Wednesday, January 2, 2013

Bob Murphy's Response

Bob's post responding to DeLong and Krugman is up. He spends a bunch of time talking about his views on them, and much less talking about his views on inflation [skip to section III in his if that's what you're interested in]. My read of his discussion of inflation is :

1. The inflation bet had nothing directly to do with Austrian business cycle theory. This is something I pointed out the morning of New Year's Eve and that Mario Rizzo pointed out later that day, and I still think that's reasonable. You can get plenty of examples of Austrians worrying too much about inflation but it doesn't really pop out of ABCT. It could, of course. I don't think Krugman's take on it as a supply shock is nonsensical. It's been characterized as a theory of the real consequences of nominal changes, and Peter Boettke has noted its relation to New Classical economists for a reason (precisely the reason that inspires Krugman to say these things). Maybe the safest thing to say is that there are supply and demand consequences of ABCT. At the upper turning point there is obviously a demand shock when investors pull back, but there is also a revealed supply shock because the capital structure is incapable of producing what is demanded in a non-credit-distorted environment. So I think it's wrong to act like Krugman is just making things up here, but Bob's explanation is sound.

2. Noting that ABCT is not the source of course does not change the fact that he made the bet for a reason. As far as I can tell it's that Bernanke created a lot of money and is either going to forgo or botch the exit strategy (and he's not sure if he's entirely wrong that this could still happen). This is interesting to me because I had always gotten the impression from Bob posting monetary aggregates that he was making a crude quantity theory argument (more money = more inflation), but he seems to be drawing a lot more attention here to what the Fed will do when the crisis ends. That's quite different.

Otherwise he seems to be withholding judgement because he thinks he may ultimately be proven right.


I liked DeLong's initial post about Murphy's inflation bet because he simply suggested that when you expect ten percent inflation and it doesn't materialize, there might be something worth rethinking. He talked about "sitting at the feet of Paul Krugman", but to my ears that just sounded like he was messing with Bob Murphy. There were no detailed theoretical suggestions in it except that Paul Krugman has been fundamentally right and Bob Murphy fundamentally wrong in some important ways these last couple years.

Bob spends a lot of time bashing Krugman and DeLong in the post, and pointing out that David Henderson and he are both supporters of austerity, but he misses an essential point: David Henderson is on Paul Krugman's side of the inflation question! I don't understand why Bob keeps pointing out that David is on the same side of a completely different policy question. He is obviously not on your side when it comes to inflation, which is why he bet against you! Unless we think that everyone who has the same view on fiscal policy has to agree on everything else, I'm not clear on what the point of repeating that is.

Krugman's post (which went up after a lot of mine, btw) was different from Brad's in that it went at ABCT itself. As I say above, I don't think that's completely nuts but I think you can argue against Krugman on that point too.

Finally, Bob's point VI. (B) is completely nuts, and we've been over that ground before.


  1. Hi Daniel,

    As a reader of blogs, it is clear to me that Bob Murphy is pointing out that David Henderson is on the same side because both Brad DeLong and Paul Krugman are saying that Bob should now, because he was so wrong about the inflation, question the more foundational aspects of his economic thought. Bob is saying that the bet was with David Henderson, and that David and he hold many of the same basic economic ideas. If Bob's bet were with Krugman or DeLong, perhaps the story would be different, but only if Bob were claiming that Austrian, or whatever, thought were essential to his inflation projection.

    Does that make sense?

    Also, I find Bob's post minimally "bashing", but mostly pretty convincing, because it cites actual words and ideas of both economists. When I've read the bashing by Krugman and DeLong, it is often a straw man or a highly edited quotation that serves as the counter-argument.

    1. But shouldn't he question the more foundational aspects of his economic thought... and maybe make them look more like David Henderson's and Bryan Caplan's?

      I mean, I understand that they'd love him to look like them, but I don't get this point that because Bob agrees with David on other questions they're somehow wrong to suggest he rethink some things about the economy!

    2. Krugman bemoans that Murphy remains "absolutely committed to his framework." DeLong is terrified that Murphy's poor inflation forecast hasn't made him rethink or modify ANY of his ideological beliefs or analytical positions by even one iota. It is doubtful that Krugman is talking about making Murphy look more like Henderson or Caplan, and, what does DeLong know about whether or not Murphy has rethought or modified any of his beliefs or positions??

      I think that sometimes, Daniel, you want everyone to get along, and to that end, you sugarcoat DeLong and Krugman. That's fine, and nice, actually. But it comes across, occasionally, as turning a blind eye.


    3. I don't think it's a matter of Daniel turning a blind eye occasionally because he "just wants everyone to get along." The asymmetry in his application of the principle of charity is too great for this application: Daniel is systematically much more generous (overly generous, I'd say) in interpreting / making sense of the words of people like Krugman and DeLong than he is in interpreting the words of Murphy (and others).

      So when Krugman writes something that seems to contradict something else he wrote or that seems to be at odds with the facts (or that seems to be hypocritical or petty or morally problematic/intellectually dishonest in general), Daniel will try to interpret Krugman (and/or the data) in such a way that the contradiction disappears / that Krugman's words are sensible (or not intellectually dishonest), while when Murphy writes something that seems to be sensible and reasonable and supported by data, Daniel will interpret Murphy's words and/or the data in such a way that they seem to be at odds with each other.

      This doesn't seem to be a recipe for making people get along with each other, but instead one for consistently favoring some people at the expense of others and thereby consistently pleasing some people while frustrating others. (and this seems to be even more morally problematic as the side that he is unfair against (Murphy) is also the side that quite clearly behaves with almost incomparably more intellectual honesty, decency and fairness than the side he is biased in favor of)

      A fairer strategy might be to let what is said (and not who said it) determine how generous and/or critical one is.(although it's an open question whether that strategy would in fact make it more likely that people will get along better. That likelihood may be quite low if there is little interest in intellectual honesty and rigor among some of the parties involved (to be sure, I'm not saying that by 'some parties' I mean 'Krugman', but I obviously do).

    4. Anonymous -
      I can't very well delete a comment calling me uncharitable, as it might be construed to confirm your point. But please don't comment here anonymously. It is a long-standing rule and it's noted on the comment form.

      I couldn't disagree with you more. I think I am just as fair to the Austrians as to the Keynesians. If anything, I try to highlight when I think people I'd otherwise agree with go wrong just to avoid the sort of accusation that you're making here. And I strongly disagree that Bob's side is "incomparably more" intellectually honest, decent, and fair. Quite the opposite. Bob himself is these things on almost all occasions (perhaps he is "unfair" on a regular basis with Krugman, but I think that's more out of error and eagerness than dishonesty or indecency).

      Anyway, I both disagree with an resent your insinuations here and that's about all I have to say about the matter.

    5. Sorry about the anonymous comment and thanks for keeping it on the site. I wanted to use my Blogger account but couldn't figure out how to do it (I'm doing it indirectly now).

      To be sure, when I wrote "the side that he is unfair against (Murphy) is also the side that quite clearly behaves with almost incomparably more intellectual honesty, decency and fairness than the side he is biased in favor of" I meant Murphy specifically (which is why I put his name there), not Austrians in general. I think there is little reason (empirical evidence or more theoretical arguments) to believe that Austrians are on average significantly (or even at all) more intellectually honest, decent and fair than non-Austrians are (although I certainly did believe that up until a few years ago).

      Moreover, you are exactly one of the people who are doing a very good and very valuable job in terms of both taking seriously and challenging Austrians (about things (positions, assumptions, interpretations or selections of data, argumentation strategies etc.) that they could prpbably get away with in an audience of only other Austrians, but that are likely to be much more problematic than they assume), and it's interesting to see how Austrians react or respond to such challenges.

      Austrians, for example, seem inclined to criticize their opponents for the ways in which these opponents deal with criticism and/or for their inability or unwillingness to understand/fairly consider and present the Austrian positions, but when Austrian positions are challenged (as you challenge them) these same Austrians may engage in the same kind of behavior (being defensive, being unwilling or unable to understand their opponents' positions) as they accused their opponents of.

      But Bob Murphy is clearly a pretty big exception to this kind of behavior (as you agree with (and I thought your comment that "(perhaps he is "unfair" on a regular basis with Krugman, but I think that's more out of error and eagerness than dishonesty or indecency)" was very apt)) and that is to his personal credit, not to his Austrianism.

    6. And it seems at least as clear (and well documented) that Krugman doesn't behave this admirably, and that for example Krugman's post re Murphy was disingenuous rather than an honest attempt at analysis of the implications (or lack thereof) of this bet and related predictions. His post did also contain good and fair analytical parts to be sure, but he made no attempt to understand Austrian and/or "Austerian" perspectives and to present those to his readers in a fair way, which is quite crucial if your goal is to do an honest and fruitful analysis re this bet and its implications.

      Instead he erects a bunch of implied straw men (about Austrian and "Austerian" theory and their relations to views on inflation, but also about Murphy's position and response) and proceeds to knock them down, casually impugning Murphy's character in the process.

      That's all pretty low, but you don’t comment on that aspect of Krugman’s post.

      Instead you

      1. try to come up with an interpretation of Krugman’s words in which somehow he is not just strawmanning the Austrian positions (so you give a generous interpretation of Krugman’s words (the stuff about supply shocks, as well as your remark that ‘So I think it's wrong to act like Krugman is just making things up here’. I mean, yes, that’s wrong. It’s also a straw man. I mean, did Murphy say or imply such a thing?)),

      2. while you at the same time interpret Murphy’s invoking the fact that Henderson is an austerity advocate as a basically idiotic thing to do, something that you simply cannot understand (so you give a not so generous interpretation of Murphy’s words (and in the comments you continue your struggle to understand Murphy’s seemingly pretty clear statement/explanation about why he said that )), and

      3. you refer to Murphy’s post as ‘bashing’ Krugman and DeLong while you did not use such loaded terms to describe Krugman’s or DeLong’s posts (even though those posts arguably were quite a bit more ‘bashing’ than Murphy’s)

      So your post seems to me to be a good example of the kind of behavior that I criticized, being (imho overly) generous to one side of the debate (Krugman and DeLong), while being overly critical of the other side (Murphy).

    7. To be sure, I am not sure that I understand your criticism / not-understanding of Murphy when he invokes Henderson’s being an austerity advocate. Here are the parts that I don’t understand or disagree with

      1. you write “I know why you are talking about Henderson as an "austerian". You think DeLong and Krugman are implicitly saying that inflation fears imply austerity advocacy and austerity advocacy implies inflation fears.”
      I think that Murphy interprets Krugman and DeLong as saying that austerity advocacy and fears of/expectations of high inflation have a common cause, namely a certain economic model and that that model is the Austrian model

      2. You write "I disagree with you that there is such a strong link."
      But what link? Do you mean a (bi-directional) link between austerity advocacy and inflation? But Murphy doesn’t say that there is such a link. As you write, he thinks or says that Krugman and DeLong are implying that there is such a link. But what then do you mean when you say that you disagree with him (Murphy) that there is such a link? Do you mean that you think DeLong and/or Krugman don’t imply that there is such a relation? If so, why would you express that by saying that you disagree with Murphy that there is such a strong link?

      3. If so, is that the reason why you think that it goes too far for Murphy to say “Since DeLong and Krugman's models say that prices wouldn't have gone up a lot, they expect me to change my policy views to theirs. “ I mean, are you saying that Krugman and DeLong don’t think that as a response to his failed prediction Murphy should change his policy views to theirs? In other words, that Murphy’s interpretation of Krugman and/or DeLong’s statements about his failed prediction is off? If not, then what do you mean?

      4. Then you write “Your #3 doesn't make sense to me because I think Krugman's model and Henderson's model for thinking about inflation in this case seem comparable. It's other issues as well as political philosophy that leads to the difference in policy.”
      Well, that may very well be the case, but that’s not the issue, the issue is what DeLong and Krugman are saying or implying about a need for Murphy to change his position about austerity in response to his failed inflation prediction, and Murphy interprets Krugman and DeLong to say just that, and that’s the part that he is criticizing in #3. Your reply attacks (at least Murphy’s interpretation of) DeLong and Krugman’s views (namely that austerity advocacy was dealt a blow with Murphy’s failed prediction), and is actually consistent with Murphy’s own views (that his failed prediction has no such implications). So I’m not sure in what way you are critizing Murphy here.

    8. finally, upon rereading my initial post, my words do sound harsher than I intended them (or at least than that I now intend them (I was a bit angry when I wrote the initial post)), so just to be sure and for what it's worth, while I do think you have been systematically biased in the way that I described, I don't think you've been intellectually dishonest (and I do think that you're often a model of wonderful scholarly behavior). If anything, I would categorize your bias more along the lines of your characterization of Murphy's handling of Krugman: "perhaps he is "unfair" on a regular basis with Krugman, but I think that's more out of error and eagerness than dishonesty or indecency.

    9. I was not the person who wrote this anonymous comment but it very closely matches my own view. The really scary thing for you should be that I started out with a strong bias in your favor. I hold Robert Murphy in extremely high regards as both a person and an economist. His kind words for you, linking to your blogs in a positive way, and especially drawing attention to your criticisms of various arguments that he felt were strong and had much merit, resulted in my initial impression of you to be strongly biased in your favor.

      Obviously that is no longer the case. It has reached the point that when Brad DeLong is so disrespectful to Murphy in his flippant remarks that he ought to shut down his blog, bow at Krugman's feet etc. it is not even remotely surprising that your first response is to try and justify it with "Maybe this was because of all those Krugman Kontradictions, Bob!"

      If I posted a blog post treating Krugman or DeLong that way, I highly doubt you would have reacted to my comments that Krugman should bow at the feet of Murphy with a justification for why I wrote that. I expect you would criticize me for being rude and insulting.

    10. Murphy talks that way about Krugman all the time and you clearly don't consider him rude and insulting.

      We all consider him to be hamming it up on Kontradiction posts that I find less convincing and you find more convincing.

      The "maybe it's because of all those Krugman Kondradictions" wasn't a serious proposition so much as a suggestion that Bob look in the mirror before he gets too worked up by it.

    11. Narrator, for the last time I'm not "trying to come up with" some interpretation that helps Krugman. What you see is what you get. I read Krugman exactly how I think it makes the most sense to read him which means when I disagree with Bob I don't just think he's reading him in the way that's inconvenient for Krugman, I think he's reading him in a demonstrably wrong way.

      I don't know why this is so hard to understand.

      And I've never been shy to say that Krugman doesn't really get the heart of the Austrian argument (although I think Bob's sushi model has helped a lot in that regard - he actually talks about malinvestments more and seems to get some basic stuff relative to what he talked about pre-sushi model).

      On Henderson - see my response below.

  2. Daniel Kuehn wrote:

    David Henderson is on Paul Krugman's side of the inflation question! I don't understand why Bob keeps pointing out that David is on the same side of a completely different policy question.

    Daniel, are you saying you don't think DeLong and Krugman want me to rethink my position on austerity? My views that the recession is a demand-side problem, and consequently we need fiscal and/or monetary stimulus?

    *They* are the ones linking my inflation bet to recession-fighting policy. So it's certainly relevant for me to point out that the guy who won the bet, agrees with me on fiscal austerity. (Full disclosure, David and I have disagreed over Fed policy in the past. I'm not sure what his exactly advice to Bernanke would be.)

    1. Well obviously they'd like you rethink your positions on austerity. DeLong said - when you brought up Romer - that if you think the right counterfactual was deflation (of course there are a couple ways to invoke a Romer defense, but that's what he mentioned), you should thank Ben Bernanke for all his monetary expansion.

      I would think the response to that is "but I think deflation and higher interest rates would have been good" or something like that. But that's a secondary point that they raised that seems to me to be independent of Bob Murphy's inflation model. I don't see how you respond to it by saying "the guy on the other side of the bet agrees with me on austerity".

    2. Daniel Kuehn wrote:

      I would think the response to that is "but I think deflation and higher interest rates would have been good" or something like that.

      Right, that's exactly what I would say. As you know from the 1920-21 stuff, I welcome falling prices as the way to reach a genuine bottom and pave the way for recovery.

      I meant to address that but forgot. I wrote the post (which was already huge by internet standards) after a 10-hour road trip.

    3. Bob, so what would a debate between you and Krugman entail exactly? Whether deflation in a recession is good?

  3. * "...My views that the recession is NOT a demand-side problem..."

  4. I don't know of any other than Austrians that fear inflation, even though some do not. This is really more an intra Austrian debate but not misguided to attribute it to Austrians.

    1. Austrians may not be Austerians but Austerians are Austrian.

  5. Daniel Kuehn, I'll just state my argument once more for posterity, since I believe you that you are genuinely confused by what I'm saying. I am surprised that you are confused, since this seems crystal clear to me, but obviously I'm biased.

    (1) I bet David Henderson that prices wouldn't go up a lot.

    (2) I lost the bet. Since DeLong and Krugman's models say that prices wouldn't have gone up a lot, they expect me to change my policy views to theirs. This is because my model (which generates my austerity views) was falsified by the data, and their model was verified, so clearly their model is right and so their policy views must be right too.

    (3) Wait a minute, I point out that David Henderson's model suggested modest price inflation, and it also recommends fiscal austerity. So why, if I lose a bet to a guy whose model recommends austerity, am I supposed to endorse the model of guys who didn't bet me and which recommends deficits?

    (4) You are saying David's policy views have nothing to do with inflation. OK then by the same token, Krugman and DeLong's policy views have nothing to do with inflation and they shouldn't expect me to alter my policy views because I misjudged price inflation.

    1. I know why you are talking about Henderson as an "austerian". You think DeLong and Krugman are implicitly saying that inflation fears imply austerity advocacy and austerity advocacy implies inflation fears.

      I disagree with you that there is such a strong link. I think your reference to David's views on austerity is a non-sequitor. Inflation fears typically imply austerity advocacy, but I don't think it runs the other way.

      In other words, I think your #2 is going too far.

      Your #3 doesn't make sense to me because I think Krugman's model and Henderson's model for thinking about inflation in this case seem comparable. It's other issues as well as political philosophy that leads to the difference in policy.

      re: " You are saying David's policy views have nothing to do with inflation."

      Well I'm saying his view of inflation and his policy views don't have to follow from each other.

      I think there's just a frustration with austerians in general and inflation fears are a common (although not universal) aspect of that crowd.

    2. Daniel, since Murphy and Henderson are wrong about austerity:, it's unclear what if anything would ever change his views.

      Austrians apparently require their own homeland or reservation or something. It's clear we need a two-state solution. So let's block off some land somewhere and let them go crazy.(That is assuming they'd not prefer a one way ticket to Somalia.)

  6. By the way here's Bob Murphy suggesting recessions might be inflationary:, implying all recessions are supply shocks, similar to Krugman's views of ABCT.

    1. Does "other things equal" not mean in mainstream theory what it means in Austrian theory? I already said Krugman's viewpoint was right, if there's no reason that the demand to hold money goes up.

  7. That these inflation bets have nothing to do with ABCT is an argument that I take with a hearty serving of salt. The problem here is that Austrians were (almost) unanimous in their predictions of out-of-control inflation circa 2008-2010. Why is that? If their views weren't somehow informed by their overarching theoretical paradigm, was it really just coincidence? Maybe some kind of group-think?

    Perhaps it was because scary hyperinflation talk was the best way to crystalise the "dangers" of government intervention in the minds of the public... Rather than some esoteric discussion of malinvestment, capital vs consumption goods and lengthening of the production structure. (FWIW, there's really not too much "esoteric" about ABCT, which is pretty simple in of itself. IMHO, Austrians typically do themselves a dis-service by using arcane and overly complicated terminology in explaining their theory... But that's a discussion for another day.)

    Anyway, I sit disbelieving as many Austrians try to distance themselves from their inflation predictions now. (My favourite mode-of-defence is that they were actually talking about money supply inflation all along and so technically are correct about hyperinflation! Talk about disingenious...) Bob, to his credit, is one person that has always been very open about his mis-hits in this department. Although, I also note that he appears to be holding out on his bet over the long run.

    Last point: Regarding David Henderson as an putative "austerian"... He has consistently argued for an aggressive increase in a money supply by the Fed over the last few years, no? It's misleading to call him "a supporter of austerity" just because he distinctly favours monetary policy over fiscal.

  8. Austrians tend to view money as, or ideally is, zero sum, and do not want to see the work of depressions left undone, so austerity is natural for them. Monetary policy and debt are just more of the same that caused the problem and will just create a larger one later. Crushing debt out of existence through austerity their preferred solution. Since we are not as rich as we thought, we must cut back spending, and this applies to our spending on government as well, government as part of the household and Ricardian equivalence as a justification. Some will argue that only bad debt needs to be crushed and so will support some monetary accommodation but just as they have no answer to what is the proper interest rate, they have none to what is the proper level of accommodation, but believe free banking is able to find and set it. To preserve all debt though, would be to engender an even greater boom and bust, a la Minsky, with inflation, so even those supporting some accommodation would not want to see full accommodation. The liquidators, OTOH, want to see all the rottenness driven from the system.

  9. I like the more debt can't save us argument, as it is analogous to more wood in the fireplace can't keep us warm because it will all turn to embers as well, we must just get used to the cold.


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