"Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation."It seems to me the answer is ambiguous or at least depends on what you consider "Austrian theory" and what you consider to be some auxiliary take on the quantity theory (which is obviously a lot bigger than Austrian economics).
Monday, December 31, 2012
Is Krugman right or wrong to have written this in November?
HT John Carney (Krugman writes it here) -
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What I consider "Austrian theory":
ReplyDelete1. The market without monetary distortions (money-printing by the government or "excessive" lending by private banks) generates the optimal level of production and investment.
2. The government (or private banks) can goose production above that optimal level by inflationary policies like printing money (or creating credit).
3. If the government (or private banks) do this, they then lower the optimal level of production and investment--and lower them by more than you gained from the monetary or credit goosing.
4. The government (private banks by now are whimpering and scared to extend credit) can attempt to head off the necessary post-inflationary-boom fall in output by doubling-down with a further round of inflationary policies.
5. But while those may cushion the short-run post-boom pain they are still inflationary policies--hence they sit in train an even larger reduction in the optimal level of production and employment in the further future.
Seems to me that Paul Krugman is right, as long as you believe that inflationary policies are policies that produce inflation. If you want to say that inflationary policies don't necessarily produce inflation, I think you are being rather silly...
Brad DeLong
re: "Seems to me that Paul Krugman is right, as long as you believe that inflationary policies are policies that produce inflation. If you want to say that inflationary policies don't necessarily produce inflation, I think you are being rather silly..."
DeleteRight about the Austrians, I mean. Is it only a supply side story? I think it's kind of ambiguous and depends on how you define things.
That is Austrians predicting runaway inflation, not Austrians predicting deflation, Shedlock say. That both claim to hold similar theories but end up with different conclusions may be an indictment of theory, an indictment of reasoning, or simply a difference in perceived facts, but while one may be correct by accident, one must be incorrect by result. You could argue Austrians are just descriptive and not prescriptive, but I don't think that is something they wish to claim, but if they are prescriptive they must be right or wrong.
ReplyDeleteIt seems perfectly possible to believe in a model where ABCT-like phenomena cause the bust, and to also believe that during the bust high and growing demand for money will mean that expanding the monetary base does not lead automatically to inflation.
ReplyDeleteIt seems that DeLong and Krugman are attacking a "cartoon" version of Rothbardianism that most Austrians do not subscribe to (though I think Murphy actually does, so I'm not sure the criticism is unfair in his case).
No Austrians are "predicting" runaway inflation. Austrians are simply explaining that the policies of the Fed have created a situation in which runaway inflation could take place. It won't however, until the public loses confidence in the dollar.
ReplyDeleteThen comes the inflation. Krugman is a crank [in my opinion].