I have a few scattered thoughts.
I think it's important to remember that not all Austrians are 100% reservists, and the ones that are taken seriously in the academy aren't. The 100% reservists are basically affiliated with the Murray Rothbard shrine that is the Mises Institute - and not even all of them are 100% reservists. My regular readers probably know this, but outside traffic might not.
That whole can of worms is fascinating in a car-wreck-on-the-highway sort of way and could be safely ignored if it weren't for the fact that we have a powerful politician with a large political movement behind him that seems to have bought into it. That's what Krugman has been mocking. Now, those 100% reservists (a subset of Austrians) have actually addressed money market mutual funds. Joe Salerno has written that "they are clearly excludable from the TMS [true money supply - another Rothbardianism], because they are neither instantly redeemable, par value claims to cash, nor final means of payment in exchange".
OK, so they say Krugman is comparing apples and organges. Fine. Austrians associated with LvMI have been making a huge deal out of this, but whether Krugman's analogy met all the Austrian tests seems a lot less important to me than some of the points that Brad DeLong raises, or the awkward question of how you require 100% reserves as an alleged libertarian.
Ultimately, though, whether fiat money passes a cost benefit test (I think it's obvious that it does), isn't going to sway LvMI Austrians of a more deontological persuasion who simply think it's fraudulent. I don't know what you do with these people. I've tried my hand at the "fraud" argument in the past - perhaps you can search the blog history if you're interested. But these sorts of arguments can be like talking to a brick wall. I have a very tough time wrapping my brain around any sort of deontological ethics, much less that of this gang.
Brad often wonders why I spend time on the Austrians (just like Krugman wonders the same with him). Part of it is an interest in intellectual history. I like Keynes, and Keynes spent quite a bit of time with Hayek, so the Austrians have always held someinterest for me. There's a bit of path dependence too. I started talking about it. I might as well keep talking about it. Plus I'm more broadly concerned about the impact of libertarianism on this country.
But one person I don't deal a lot with is Mises.
It's not because I think he's "the crazy one" (that's Rothbard, after all). I genuinely don't get what's going on in Mises's head in the way that I feel like I grasp what is going on in Hayek's head. There is a way to (potentially) solve this: read him. I say potentially because of course reading someone that writes inscrutibly doesn't guarantee an understanding. But Mises's books are long and he seems to pontificate a lot, and there is so much else to do and read.
So I stick with Hayek because I understand him, and I actually think he has important ideas. I agree with Friedman that the Austrians have some good insights, but not in monetary theory. It's easy to understand how credit creation causes recessions in Hayek - it's much more transparent than in Mises. You have a sequence of Cantillon and Ricardo effects that cause real changes in the structure of production. In that sense, it's a credit-induced-real-business-cycle-theory. Hayek specifically takes the Bohm-Bawerkian view of capital as goods in process so that the carrying cost of capital has to be considered in capital accumulation decisions. Since production is carried out over an expanse of time, the marginal product of capital itself is a function of the interest rate, and credit expansion and contraction can change (to use Keynes's terms) both the volume and direction of investment.
I find all this quite interesting and quite sensible... as a statement about capital.
I don't think it's sensible as a business cycle theory, and this is one of the things I've been thinking a lot about lately.
But there's a lot of interesting stuff to unpack in Hayek - and that doesn't even get into what Brad DeLong has in the past called "the good Hayek" - the Hayek who talks about decentralized knowledge and the price system.
I don't feel the same way about Mises. I am the first to admit that part of that is my own ignorance (an ignorance I have no plans to remedy any time soon). A lot of Brad's post is about Mises. I can do my best to take a shot at that, but I really don't know Mises.