Friday, September 13, 2013

Krugman Is Messing with the Austrians

I suspected this would happen. Now that Mark Spitznagel in his book, The Dao of Capitol: Austrian Investing in a Distorted World, has absurdly renamed James Tobin's Q ratio in "honor" of Ludwig von Mises, Paul Krugman has decided to trot out Tobin and reference the paper where Tobin discusses his Q ratio creation. Krugman writes this morning:
Woodford has been arguing for some time that the balance-sheet approach is inadequate, and I agree. But why does he think QE, or at any rate expansion of the Fed’s balance sheet, is positively harmful? I’m not sure. But the discussion has led me to do something I should have done some time ago, and recast the QE debate in terms of a Tobin-style framework (pdf).
What Tobin suggested was that we think of financial market in terms of a sort of ultra-short-term equilibrium, before changing asset prices have time to have any effect on the real economy. In that case, asset prices must adjust to make people willing to hold the asset stocks currently out there; so it’s a sort of restricted general equilibrium.
The PdF link Krugman supplies is to the 1969 Tobin paper that Spitnagel references. AND Krugman uses the Tobin framework to justify more quantitative easing:
On the whole, I’m sympathetic to skepticism about the effectiveness of QE, predictably. After all, I’ve been arguing for forward guidance instead for 15 years. On the other hand, right now investors are not making a clear distinction between QE and forward guidance; taper talk has been accompanied by a clear shift in expectations toward the notion that the Fed will raise short-term rates sooner rather than later. So I wouldn’t be tapering now — it sends a bad signal at a time when recovery remains very weak and fragile.
But interesting stuff, anyway — and I do love the chance to roll out my old Tobin lore.
The original Tobin Q ratio is a bunch of aggregated nonsense that Mises would never go near. It's a bit of a stretch to use the Tobin framework to justify QE in the manner Krugman does, but it is far less of a stretch than Spitznagel calling the Q ratio Misesian. I think Krugman has become aware of Spitznagel's claim and is just messing with the Austrians. Though it is a huge stretch to consider Spitznagel an Austrian when he is hailing a massively aggregated  data mess as Misesian.


  1. Krugman has to excited today. NJ boardwalk burnt to the ground. "broken window theory" all is good.

  2. Spitznagel shows that the ms index indicates very well the degree to which Mises' concept of a stationary economy is implied by the markets. That's it, and you can't really refute this. So don't see why connecting it to Mises as he does is in any way absurd.
    Furthermore, Spitznagel even mentions (on page 186) how Krugman calls the way the denominator of the q doesn't catch up with the numerator a "real puzzle" and how that reveals classical economics' (specifically Krugman's and Tobin's) fundamental misunderstanding of the real world and monetary interventionism.
    Really, Spitznagel's is an extremely significant Austrian work. He becomes one of the greats, in addition to apparently already one of the great investors.

    1. Mises would never use such an index. That he never developed any such indexes: None, zero.It is simply bizarre to claim that the index has anything to do with Mises type thinking. Mises wrote:
      "Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical. The economist does not need an expensive apparatus for the conduct of his studies. What he needs is the power to think clearly and to discern in the wilderness of events what is essential from what is merely accidental."

      The Tobin formula is nothing more then an aggregated, complex price to book value formula. It is uninstructive on a theoretical level and of zero forecasting value (If it could be constructed in real time, which it can't), since it would be a coincident indicator.

  3. Judging by The Dao of Capital's endorsers, looks like Peters Boettke and Klein (two of the biggest names alive among Austrian economists) disagree with your opinion of the book. Woops.

    1. LOL, I would like to see them come out an endorse Tobin's Q ratio as a great Misesian discovery.