and slows down the job search process–and that these laws are not suspended during recessions or depressions initiated by other causes. And this is precisely Mises’s position. Indeed if Krugman had bestirred himself to carefully read the “fascinating post” from the obscure left-wing blog that he recycled for his New York Times op ed, he would have found the following passages from Mises quoted by “Lord Keynes”:

The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. . . . The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. . . . .Thus, we see that unemployment, as a long-term mass phenomenon, is the consequence of the labor union policy of driving wage rates up. Without unemployment relief, this policy would have collapsed long ago. Thus, unemployment relief is not a means for alleviating the want caused by unemployment, as is link in the chain of causes which actually makes unemployment a long-term mass phenomenon.”

In fact Mises did not deny that the Great Depression was initiated by credit expansion. Rather, he used basic economic theory to explain the subsequent protracted and unprecedented mass unemployment as a consequence of labor market failure induced by government interventions. Why is Krugman unable to grasp a multi-causal explanation of a complex and multifaceted historical episode? Could it be because Krugman himself is in thrall to the simplistic notion of aggregate demand failure as the one and only cause of all recessions/depressions present and future?

In fact, economists are finally beginning to rediscover Mises’s explanation of the prolonged mass unemployment of the 1930s. For example, UCLA economist Lee Ohanian in his recent paper, “What—or Who—Started the Great Depression,” argues that Hoover’s policies of propping up wages and encouraging work sharing “was the single most important event in precipitating the Great Depression” and resulted in “a significant labor market distortion.” He estimates that “the recession was three times worse — at a minimum — than it otherwise would have been, because of Hoover” and that the severe labor-market disequilibrium induced by Hoover’s policies accounted for 18 percent of the 27 percent decline in the nation’s GDP by the fourth quarter of 1931.

Ohanian concludes along Misesian lines

the [Great] Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program. Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages. This analysis also provides a theory for why low nominal spending — what some economists refer to as deficient aggregate demand — generated such a large depression in the 1930s, but not in the early 1920s, which was a period of comparable deflation and monetary contraction, but when firms cut nominal wages considerably.

I conclude with a piece of advice to Krugman in regard to his unwillingness or inability to give an honest and accurate account of the Austrian theory: Perhaps you should stop trawling obscure blogs for biased material to write glosses on and make an effort to expand your study of the Austrian theory beyond the pedestrian and inaccurate description of it given in Gottfried Haberler’s dated review of business cycle theory, Prosperity and Depression. One place to start might be the article A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis in which I engage some contemporary arguments against the theory, including your own. The paper contains copious references to the mainline Austrian literature, old and new, for your further edification.

Comments

  1. Would Austrian economics work? We can’t prove it, because they won’t try it. And why would they? Violent monopoly is making those in control very prosperous and happy.

  2. Krudman is not going to abandon Keynesianism — the entire state, military, bureaucracy, media, Fed, academia, etc., are backing him up. He’s making a great profit, and he will keep up his appearances until the collapse.

  3. “The actions of labor unions can have effects similar to those of minimum wages, leading to structural unemployment…. unionized workers earn higher wages and benefits than non-union workers with similar skills. The result of these increased wages is the same as the result of minimum wage: labor unions push the wage that workers above the equilibrium wage. Consequently, there are more people willing to work at the wage being paid than there are jobs available. Like a binding minimum wage, this leads to structural unemployment” (“Economics” by Krugman and Wells 2004, p. 772)

  4. What happens to the family-ownership’s legacy when their “Paper of Record” is cast by later historians as prosthelytizing obscurant, pseudoscientific, quantitative mysticism predicated on an infinite faith in technology to solve any human problem we run up against? Because that’s what’s going to happen.

    I can’t really understand how one could have the most tepid understanding of mathematics, human nature, world history and economics and not grasp that Austrians got the business cycle right. You can bend an economy a bit. But you can’t get around the speed of light, the force of gravity, or the consequences of encouraging people to exploit an over-exploited pattern of specialization and trade.

    So I’m left with only one possibility: that Krugman is either an irrational zealot, a dishonest man, or both.

  5. New York Times Fears The Dissolution Of Statist Thought.

    It is a victory and a grand day when the New York Times feels its back against the wall and starts wildly flailing its propaganda arms in a desperate attempt to prevent unadulterated knowledge from reaching the public.

    When an agency of State propaganda goes on the attack it is worth while to see its target. The Ludwig von Mises Institute is championing the philosophy of classical liberalism and Austrian economics and it is gaining great traction among young people and anyone who is thoughtfully searching for justice, economic truth, and liberty.

    And so the New York Times and the recipient of the Nobel Prize for Wackonomics, Paul Krugman, goes into an attack mode.

    Its fear is justified because the groundswell of educated and energized and activated people will cause the New York Times to be viewed as a divisive, manipulative source of propaganda designed to keep people uninformed and misinformed and oppressed.

  6. Further, “Lord Keynes”, Krugman and all the rest lie about, ignore, obfuscate and fudge the obvious fact that Austrian analysis is based upon price distortions caused by prior credit and funny money expansions or dilutions. The “nominal” itself is the source of the problem. As Hayek explained in 1977, Keynes was attempting to solve a problem of distorted British wages caused by the previous WWI inflation followed by Britain going back on a quasi-gold standard at too high of a value:

    Mr. Buckley: Well, how would you account for the almost unanimous opinion of liberal Democrats that in order to reduce unemployment it is necessary for the government to pursue vast spending projects? Since you speak of this as being almost manifestly ill-advised, the question arises why such superstitions should survive?

    Mr. Hayek: Well, it’s almost entirely the work of one man – in a way a genius, Lord Keynes – who is much more concerned about influencing current policies than about advancing the right sort of theories and he was operating then in a very peculiar situation. Now in Great Britain, a successful attempt was made after World War I – which brought a good deal of inflation – to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages. Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime salary and wages, or inflated wages, could buy much more. Wages had not come down.

    Now, his first argument was wages must come down. Then he found that was politically impossible, so he must find another way. Instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages and then by a curious intellectual somersault I would almost say he led himself to believe that even bringing down money wages was not of any use. It involves a complex economic argument and all he concluded was that – well, we must inflate, in short.

    Now notice several things. Keynes was a genius, but a genius who spent only a fraction of his time on economics – one of the busiest men I ever knew. But he knew very little economics except particularly the Cambridge tradition, and he was much more concerned to influence policy at a particular moment than develop a true theory. In fact, the last time I talked to him was after the war. I knew him very well. When I asked him wasn’t he getting alarmed about what his pupils who swallowed all this theory were doing after the war when the danger was clearly inflation, his answer was:

    “Oh, don’t mind. My theory was frightfully important in the 1930s. Then, we needed an expansion to correct a situation. Do trust me. If this theory becomes dangerous, I’m going to turn public opinion around like this”.

    Six month later, he was dead. And as usual, what happened is that the very doctrine – pupils of this man did apply to completely different situation a theory which was designed to influence policy in a particular situation. The only thing I blamed Keynes for is to making his theory more attractive and effective, he called it THE general theory. In fact, he knew precisely that it was not a general theory, but it was an argument to persuade government in the 1930s to do particular things.

    Mr. Buckley: It was an ad hoc?

    Mr. Hayek: It was entirely ad hoc. He was one of the most fascinating men I knew, but the personal magnetism of this man not only persuaded the younger generation of economists. And if I had been a much younger man and a student, I probably would have been swept off my feet as were most of the people.

    Mr. Buckley: Like Nixon.

    Mr. Hayek: No, no. (laughter).

    http://www.youtube.com/watch?v=gaQcbGoW2C0

  7. It’s a hobby of ours to smack down the dishonest and rude “Lord Keynes”. I’ve been explaining to him for years over and over that he does not even understand the basic Austrian concept of economic calculation.

    Bob Murphy wrote:

    Heh this is actually funny. I had always assumed Roddis was being unfair when accusing LK–who has read a ton of Hayek–of not knowing the Austrian concept of economic calculation. But, based on LK’s angry retort, turns out Roddis was right.

    http://consultingbyrpm.com/blog/2012/09/tom-woods-keeps-krugmans-feet-to-the-fire.html#comment-45198

    LK’s latest shot-that-missed is insisting that the alleged fact that large businesses will cut production and not prices during bad times (“fixprices” !!!!!) disproves the Austrian concept of economic calculation. His blog is full of posts regarding interviews with how companies set their prices. Sad.

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