"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.
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
"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.
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
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