Monday, January 26, 2009

Krugman Correct

More than a decade ago, Paul Krugman characterized Austrian Business Cycle Theory (ABCT) as "The hangover theory":
"It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion"
The other day, Steven Horwitz, one of the leading advocates of ABCT offered the following analogy for economics:
"the mistake is drinking too much and being hungover is the correction."
(Steven Horwitz is the secretary and webmaster for the Society of the Development of Austrian Economics and manages to get letters to the editor published in the Watertown Daily Times. Myself, I read the Lowville Journal & Republican if I want to know who is growing the largest pumpkin and who has been visited over the weekend by their children away at college.) I think my critique of ABCT goes more into the nuts and bolts of the theory.

Elsewhere, Krugman adopts a Post Keynesian point:
"I should also point out this, in [Robert] Barro’s article:
'John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.'
Is it too much to ask that someone criticizing Keynes actually, you know, read Keynes — at least enough to know that he devoted a whole chapter to explaining why a fall in wages would not expand employment?"


Anonymous said...

Krugman has been, rightly, invoking Chapter 19 of The General Theory a lot of late, although in the context of a "Liquidity Trap" -- that is, when the "normal" rules of (neo-classical) economics no longer apply.

Which, I would say, should make you wonder why Keynes called his book a "General Theory"...

And talking of post-Keynesianism and Austrians (something I've blogged about recently as well), I rediscovered this:


Which is essential, and fun, reading...

J.E. King references that article in his A history of post Keynesian economics since 1936, which makes the point I've made a few times that the business cycle theory of Austrian economics rests of equilibrium positions (the "natural rate" of interest) they usually dismiss as meaningless.

An Anarchist FAQ

Anonymous said...

Mario Rizzo has an amusing rebuttal to Krugman's flippant comments about knowing Keynes.

Robert Vienneau said...

Iain, Chapter 19 does more than describe a liquidity trap. I think we agree. I like both that Davidson article and the King book. (For years, I've intended to read Silvio Gesell, who you mention in your blog post.)

Mario Rizzo's citing a non-existent CBO estimate raises the question: stupid or dishonest? Anyways, I don't see how that post can be a rebuttal of Krugman, since Krugman doesn't merely argue mistakenly from authority. Furthermore, as a Post Keynesian, I'm hardly likely to accept mainstream "Keynesian" - that is, bastard Keynesian - interpretations of Keynes. Keynes was more interested in designing proper institutions for his day, which, with compromises, he succeeded brilliantly at at Bretton Woods. Abba Lerner is the one who invented the idea of functional finance.

YouNotSneaky! said...

You're very trigger happy with this whole 'stupid or dishonest' business which really ends up reflecting on yourself.
In fact there WAS a CBO estimate, even if, at the time there was no official CBO report.
And even IF there had been no CBO estimate there was STILL an AP story which quoted a CBO estimate. I really can't see how relying in good faith on an AP story - a respectable news organization after all - even if that story turns out incorrect would make anyone either stupid or dishonest. Mistaken maybe. But not those two.
Like I said. Reflects.