Monday, June 14, 2010

Wayne William Anderson and Paul Krugman

First, I wanted to share Wayne William Anderson's critique of a recent Krugman post on Hayek, which he provides a link to on the blog here. It's hard to know what to make of this. Some of it is outright bad blogging. Anderson writes:

"Krugman once again refuses to take a serious look at what the Austrians claim, deciding, instead, to place them in a false light in order to make them seem as though they are united by one thing: hatred of humanity."

"In fact, Krugman seems to believe that he really is above any such explanation, as his declaration alone should be regarded as ex cathera."

"Unfortunately, Krugman and DeLong never see that simple point [that Austrians think government policies make recessions worse]."

"Krugman and the Keynesians, on the other hand, believe that once the liquidation process begins, the economy never recovers. Ever."

When you read things like that it's hard to take the rest of it seriously. Wayne William Anderson has frustrated me for a long time. He seems more dedicated to gross generalizations about Keynesians and insulting Paul Krugman than he is dedicated to economics. Indeed, even his characterizations of the Austrian school come across as gross generalizations.

But this is a sensitive point for Austrians, so it's worth addressing. What do Austrians think of recessions? Well - they do think that they are necessary for readjustment and liquidation, do they not? Malinvestments need to be purged. I don't see what they have against the liquidationist label, exactly, because that's really the whole point of identifying a recession as the revelation of malinvestments. Indeed, without highlighting the positive function of the liquidation process I'm not sure what there is left of the Austrian school... a little epistemology and political philosophy I guess.

So did Krugman characterize it right? Well, Krugman called unemployment during the adjustment "persistent". Hayek said "The only way permanently to ‘mobilise’ all available resources is, thereforeto leave it to time to effect a permanent cure by the slow process of adapting the structure of production". Anderson wrote "In the Austrian view, we have EITHER liquidation of malivestments or long-term high unemployment, with any high amounts of unemployment coming from the liquidation process being temporary."

Anderson is slippery here, because "temporary" just means it will come to an end. However, since he objects to Krugman's "persistent" characterization of unemployment as a long term problem, presumably Anderson intends "temporary" to mean "short".

So who is more accurately representing Hayek's point about a "slow process" of adjustment? It seems to me that Krugman gets Hayek and Anderson doesn't. Where does Hayek ever say what Anderson seems to be saying he says: that the unemployment is short? It's an honest question because I'm no Hayek scholar - but he doesn't seem to be saying it here. Where does Krugman or any Keynesian ever say that unemployment will continue forever if governments don't do anything (as Anderson explicitly says they claim). I'm not aware of anything like that being said by anyone. This is the problem with Anderson - it's bad enough that he's so obsessed with Krugman that his blog is dedicated to criticizing the guy. But at least you'd wish he would represent the Austrian school well. I really don't think he does!

This of course raises the question of what would happen if intervention weren't allowed to occur. It's a question that Jonathan Catalan (who represents the Austrian school considerable more effectively than Wayne William Anderson) raises here. I've only skimmed the post so far, but he raises some good points. The first is about my favorite economic catastrophe, the 1920-21 depression. Catalan writes:

"There is a wide array of empirical evidence in support of Hayek, and contra Krugman, including in this case the depression of 1920-21 (high interest rates, temporarily high unemployment, but a relatively quick recovery regardless)."

I think my explanation for 1920-21 is fairly well known to readers. I think it supports the Austrian school, but it doesn't support their interpretations of 1929 or 2008. It's also clearly consistent with Keynesianism. 1920-21 is a fascinating period but it doesn't work very well as a way to arbitrate between the Austrians and Keynesians.

What does Wayne William Anderson have to say on that?: "Krugman would argue that the 1920-21 recession was "different," but only because it doesn't fit his theory. Krugman has a very crude theory, and Hayek does not, so it is easier for Krugman to appeal to the masses, as well as the ignorant crowd that thinks the NYT is God."

I kid you not - that's a "professional" economist's take on a fellow economist. Not quite as impressive as a few posts Jonathan has written recently on the episode. Again, a little hard to take seriously. I can engage people that think differently than me on this episode. I have a hard time respecting people that act like Keynesians like me, Romer, and Temin haven't thought this one through and just casually dismiss evidence (Tom Woods essentially argues this too - it's an obnoxious accusation). The most detailed work on the 1920-21 depression has been done by Keynesians, and the Austrians that like to talk about it don't even realize that because Tom Woods and Robert Murphy never cite them.

Jonathan also mentions Fed policy during the depression and commits the mistake the Friedman always enjoyed pointed out - assuming that low rates mean loose money:

"For the first three years the discount rate was relatively low (1½%), and even while the Fed raised the discount rate in 1931 they lowered other rates, such as the acceptance rate."

He also writes:

"Let’s be clear, Herbert Hoover was the greatest presidential spender up until Franklin Roosevelt. So, in that sense, the “liquidationists” did not win."

Which is what makes talking about these things so tough. Let's be clear - Hoover shot a bb gun at an elephant. During his tenure spending as a percent of GDP increased from about 4% to about 9%. Much of that increase was caused simply because the denominator (GDP) dropped through the floor (i.e. - no real added demand). BFD. It was not liquidationist but it wasn't Keynesian either. Krugman is pulling his hair out over Obama's policy right now and Hoover is supposed to be some kind of example? I think not. Let's think of it this way - how much would Wayne William Anderson and Hayek want to increase government spending? My guess is 0%. How much would Krugman have wanted? Double digits. By my math, especially taking into account the fact that the denominator of the spending to GDP ratio was falling, Hoover is closer to Hayek than he is to Krugman. The fact is no one owns Hoover. He's off in his own little "associationalist" world. So stop pretending otherwise.

I really feel like I'm rambling... it's been a long weekend and I'm still pretty exhausted. Here's the synopsis: Don't read Wayne William Anderson. Read Jonathan Catalan. Tentatively accept major portions of the Austrian school. Tentatively accept what Krugman says. Be a Keynesian.


  1. "Tentatively accept what Krugman says."

    Just to be clear ... on any subject?

    "Be a Keynesian."

    No thanks.

  2. "Be a Keynesian."

    Because your policy suggestions have worked out so well, am I right?

  3. "Indeed, without highlighting the positive function of the liquidation process I'm not sure what there is left of the Austrian school... a little epistemology and political philosophy I guess."

    And yet you whinge about Anderson being sloppy and unfair... go bark up another tree, honestly.

  4. Anonymous -
    Could you be more specific? What other major component of the Austrian school is there except:
    1. Libertarian political philosophy
    2. Praxeological methodology, and
    3. A capital structure/credit cycle view of the business cycle.

    I'm not sure why of all the quotes you were upset with that one. I thought that was a fairly benign one. These are the three major components of the Austrian school. I'm not sure anything else is really "major" in the sense of being essential to the Austrian paradigm.

  5. Mattheus -
    Where the sugestions have been followed they've been decent enough. Where they haven't, things have gotten pretty rough.

  6. Daniel,

    "Where the sugestions have been followed they've been decent enough. Where they haven't, things have gotten pretty rough."

    Keynesianism lead to such superb outcomes in the U.S. in the 1970s. Oh, that's right, it lead to outcomes that the Keynesians responded to thusly: "Uh, that doesn't fit our models of the world; how could that happen?" This illustrates that ultimately Keynesianism is a very reductionist and thus rather simplistic ideology.

    Anyway, Keynes vs. culture:

  7. The 70s were precisely an incident where I was thinking Keynesianism was not followed faithfully (until Volcker, that is). What exactly do you think Keynesianism is, Xenophon?

    The 70s were inconsistent with the simple Phillip's curve which many economists - including most Keynesians - accepted. But who has provided the best revision of the Phillip's Curve? Oh ya - Keynesians.

  8. I should note - Hayek also agreed that Keynesianism was not followed in the 70s.

  9. dkuehn,

    Keynesians were of course in the driver's seat and they got exactly what they wanted in the 1970s. Of course this is part of the problem with Keynesianism; there are so many blends and schools of it that one can never quite nail it to the wall (indeed, Keynes himself is part of the problem here - one can justify nearly anything based on his writings).

  10. From its approach to marginalism (which is -not- the same as the neoclassical approach in truth), to its theory of interest, to its capital theory (which is whence its business cycle theory stems), to its theory of entrepreneurship and competition (which is pretty mainstream in management theory but not so much in economics), it is pretty broad. You can pretend all there is to it is what you mentioned, but it'd be nonsense, unless you somehow contend the business cycle theory already includes all the former (it is derived from them of course.)

  11. RE: "Keynesians were of course in the driver's seat and they got exactly what they wanted in the 1970s. Of course this is part of the problem with Keynesianism; there are so many blends and schools of it that one can never quite nail it to the wall (indeed, Keynes himself is part of the problem here - one can justify nearly anything based on his writings)."

    Nearly anything?

    Look - as long as libertarians disown Ronald Reagan and George Bush I think we're perfectly entitled to disown economic policy makers in the 1970s that even Hayek recognized and stated decisively weren't consistent with Keynes.

  12. Anonymous -
    Do you really thing the differences between, say, Menger and Jevons represents a "major" element of the Austrian school? If Austrian marginalism was rejected in its entirety and neoclassical marginalism adopted, what difference would it really make? You say it would be "nonsense" but I really doubt it. And I doubt it because there are lot's of very sensible Austrians out there who use a neoclassical marginal approach because they aren't aware of Austrian marginalism. I mentioned the capital structure. How is the theory of interest any different from the rest of economics? It's essentially time preference, right?

    I'm just trying to think about what makes an Austrian an Austrian and I think it's those three things: libertarian political philosophy, praxeological methodology, and a theory of the business cycle based on the capital structure. That's all you need to be an Austrian, and some even dispense with praxeology.

    You could also mention cardinal vs. ordinal utility, which you didn't. That's unique to Austrians too. But is it major? Come on now - of course it's not major. You can do what could be reasonably called "Austrian economics" with either utility theory.

  13. Daniel,

    Yes, nearly anything. The more I look at Keynesianism the more I realize there is nothing there.

  14. And yes, you are perfectly free to disown them; but disowning them seems problematic given that was when Keynesianism was at the height of its power and importance.


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