Paul Krugman recently piggybacked upon a critique of Mises’ views on the Great Depression. There’s really nothing new in Krugman’s post, but as an ardent Misesian with a book on the Great Depression and a public vendetta against Krugman…I am pretty much contractually obligated to write a response.
In the first place, it’s interesting that Krugman refers to the source of his information as “The blog Social Democracy for the 21st Century,” rather than listing the actual author. This is presumably because the author lists his name as “Lord Keynes,” and Krugman realized that if he said, “The blogger Lord Keynes has written a fascinating account…” then even Krugman’s loyal readers would be a bit creeped out.
I also draw your attention to one of Krugman’s favorite rhetorical ploys when he wants to ridicule someone. Krugman writes, “First of all, as the blog tells it, von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory…” Krugman often uses that caveat “basically,” so that he can make his charge stick, because nobody can ever prove him wrong. Watch, I’ll demonstrate: Paul Krugman did some good work in technical, peer-reviewed economics, but on his NYT blog he basically applauded every expansion of State power and rejected every argument for limited government put forth by libertarians. See how that works? Don’t even bother trying to refute me, because I just need to point out a few examples and my “basically” goes through enough so that I’m not demonstrably lying.
Anyway, back to Krugman. He says, “ABCT is essentially a story about the excesses of the boom; it offers no clear or plausible story about how that boom leads to a sustained slump. And von Mises was in effect already conceding that point by 1931.”
Mises did no such thing. In “Lord Keynes”‘ post, he quotes Mises as writing (in 1931):
The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media….Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.
The first three sentences are crucial: Does this sound like Mises is “in effect” abandoning Austrian business cycle theory, as Krugman alleges, because it can’t explain how booms lead to sustained slumps? Of course not. Mises was simply saying that something qualitatively different was happening this time around, making the depression in the early 1930s different from the typical boom/bust cycle for which he had developed his business cycle theory. (Incidentally, here I have answered Krugman’s critique of the “hangover theory”–which he links in his current post.)
Krugman then goes into his familiar discussion of inflexible prices. According to Krugman, the market economy is so fragile and prone to involuntary unemployment because of “sticky” wages and prices; it is the acknowledgment of this empirical fact that separates the scientific Keynesians from the ideologues in the profession. And yet, even though it is sticky wages that make the “classical” reliance on markets so wrong, Krugman always makes sure to tell his readers that making wages more flexible (by taking away union privileges and abolishing government unemployment assistance) would make things even worse. Only government and central bank stimulus can save the day. Besides my noting how slippery the argument is–remember, Krugman says sticky wages mean markets don’t work, but even if we make wages flexible then markets will work even worse–I also point readers to my lengthier response to this standard Keynesian argument.
As I said at the beginning, there’s really nothing new here, except Krugman’s bogus charge that Mises threw in the towel on his own business cycle theory. To repeat, this is not at all a correct reading of the quotes from Mises that the blogger “Lord Keynes” produced. On the contrary, Mises was simply showing how (a) artificially low interest rates caused an unsustainable boom followed by an inevitable slump, while (b) government price-fixing and other distortions prolonged the slump. I have written a similar analysis for our own times: The Fed contributed to (or arguably caused) the housing bubble, which necessitated a crash. But it was the Bush/Obama “stimulus” programs and other interventions–such as raising the minimum wage and extending unemployment benefits–that have kept the official unemployment figures so high, and have turned this fiasco into the second Great Depression.