Ludwig von Mises on the Meaning and Significance of Deflation

After Richard Ebeling sent the letters from the Cambridge vs LSE debates, we had the following email exchange:

Wenzel: I note that Hayek comes out against deflation. I think it is pretty clear that Murray Rothbard would not be against such deflation. I'm curious if in your readings you have come across Mises anywhere explicitly stating his view on deflation? Do you think he would be in the Hayek or Rothbard camp?

Ebeling: We need to distinguish between "price deflation" and "monetary deflation."

Ludwig von Mises argued that falling prices due to growth in the economy (technological innovations, productivity improvements, increases in the supplies of the factors of production, etc.) that lowered costs of production and expanded the general supply of goods and services in the market was not in anyway harmful. Indeed, this could be considered one indicator of economic progress. It enables consumers to buy more with their given money incomes as a result of the increased purchasing power of the monetary unit.

And this particular analysis of a "supply-side" generated decline in the general "scale of prices" (price deflation) has been a hallmark of "Austrian" monetary theory and policy analysis since the 1920s. It is one that was shared in the 20th century by other Austrian Economists, including F. A. Hayek, Gottfried Haberler, Fritz Machlup, and Murray N. Rothbard, to name a few of the "older" Austrians. Among the more recent Austrians or Austrian-oriented economists, this view of price deflation has been defended by Lawrence H. White and George Selgin with great cogency, and many other "younger" Austrians.

Mises, however, was not in favor of an active government policy of contracting the money supply (a monetary deflation). His writings from the 1920s throughout the rest of his life make it very clear that he was not a "monetary deflationist." He pointed out that if a man is run over by a car and seriously hurt, you do not make his condition better by putting the car in reverse and running over him again. (See, Ludwig von Mises, 'The Non-Neutrality of Money' [1938] in Richard M. Ebeling, ed., "Money, Method, and the Market Process: Essays by Ludwig von Mises" (Mises Institute, 1990) p. 76.)

An monetary inflation generates a series of distortions and imbalances in the market. These distortions and imbalances are not set right by then intentionally contracting the money supply. In Mises' view, this merely, and inescapably, superimposes a new series of distortions and imbalances as a result of the monetary deflation.

Thus, when he wrote on or was questioned at lectures about the best means to, say, return to a gold standard, Mises never proposed contracting the money supply to return to the former pre-inflation purchasing power (a lower "price level") to restore the original parity or exchange rate between the currency unit and gold.

He argued that it was best for the monetary authority to stop any further increase in the supply of money and credit, allow the market a period of time to stabilize and determine, on an unregulated and free gold market, the post-inflation parity or exchange rate between the depreciated monetary unit and gold. Then, when the market had decided what that ratio of exchange should be based on overall supply and demand conditions, the monetary authority should declare that as the new official rate of redemption at which a unit of gold will be exchanged for a given quantity of the currency in circulation. This becomes the basis of a new legal gold standard.

To try to return to the pre-inflation gold-currency redemption rate for a reestablished, legal gold standard would necessitate dragging the domestic market and its structure of relative prices and wages down to a much lower scale (or general level) of prices to bring the internal market into balance with such a restored external value of the monetary unit.

On this point, Mises followed Carl Menger, the founder of the Austrian School. Menger was a participant in the deliberations that lead to the establishment of a gold standard in Austria-Hungary in 1892. In some of his writings, Mises quoted from and agreed with Menger's recommendation at that time that the new legal redemption rate between gold and the new Austrian "crown" should be established at the rate set by the market, and not artificially imposed at an exchange rate either higher or lower than this. To do so would only impose unnecessary adjustments and hardships on various sectors of the Austrian economy.

(See, for example, Ludwig von Mises, 'The Political-Economic Motives of the Austrian Currency Reform' [1907] in Richard M. Ebeling, "Selected Writing of Ludwig von Mises," Vol. 1: "Monetary, Fiscal, and Economic Policy Problems Before, During, and After the Great War" (Indianapolis: Liberty Fund, forthcoming, 2011).

However, Mises did believe that due to fractional reserve banking, during a period of an expansion of money and credit, the structure of relative prices and wages (and the allocation of labor and capital among alternative productive uses) will have been both distorted and pushed up to a general scale or level that will need correction. Once an monetary inflation had been brought to an end, the "discovery" of misdirected resources and malinvested capital that are unsustainable in the post-inflation market environment will necessitate a "rebalancing" of both the structure of relative prices and wages and the reallocation of labor, capital and other resources to reflect the post-boom reality of actual supply and demand conditions.

At the same time, part of the credit expansion induced by the increase in the monetary reserves within the banking system (and which has had a "multiplier" effect on bank credit due to fractional reserve banking) will likely contract as investment borrowers face some losses and bank depositors withdraw money from their accounts.

Thus, a degree of price deflation may be inevitable as an integral part of the readjustment of outstanding bank credit in the post-boom period. Mises occasionally, in his writings, makes the historical observation that this has been a pattern in the past once the business cycle is in its "downturn" phase.

What Mises did think can and had generated an unnecessary "cumulative" general decline in prices and wages, were rigidities in the structure of relative prices and wages. Thus, when selling prices are having to be adjusted (downwards) to a new "market clearing" level in the post-boom period, money wages were often "rigid" or inflexible in adapting to the new market environment due to government intervention or trade union resistance to accepting reductions in money wages to bring the cost of labor more into line with the lower prices at which goods that labor assists in producing could be sold for.

Falling employment due to money wage inflexibility reduces the unemployed's ability to buy goods, and the same cycle begins again. But the problem, Mises was adamant in emphasizing, is not a short-fall in anything called "aggregate demand" (as the Keynesians argued) but a failure for appropriate adjustments in the structure of money wages to the new relevant post-boom structure (and level) of goods prices to restore a sustainable and profitable pattern of wage costs relative to selling prices.

(See, for example, Ludwig von Mises, 'The Economic Crisis and Capitalism,' [1931] in Richard M. Ebeling, ed., "Selected Writings of Ludwig von Mises,) Vol. 2: "Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression" (Indianapolis: Liberty Fund, 2002) pp. 169-173.)

Thus, Ludwig von Mises, to a certain extent, would be somewhere in between either Hayek or Rothbard on the meaning and policy relevance of price deflation or monetary deflation.

Wenzel: Thanks for a great exposition. I want to push you a bit further on the point, though.

It appears that Hayek in the letter is referring specifically to price deflation, not caused by growth, but by hoarding. This I would argue is part of what is occurring in today's economy.

Since I am travelling, I don't have reference to my library, but, if I recall correctly, Rothbard explicitly stated that he has no problem with price deflation caused by hoarding--which appears to be in opposition to what Hayek signed as part of the LSE group.

I don't recall Mises ever discussing the hoarding that tends to go on during the down phase of a business cycle and am wondering if you recall doing os and if so, on this particular type of price deflation (from hoarding especially during the down phase of the business cycle), does he take the Hayek view or the Rothbard view.

Also, do you agree that Hayek's view may suggest money printing as a remedy--since he does see hoarding price deflation as a problem?

Ebeling: Mises is ambiguous on the issue of "hoarding" in the downturn. And never, to the best of my knowledge, addresses directly in the way you are asking about.

But from "reading between the lines" (if I may), I would suggest that he considers such an "abnormal" rise in the demand to hold cash balances ("hoarding") inevitable once the "crisis" emerges. General uncertainty, wanting to hold on to cash in the face of falling sales to have the means to meet financial obligations, etc., one of the side effects of the discovery of investment and pricing errors, and transition to a rebalancing as part of the adjustment process. That this may result in further downward pressure on prices in general is part of the process, as individuals attempt to grope their individual ways toward re-coordination of in the market.

He would NOT consider any attempt to "reflate" the supply of money and credit to "prop" prices up as a stabilizing step in the face of falling prices either resulting from the rebalancing to re-coordination or as a "solution" to the rigidity of various wages and prices that are retarding the adjustment process. Rather, it would run the risk of setting in motion a new wave of malinvestments and and unsustainable employments in various sectors of the economy. Furthermore, it would generate even more wasted capital in wrongly invested capital projects that will, then, mean even lower wages for workers due to a resulting lower marginal productivity of labor as a byproduct of squandering scarce capital.

Mises Naturalization Document

Richard Ebeling sends along a picture of the naturalization document from 1946 of the great economist Ludwig von Mises. Very cool. (Click for larger view)

Mises On the Necessity of Copyright Protection

We may disregard the problem of second-rate authors of poems, fiction, and plays and second-rate composers and need not inquire whether it would be a serious disadvantage for mankind to lack the products of their efforts. But it is obvious that handing down knowledge to the rising generation and familiarizing the acting individuals with the amount of knowledge they need for the realization of their plans require textbooks, manuals, handbooks, and other nonfiction works. It is unlikely that people would undertake the laborious task of writing such publications if everyone were free to reproduce them.--Human Action, chapter XXIII, part 6.

ViaDavePrychitko

A Study Guide for the Most Important Book in Economics

Ludwig von Mises' book, Human Action, in my view, is the most important book ever written in the field of economics. If you master this book, you will have the equivalent of a black belt, in economics.

However, up until now, attempting to digest Mises' magnum opus was pretty much a solitary task. There was only, Percy Greaves valuable, Mises Made Easier, but that is pretty much only a glossary of the words and encyclopedic type references that Mises made in Human Action and some of his other works.

Now word is out that Bob Murphy has completed the Study Guide to the Scholar's Edition of Human Action. I plan to read the study guide over the holiday season and will have a full review after I complete it.

In the meantime, Bob has a write up explaining his take on the Study Guide, here.

Bob Murphy Comment Is "Disappeared" from Brad Delong Site

Brad DeLong has some pretty nasty things to say about what he thinks is Ludwig von Mises' Theory of Money and Credit (TMC).

I say what he thinks is Mises' TMC, since as David Gordon points out in a comment at DeLong's blog, DeLong's quotations are all "from the Appendix, 'Planned Chaos', written in 1944." TMC was originally published in German as Theorie des Geldes und der Umlaufsmittel in 1912.It was then published in the United States in an English version in 1934.

That DeLong mixes this up does not surprise me.

My blood pressure has never gotten excited over Brad DeLong comments about books, especially after reading, last year, his laughable review for the Los Angeles Times of Alan Greenspan's book The Age of Turbulence.

After reading DeLong's review of Turbulence, I thought to myself, "this dude doesn't sound like he read the book."

In the Turbulence review he tells us that

"The Age of Turbulence" is three books in one.

What does he say about book 2? That he is going to give his students a quiz about it. That's it, I kid you not:

The second book gives Greenspan's view of the world and is, I think, least successful. He is trying to convey complicated and subtle technocratic ideas about the global economy -- its current structure and how it functions -- in a way that is comprehensible to general readers whose purchases drive bestseller lists. My students will read it because it will be on the midterm. But the book's target audience is likely to find this world tour a slog, and they are not incentivized by midterms.

I ask you? Would you need to read a book to write this kind of nonsense?

It's the same for what he identifies as book 3:

The third book -- Greenspan's account of public policy -- is making the biggest splash as news. But it is news only in a very peculiar sense. That Greenspan and other committed small-government Republicans have been horrified at the turn their party has taken and have desperately sought some way to take it back from the cynical media consultants and political hacks who now run things is well-known -- to readers of Ron Suskind's "The Price of Loyalty" and Bruce Bartlett's "Imposter" and a host of people who know people who know Bush administration undersecretaries. Greenspan's much-quoted judgment in the book -- that current Republican office holders "deserve to lose" elections because they sold their principles for power and "ended up with neither" -- should come as no secret. Yet stories over the last few days have breathlessly reported selected phrases from the new book, characterizing them, as the Washington Post's Bob Woodward did, as "unusually harsh criticism [of] President Bush and the Republican Party" for abandoning "the central conservative principle of fiscal restraint."

Oh yeah, Delong read this book before he reviewed it.

Dear reader, from Delong's "review" what exactly has he said specifically about what he identifies as book 2 and book 3 (note: he does say a bit more about book3)?

At least, for book 1, he pretends to have read the book and pulls some quotes out that it appears he has skimmed from the book. I say skimmed since he misses all of the most significant Greenspan comments.

So it is with this background that my blood pressure did not go over the top when Delong's "analysis" of Mises book was that is a:

readable in a rhetorical-excess-train-wreck mode, for it is also totally bats--- insane.

I just thought that DeLong reads everything in a train-wreck mode. It's his typical modus operandi. Why, he must rhetorically think, should he actually reasonably read and debate anything, when he can spin off nonsense that he has readers for, that will apparently gobble it all up?

But heaven forbid that somebody call him on his nonsense, as Bob Murphy did.

What does Delong the scholar with the unusual book review style do when a reasonale attempt is made to debate his statements? Why he erases Murphy's well reasoned comment and announces on his blog:

OK. Time to cut this off and prune it down to something useful..

And Murphy's comment is disappeared! Poof, bam gone.

Seven minutes later, the Great Reviewer Delong writes:

The comments to this entry are closed.

The Strange Mind of Nobel Laureate Paul Krugman

By Robert Wenzel

I have never before read writing so twisted, deceiving and evil as an article written, 10 years and some months ago, by the new Nobel Laureate, Paul Krugman. A quick reading of the piece will give one the impression that the piece is vicious, yet elegant. A deeper analysis reveals such evil that one has to wonder what twisted conditions faced Krugman as a child that he chose to use his mind in such an ugly manner.

I will dissect this article paragraph by paragraph so the article finds its justly spot, tossed onto an ash heap.

This is paragraph 1 from Krugman's piece, Hangover Theory:

A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking—not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.

Notice the vicious launch, "I regard [Austrian Theory] as being about as worthy of serious study as the phlogiston theory of fire".

Interestingly, it was the great Austrian economist, Ludwig von Mises, who taught that one should study all economic theories so that one could argue and point out the faults in weak theories. Apparently, Krugman has a superior method of understanding so that he does not even have to study a theory before he dismisses it. This nonsensical start by Krugman is enough to toss the paper. But, let us do something he claims he does not need to do, let us review arguments contra to our own thinking, that is, let us give the rest of his article full hearing.

He then writes: "the incident set me thinking—not so much about that particular theory as about the general worldview behind it". This is twisted cleverness if there ever is such a thing, because for the rest of the article he does nothing but discuss the theory, with one subtle deviation, when he attempts to force Austrian Business Cycle Theory ("ABCT") into a subtle box as a moral quasi-religious theory, as opposed to the well reasoned economic theory that it is.

He then begins discussing the theory, "Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion."

There are a couple things that need to be pointed out here. First,in debus ex machima fashion, he begins the theory with the boom already in place. In ABCT, how the boom starts is integral to an understanding of the theory. ABCT holds that central banks create an artificial boom by printing money that ends up in the capital goods sector.

Thus, not all booms will cause the negative consequences of a bust. An increase in productivity can cause a roaring boom that every ABCT theorist would agree has no reason to end in recession.

And notice the deceiving use of the word "punishment". Nowhere do ABCT theorists use the word. It has the connotation that ABCT is some moral theory about those who party too hard getting their just desserts, in a moral sense. This is pure twisted evil Krugman. He is much too good a wordsmith not to know the deception he is spinning here.

On to paragraph 2:

The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn't. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.

Ah yes, the use of the word "punishment" now sets the reader up for this poppycock paragraph about a "morality play" , hubris and downfall. Thus, the evil Krugman digs the deception deeper. And, notice the use of the word "seduction", for a theory that has perhaps 1.0% of the followers of Krugman's Keynesian religion.

Paragraph 3:

Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded.Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less. Nor is this merely an academic argument:

The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world's depressed economies at this very moment.

Notice the sly Krugman here, this “seductive” ( which accounts for 1.0% of trained economists) morality play (A morality play which is a strawman, created by Krugman's twisted and deceiving use of the word "punishment") "must be resisted."

Krugman then goes on to remarkably blame the Austrians for the Great Depression, a period during which FDR instituted more controls on the country than ever seen before. UCLA economists Harold L. Cole and Lee E. Ohanian have shown that FDR drove up wages and prices and was responsible for extending the length of the 1930s economic downturn by years.

Paragraph 4:

The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

This is simply another twisted paragraph . Now it appears that Krugman has slyly changed the debate. He is no longer discussing ABCT, but all "hangover theories", and whatever happened to discussing ABCT's "worldview"?

Paragraph 5:

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don't say that it's obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines because(sic)the whole economy to slump.

Again we have Krugman using a loaded term, the supposed ABCT view of the "virtue" of recessions. ABCT theorists see recession as the readjustment period necessary from a previous central bank inspired boom. Krugman wants to keep his near-religious “morality play” going, so he uses the word “virtue". As for arguing that Keynes has made ABCT theory obsolete, by simply stating such, that’s as strong an argument as my saying, Henry Hazlitt made Keynes obsolete. But at least there is a book by Hazlitt, The Failure of the New Economics, that did make Keynes obsolete.

Paragraph 6:

Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

So much for not discussing ABCT, and to just look at some worldview. Of course, the person that gets laid off does not automatically find a job the next hour, a search for a new job must take place. Further, Keynesian unemployment programs extend the unemployment! Since why should anyone rush to find a job when they are being paid not to work?

Paragraph 7:

Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

Notice the viciousness, “supposedly deep Austrian theorists “.

As for as Krugman’s question as to why there isn’t a rise in unemployment during the boom part of the cycle , this clearly demonstrates his lack of a deep understanding of ABCT. Before a boom starts, the economy can be said to be in equilibrium between the consumer goods production and capital goods production. When a central bank then pumps in new money, new demand is created for labor in the capital goods sector causing bidding for labor away from the consumer goods sector. Thus, there is no point where rising unemployment would be a factor in this part of the cycle. However, during the downturn part of the cycle, it is not a case that the central bank is pumping money into the consumer sector. What is occurring, instead, is that a transfer of money is taking place from the capital goods sector to the consumer goods sector. It is this money drain from the capital goods sector that causes the unemployment. During the central bank induced boom, money isn’t being drained from anywhere.

As for every industry being impacted by a recession, Krugman just doesn’t get what a capital good is. What I have identified as Wenzel’s Observation # 2 states that you need to know the purpose a good is being put to, to know if it is a capital good or consumer good, as I explained recently with regard to NBA tickets and how some purchases are consumer good purchases and other purchases are capital good purchases. Likewise, a hot dog sold on a summer day in a park is different from a hot dog sold at a construction site.

Thus , the “supposedly deep Austrian theorists” are much deeper on this topic than Krugman.

Paragraph 8:

As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?

Here Krugman wants to become an inflationist. He decries an economy wide demand for cash, but wants to pump money through the banking sector, which benefits debtors at the expense of savers. If it is an economy wide increase in the demand for cash, why not just let the new lower price structure settle on the economy? Why would an increase in the demand for cash cause “good productive capacity to be left idle” unless ABCT is correct?

Paragraph 9:

The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms—especially when it gives them a chance to lecture others on their failings.

“The hangover theory, then, turns out to be intellectually incoherent,” writes Krugman, This again from a man who says at the start of this article that he is not gong to examine the theory but the “worldview”. It is not the ABCT that is incoherent, it is Krugman’s article.

Then , he is back to the “emotional” appeal of ABCT. He then goes on to tell us the reasons that “some” are attracted to ABCT. This is very close to a Marxian view of class logic, again all subtlety slipped in.

Paragraph 10:

Few Western commentators have resisted the temptation to turn Asia's economic woes into an occasion for moralizing on the region's past sins. How many articles have you read blaming Japan's current malaise on the excesses of the "bubble economy" of the 1980s—even though that bubble burst almost a decade ago? How many editorials have you seen warning that credit expansion in Korea or Malaysia is a terrible idea, because after all it was excessive credit expansion that created the problem in the first place?

“Moralizing on the region’s past sins”? Again another attempt to make ABCT sound as though it is a religious moral theory , and not a theory based on sound principles and reasoning.

Paragraph 11:

And the Asians—the Japanese in particular—take such strictures seriously. One often hears that Japan is adrift because its politicians refuse to make hard choices, to take on vested interests. The truth is that the Japanese have been remarkably willing to make hard choices, such as raising taxes sharply in 1997. Indeed, they are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out. The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a
recession; the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always, "it is ideas, not vested interests, that are dangerous for good or evil."

Raising taxes in the middle of a recession was a hardly smart move by the Japanese. Keynes was right, though, about ideas that can be dangerous for good or evil. And as can be seen in this article, Krugman’s ideas are evil in their tone and they attack ABCT in a twisted, and deceiving manner. But, at this point, the Austrian economic analysis must stop and the other Austrians, lead by the foundational thinking of Sigmund Freud, must take over to explain what would cause a mind to write the twisted deceiving article that Krugman did.

Robert Wenzel is Editor & Publisher of  EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Ban .and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. The Robert Wenzel podcast is on  iphone and stitcher.

Obama Links McCain to 'Reckless' GOP Economics

Barack Obama is correct in calling current GOP economics reckless and calling for change.

"We can either choose a new direction for our economy or we can keep doing what we've been doing. My opponent, John McCain, thinks we're on the right track," Obama said on a campaign swing through Missouri.

Change is needed but it is change that needs to follow the line of thinking of Adam Smith, Milton Friedman, Murray Rothbard and Ludiwg von Mises, not Obama economics, which could very well be socialism.