Thursday, November 29, 2012

Paul Krugman Displaying Basic Ignorance--That Started When He Was 10 Years Old

Paul Krugman's "Schiff Post" is bountiful with things to comment on. Here is Krugman displaying his total ignorance of basic Austrian economic business cycle theory:
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.
He has Austrian theory confused with the now dead Chicago School/Milton Friedman monetary theory(see my upcoming interview with Casey Mulligan). It was Friedman who throughout the 1980s got egg on his face by thinking there was a direct correlation between increases in money supply and overall price levels.

That has never been the Austrian view. Murray Rothbard specifically addressed this in his 1963 book, America's Great Depression. He separated money printing from it necessarily resulting in an increase in prices at the consumer level:
 One of the reasons that most economists of the 1920s did not recognize the existence of an inflationary  problem [in terms of increasing money supply] was the widespread adoption of a stable price level as the goal and criterion for monetary policy. The extent to which the Federal Reserve authorities were guided by a desire to keep the price level stable has been a matter of considerable controversy. Far less controversial is the fact that more and more economists came to consider a stable price level as the major goal of monetary policy. The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the Great Depression caught them completely unaware.
Actually, bank-credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion. Statistically, therefore, we can only identify the increase in money supply, a simple fact. We cannot prove [monetary] inflation by pointing to price increases. We can only approximate explanations of complex price movements by engaging in a comprehensive economic history of an era — a task which is beyond the scope of this study. Suffice it to say here that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods...
The stability of the price level in the 1920s is demonstrated by the Bureau of Labor Statistics Index of Wholesale Prices, which fell to 93.4 (100 = 1926) in June 1921, rose slightly to a peak of 104.5 in November 1925, and then fell back to 95.2 by June 1929. The price level, in short, rose slightly until 1925 and fell slightly thereafter. Consumer price indices also behaved in a similar manner.[2] On the other hand, the Snyder Index of the General Price Level, which includes all types of prices (real estate, stocks, rents, and wage rates, as well as wholesale prices) rose considerably during the period, from 158 in 1922 (1913 = 100) to 179 in 1929, a rise of 13 percent. Stability was therefore achieved only in consumer and wholesale prices...Federal Reserve credit expansion, then, whether so intended or not, managed to keep the price level stable in the face of an increased productivity that would, in a free and unhampered market, have led to falling prices and a spread of increased living standards to everyone in the population. The [monetary] inflation distorted the production structure and led to the ensuing depression-adjustment period. It also prevented the whole populace from enjoying the fruits of progress in lower prices and insured that only those enjoying higher monetary wages and incomes could benefit from the increased productivity.
There is much evidence for the charge of Phillips, McManus, and Nelson that "the end-result of what was probably the greatest price-level stabilization experiment in history proved to be, simply, the greatest depression."
Clearly, Krugman is thus all wet, creating in his mind an "Austrian model" that calls for hyperinflation every time the Fed prints money. Rothbard flattened this view, when Krugman was 10 years old. It's sad that at 59 Krugman still hasn't been able to grasp what Rothbard wrote.

17 comments:

  1. Schiff has predicted high inflation for years resulting in a dollar crisis. He has recommended that people get out of the dollar and into foreign equities and foreign currencies. He has been right about some things and wrong about others.

    I would love to hear Krugman's response to Frederic Bastiat' s 'the Broken window fallacy'
    That would be interesting.

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    1. Krugman has already shown that he doesn't understand the Broken Windows Fallacy. The man doesn't know so much that it's hard to keep track of what he doesn't know.

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    2. Here you go...

      "And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment."

      http://krugman.blogs.nytimes.com/2011/09/03/broken-windows-ozone-and-jobs/

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  2. I had this post on my own Krugman blog: http://krugman-in-wonderland.blogspot.com/2012/11/are-austrians-wrong.html

    Bob, what I really find interesting is that for all of his supposed formal education, Paul Krugman does not know how to ARGUE. He either sets up straw men, or engages in outright bullying, but he seems to be incapable of setting up a premise that is accurate and then using facts and logical constructs to argue his point.

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    1. Dr. Anderson,
      Seems like a perfect approach, from his perspective, especially given his faulty, losing-side premise. He has the bully pulpit and, rather than honestly portray the position of his opposition, he can craft cherry-picked, distorted views and - voila - the enemy is vanquished. In the minds of those who read him, especially the opinion-makers in the media, the views of Peter Schiff, like those of Ron Paul and other public figures who pose a threat to their status quo, can safely be disregarded as "crazy", and "kooky".

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    2. Since Keynesianism is and always has been a hoax (where did Keynes address the pre-existing analysis of economic calculation???), its advocates cannot really engage in a true and fair debate. And they never do because they dare not. The pricing process and economic calculation are at the core of Austrian analysis. Once someone grasps the implications of those concepts, they can immmediately see that the Keynesian form of analysis is preposterous. Thus, no Keynesian will ever allow his/her tiny mind to ever get close to the concept of economic calculation, which is like Kryptonite to the Keynesian brain. As such, all that a Keynesian can spit out in response to Austrian analysis is ad hominem attacks, subject changing and assorted nonsense.

      And then there is Mike Norman:

      http://tinyurl.com/bqc84xw

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    3. I have to admit that I am endless fascinated but thoroughly appalled by the invariably infantile and dishonest response to Austrian analysis by Keynesians and statists. It is almost like the response of a truly retarded person who views pornography for the first time. The statists have apparently managed to instill a strong taboo factor into the populace which makes them avoid critiquing anything with the slightest scent of FDR. We’re really not dealing with rationality here.

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  3. The sickest, saddest part is the fact that he realizes that falling prices would help the consumer, and the increasing money supply stopped the fall in prices.

    The man is sick.

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  4. Jeez, I F'd up.

    I re-read the second portion (after reading some other things) and attributed the highlighted portion to Krug. I thought it was so cogent and easily understood that it shocked me The Krug wrote it.

    Now I see it was Rothbard. I was foolish to think The Krug could analyze economics so thoughtfully. Maxima Mea Culpa.

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  5. Is there really any point to these posts any more?

    Krugman isn't going to add anything of value to any discussion of Austrian Economics. People have repeatedly said he understands very little of it.

    Wouldn't this space be of better use discussing actual data, analysis and insight into market behaviour? Or better yet how about unintended or unstated consequences of government regulations and policies?

    Just asking...

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    1. Yes. The point is to expose Krugman as a paid liar.

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  6. There is value in reacting to Krugman because as the establishment's top pop economist he is so widely read and many of us don't have the best rejoinder on the tip of the tongue. So I appreciated seeing Rothbard's bit on the 1920's again, simply because I needed some help remembering. But, it would be interesting to also see a fuller Rothbardian analysis of the situation -- exactly how much have prices been increasing, and if less than the rate of increase in money supply, why the difference.

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  7. Krugman is a political terrorist...Why do you keep banging on like he is human? He is not an Economist and never was.

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  8. Those Rothbard quotes seem to indicate that wages in the twenties rose more than other prices. This seems to contradict his saying that living standards weren't increased.

    I think people who say inflation lowers living standards and deflation raises living standards are confused. Even putting aside problems deflation might cause, higher inflation implies higher wages, income or borrowing and deflation lower wages, income or borrowing.

    So if prices are lower but your income is lower you're no better off. But add in fixed costs, debt, etc. and you can get the Keynesian story of a downward spiral.

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    1. Anon, please learn the concepts of economic [mis]calculation and the pricing process. Those are the core Austrian concepts. Be the first Keynesian in you galaxy to do so.

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  9. Ceteris paribus aggregate prices cannot rise without an expansion of money and credit.

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