This is an expanded version of today’s Mises Daily article with additional analysis and more references to scholarly articles:
More Evidence That Krugman Is Wrong About Hayek and Mises
Paul Krugman has recently been critical of Friedman (and Phelps), the Phillips Curve, and the Natural Unemployment Rate (NUR) theory (“Milton Friedman, Unperson”). Per Krugman in the aftermath of the Great Recession, the accompanying financial crisis, and follow-up Bush-Obama-Fed Great Stagnation, Friedman has vanished from the policy front. Krugman makes this claim despite the fact that there is an on-going vigorous debate on rules versus discretion with at least some attention to Friedman’s plucking model (“Friedman’s ‘Plucking Model’: Comment“ or Austrian Business Cycles and Plucking Models). While maligning Friedman’s contributions, Krugman manages a slap at Austrians and claims a renewed practical relevance for Keynes:
What I think is really interesting is the way Friedman has virtually vanished from policy discourse. Keynes is very much back, even if that fact drives some economists crazy; Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians bring little to the table but the notion that fiat money is the root of all evil — a deeply anti-Friedmanian position. But Friedman is pretty much absent.
The Friedman-Phelps hypothesis was the heart of the policy effectiveness debate of the 1970s and early 80s (The Keynes-Hayek Debate: Lessons for Contemporary Business Cycle Theorists). The empirical evidence developed during the debate over the policy implications of the NUR model, at least temporally, discredited active Keynesian discretionary policy as an effective tool to reduce unemployment in the long run. One result of the debate; monetary policy appeared to improve, especially compared to the Fed’s dismal record in the late 1920s and 1930s and the mid 1960s to the late 1970s. Central banks, a la Friedman, focused on rules based policy and inflation targeting resulting in what many, following John B. Taylor, call the Great Moderation of the early 1980s to the early 2000s.
Krugman does recognize the “stagflation (of the 1970s) led to a major rethinking of macroeconomics, all across the board; even staunch Keynesians conceded that Friedman/Phelps had been right (indeed, they may have conceded too much [emphasis added]), and the vertical long-run Phillips curve became part of every textbook.” Ravier, in a new QJAE paper, argues, correctly in my view, that the long-run Phillips is in fact upward sloping. My early work with Fred Glahe on Hayek and Keynes (The Keynes-Hayek Debate: Lessons for Contemporary Business Cycle Theorists and The Hayek-Keynes Debate – Lessons for Current Business Cycle Research) argued that this development was important, but misleading. The then current business cycle research and its newer variants could benefit from re-examining the issues at the heart of the Hayek-Keynes debate. Money, banking, finance and capital structure were and still are for the most part ignored in much of the new (post Friedman-Phelps) macroeconomics including the new–Keynesian approaches. In this regard, Hayek and Mises had then and have now more to offer than Keynes (Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians). The Austrian approach with capital structure and money and banking integrated into the analysis is the key to understanding boom-bust cycles. In fact, the most recent boom-bust episodes illustrate the policy errors and damage that can be inflicted on an economy even in a stable money or stable inflation policy environment such as that which produced the Great Moderation (Cochran, Hayek and the 21st Century Boom-Bust and Recession-Recovery, Fisher, Monetary Policy and Capital-Based Macroeconomics: An Empirical Examination for the United States (1963–2012), and Young, Austrian Business Cycle Theory: A Modern Appraisal).