Wednesday, March 28, 2012

Krugman's Simplistic and Wrong View of Austrian Economists

Paul Krugman writes
Austrians...believe that whatever the market does is right, unless it’s fractional reserve banking, which is somehow terrible.
Actually, Austrian economists don't believe that whatever the "market does is right".  Austrians know that the world is a very complex place where two things apply with regard to knowledge:

1. Not all knowledge of upcoming events is known in advance.

2. Knowledge of specific situations may be limited to a few.

Thus, because of No. 1 mistakes can be made. Which means it is very dangerous to put all decisions in the hands of interventionists and central planners, who think they know all. They can't. With a free market, mistakes can be made but they are limited. A central planner that makes decisions for all simply magnifies his mistakes to all.

As for No. 2, since some information is understood only by a limited few, the free market provides the opportunity for those few to offer their services on the free market, whereas a central planner may never become aware of such a method of handling a problem.

Thus, Austrians see the free market as the best way of disseminating information in an economy and the best way for promoting alternative methods of solving problems (Where mistakes can still be made). This is contrasted with interventionists and central planners who have the crackpot notion that they know all and will set the rules down for everyone.

As for fractional reserve banking, that has nothing to do with free markets. I can't imagine how a fractional bank would survive in a free market. But, hey, if Krugman thinks money can be loaned out and guaranteed to be paid back to a depositor on demand at the same time. He's perfectly free to put his money in such a bank.

16 comments:

  1. I believe he got his Nobel for his work in "trade theory" and I also have heard that his work wasn't all bad.
    Well, that's pretty specialized. It's not like he got the prize for his all-encompassing knowledge of economics.
    From what I HAVE read by him, it seems like he don't know SQUAT about econ in general.
    Does the Times print him because he's cute and gnome-like???

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    1. they print him because he's a propagandist for the state

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    2. I've heard (not sure how true, but...) that his wife has a big hand in his articles.

      MB

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    3. The Times prints him because he's a propagandist for central banking (and its sidekick, Big Government), and central bankers are the guys who underwrite the Times and "mainstream media" generally (which nowadays is generally a big money loser).

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  2. "Every significant 100-percent [reserve] bank known to history was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions."

    http://www.freebanking.org/2011/05/31/the-state-and-100-percent-reserve-banking/

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    1. I may be reading this wrong, or maybe I have a fundamental misunderstanding of Austrian theory, but the above-referenced article seems to be saying a "100-percent [reserve] bank" cannot make loans. I believe that interpretation is incorrect.

      I believe, in the Austrian construct, 100% reserve banking means a bank has either cash-on-hand or assets to represent all their deposits. They can't loan multiples of their assets by borrowing printed money from the Fed. However, banks can still loan money. In the "olden days", separate savings and checking accounts actually meant something. You traded the immediacy of access to your money for an increased interest rate.

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    2. A whole lot of talking about fractional reserve really is semantics, mostly it just is (sometimes I think intentionally) misunderstanding of the opposite understanding of "fractional reserve".

      I sometimes even think the word is void of any meaning at all. Fraud is if a bank guarantees that you can have all your money from your checking account any time you want while part of it is really lent out. But if it does not guarantee that, because it stated clearly in the contract that you signed that under certain circumstances the bank reserves the right to delay payment, then there is no fraud involved. As far as I know banks usually do that. So the obvious conclusion should be that there are no real checking accounts at all any more today! Functionally it is all savings accounts.
      Why is that? Because customers don’t demand real checking accounts. Why is that? Because customers don’t need to worry because of central banks and federal deposit insurance guarantees.

      I just think that is a very bad system with very bad incentives and lots of unintended consequences (A whole industry that second guesses the FEDs decisions, profiting due to front running especially by primary dealers, Moral Hazard en mass, Cantillon effects, overblown egos of leading central bankers smiling from big magazines, etc..)

      If in a world that necessarily involves risk, a system is tried that appears to the individual to be riskless, you are not guaranteeing Zero Risk, in fact you guarantee 100% probability of the worst case scenario at the end of the road. That is fraud.

      Fraud is also when you hear the propaganda that the FED would stabilize monetary value, fight inflation, enhance economic growth etc. By nearly all standards the FED failed. George Selgin has a nice talk about that. (http://www.youtube.com/watch?v=yLynuQebyUM)

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  3. Right, associating fractional reserve banking and free markets is more than just a little stretch, it wouldn't happen. In any free market system, it would be considered FRAUD.

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  4. Krugman won the prize for a model on international trade theory. Its been a while since the class so I dont remember the exact theory off the top of my head. His work is pretty much par for the course in terms of neo-Classical/Keynsian economists. He believes in econometrics and IS a brilliant mathematician. He shouldve gone into engineering. What I dont get is that after being consistently wrong he still gets recognition as if we should be listening to him. Keynsians get to keep telling Austrians how wrong they are without ever actually having to be correct themselved or without ever having to make a clear cogent argument that actually properly summarizes and critiques Austrian economics. Even Marxists can come up with a proper argument (wrong as they may be). Instead all we get from the standard bearers are distortions.

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    1. Keynesians don't need to critique Austrian School economics because it's Keynesianism, not Austrianism, which is generally taught in high school and in college. Since readers of the NYT and other (central banker-subsidized) "mainstream media" are nearly alwas fully ignorant of Austrian School economics, it's easy to get away with distorting the actual arguments of Austrianism.

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  5. How many things has Krugman predicted incorrectly over the years? I have lost count. I liked his lines about QE2 not affecting commodity prices unless demand was stimulated, or his argument with wenzel that we are in a depression and not a fed manipulated mini boom and deflation was cause for concern, or him calling for lower and lower interest rates prior to the housing collapse, or just about any prediction he has had!

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    1. First of all, if anything goes wrong, Krugman just argues that the government should have spent more money.

      Second, he can generally count on his readers and the (central banker-underwritten) "mainstream media" to ignore the claims of the Austrian School anyway, so what's there to worry about?

      Third, Krugman pointedly refuses to have a debate with an Austrian School economist, so he never has to worry about ever being exposed to the government-miseducated readers anyway.

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  6. First they ignore you, then they ridicule you, then they fight you, then you win.

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  7. Fractional reserve banking falls under fraud. Calling them "deposits" is really misleading. The money can't be deposited in the bank and out on loan at the same time. It can't be in two places at one. The other victim of this crime is dollar holders, who find their money buys less and less as the money supply is expanded, while one bank after another accepts fractional reserve money and fractional reserve lends it.

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  8. Difster and Deft are right. Fractional reserve banking is fraud. Hans-Hermann-Hoppe has proven this beyond doubt in "Against Fiduciary Media". So Krugman is actually right in the second part of his statement on Austrians.

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  9. Let's focus more on Krugman's consistently humiliating and incorrect predictions rather than on issues austrians can disagree on.

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