Thursday, September 3, 2009


Krugman On Why Economists Missed the Crash

Tyler Cowen links to this 8-page Krugman essay--and be careful, you might have missed it if you merely check Krugman's blog. (I.e. I didn't see it linked from there; I think Tyler gets tweeted whenever somebody rips the free market.) Anyway, Krugman starts off great:
[I]n a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
Wow! So a bunch of economists who either had the ear of government or were actively running policy, were horribly wrong. I guess that means we shouldn't trust the government to pick experts to tinker with the economy then, right Paul?

Of course not. What this all proves is that economists worshipped the market because (a) there was so much money in touting pure capitalism and (b) they wanted to show off their fancy mathematical skills.

I know, you're saying, "Surely you're joking! Those are two reasons that Austrians usually give to explain the success of the Keynesian revolution. Wasn't Paul Samuelson the godfather of mathematical economics?! Is he a free marketeer now?" Well no, I'm not joking, and don't call me Shirley.

BTW I only skimmed the first page of Krugman's treatise, but--if I may paraphrase the MarginalRevolution lingo--it is self-loathing, so go ahead and click it if you dare. I'm sure it must be packed with some great stuff about how unfettered capitalism just happened to blow up 16 years after the institution of the Federal Reserve.


Only about halfway through. Thought I'd share the following

This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

In short, the co-op fell into a recession.

Krugman completely misses the price movement that could happen in this exchange (absent price controls that demanded one coupon equals one half-hour of baby sitting).

He thinks the answer is more money, I think the answer is that the price of baby sitting is going down due to the member's demand for money increasing. This is so classic of the Keynesian view of the world.
Yeah David Gordon made your point too in his review of Krugman's _Return of Depression Economics_.
Shirley, I can't imagine having enough time to read this.
If the Austrian explanation is so wrong, why does Krugman avoid it like Kryptonite? Apparently, the ABCT is Kyptonite to a Keynesian.

Mr. "not a major school" Krugman: If the Austrian school is so wrong and insignificant, it should be quite easy for someone of your extreme intelligence to the refute it and vanquish Ron Paul and the anti-Fed types forever.

Bob Roddis... see this article by some weirdo here to read some of what Krugman has criticized of the "hangover" theory... as well as a good rebuttal. There is an audio version that is excellent.
Thanks, Jesse. I had seen the Krugman article before but not the item by Cowen. It appears to me that the only criticisms of Austrian theory that ever appear are attacks upon Hayek for perhaps having been a bit too specific regarding the structure of a boom. Ignored by the critic is the general pattern of malinvestment that is caused by central bank monetary dilution (note that Krugman’s article does not really mention that or how intelligent economic calculation could possibly occur under such a regime). Our latest boom resulted in a housing bubble. Housing is not exactly a “producer’s good”. People purchased housing because the regime of monetary dilution made housing look like both a good investment and an inflation hedge. And a source of “equity” from whence to borrow more money which would never have to be paid back because the house could be sold at a profit when the bills became due. After a while, folks realized that they were not going to soon be receiving $500,000 worth of stuff on the sale of their home but, say, only $150,000 and they found themselves significantly poorer than they originally envisioned. People investing in houses and T-bills are not investing in capital goods. And the ensuing unemployment is a mystery?

If their specific predictions were always on the mark, all Austrians would be investment gurus and billionaires. The fact that some Austrians might have been too specific in their predictions of the structure of a boom does not refute the undeniable insight that monetary dilution is going to generally screw up the structure of investment.

In the current article, Krugman takes down monetarism.. Monetarism is the gift that keeps on giving to statists like Krugman. Monetarism is a government program (slow, steady Fed monetary dilution) that’s bound to fail, and when it does fail, the statists can again celebrate the collapse of laissez faire.

Thanks to clowns like Krugman, the ultimate source of the monetary dilution and price inflation (the Fed) may never be spoken in polite company. Krugman’s main task is keeping the general public from understanding the simple truth while convincing everyone that economics is arcane and incomprehensible other than to geniuses like himself. Krugman’s rants should properly appear on the style and fashion page of the newspaper in concert with “What Not to Wear”. It would be called “What Not to Think or Say”.
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