Apparently, Paul Krugman has never read the work of Ludwig von Mises and F.A. Hayek. Chortling on The New York Times blog, he yammers away in this manner:
Many of the comments to my Austrian economics post are of the form “Well, of course employment rises when investment is expanding, and falls when the investment is falling — in the first case the economy is booming while in the second it’s slumping.”
As I tried to explain, however, that’s assuming the conclusion; there’s no “of course” about it. Why do periods when the economy is investing more correspond to booms, while periods when it’s investing less correspond to slumps? That’s easy to understand in Keynesian terms — but the whole Austrian claim is that they’re an alternative to Keynesianism. Yet I have never seen a clear explanation of this central point.
There are books that deal with this by Hayek, Mises and others. Why doesn’t Krugman reference them, rather than drone on about the quality (or lack thereof) of his blog commenters?
I could, at this point, dredge up those Hayekian and Misesian pearls. But, for the moment, I feel challenged by Krugman’s apparent requirement that bloggers spin this stuff anew, so I’ll give my shot at an answer to his challenge, without referencing any of the Austrian classics. They are there for all to read. But it’s always a good experiment to see how one thinks through this on one’s feet.
Problem is, Krugman’s challenge seems fairly obvious. I need a handicap. So I’ve downed three shots of anisette, and am on my fourth. Can I answer Krugman drunk?
I think so.
Reading his post, I see that the question should be reformulated: Why is it when investment picks up, so does employment? [I take another healthy glug on my fourth rather large “shot” of my favorite licorice-flavored liqueur.]
Krugman says (a) it depends on aggregate demand and (b) Austrians don’t have such a concept.
Let’s deal with the second contention, first. Austrians have a conception of demand in and of itself. They tie demand for products in society (“the economy,” in mod-speak) to individual demands for each product. Indeed, in standard supply and demand discussion, any discussion of prices in integrating markets (“the market”) is an aggregation. All economy-wide pricing discussions deal with aggregated notions. Marshall had such a notion. He didn’t need Keynes. Earlier economists had such notions. They didn’t need Keynes. I mean, any discussion of the value of money (and Austrians love such discussions — I’ve read dozens) depends on the supply of money and the demand for money, and these are, at the macro level these discussions usually get talked about, “aggregate” concepts.
Austrians talk in this manner all the time. They are just very careful to tie all aggregating, macro notions to the actions and values of individual actors, and they are very cautious about what we can actually know about large numbers of people. Most importantly, when equilibrium pricing is being discussed, Austrians (and good Harvard economists, like F.W. Taussig) emphasize the role of marginal pairs, the marginal buyer and the marginal seller.
OK, OK: I know. Keynesian aggregates aggregate EVERYTHING. All demands for consumer goods. Not just the demand for one good, or goods in one sector. My mistaking of standard demand and Keynesian “aggregate” demand must be the anisette talking? [Another glug.]
But do you really need an Aggregate of Aggregates to understand the problem Krugman sets before us? No.
First, take away all aggregates. Let’s invest some money in a business. Say, $100,000. We’re going out on a limb and starting a school to train better economists than Krugman. We’ll start young, with early teens.
What happens to our investment in a private school? The $100,000 goes to set up the legal structure of a corporation. We appoint a board. They agree to work free until a profit is made. We list the board members prominently on our letterhead. We rent a building. We lease some computers and whiteboards. We buy some books and a batch of used chairs and desks. We engage in a massive email campaign to get students.
Oh, what else do we do?
Oh, yeah: The new school hires some teachers and an administrator of some sort. [Two glugs: Down the hatch!]
Yes: Just about any process of production requires at least a few employees. Yup, you heard right. A process of production. “Investment” means nothing without a process of production. Savings is hoarding until it’s invested in such a process. That’s not merely Keynesian wisdom, that’s ordinary wisdom. (The only exception is “investment” of money in a loan, at interest, to consumers. Then there is no absolute necessity for the investment to go into production; but if, generally, people spend more, there will likely be other investments into production to increase consumer goods to sell to . . . this may sound Keynesian, but it isn’t that special.)
So, why does employment rise when investment rises, generally? Because investment is in productive processes, and labor (employment) is, along with land and machinery, one of the major factors of production. You don’t need a total aggregation to understand this. Just aggregation as it actually occurs, from micro to observable trend, in society.
Understanding this does not require Keynes. I’m pretty sure I read all this in Say.
But hey: [Another sip o’ the delicious liqueur.]
Yes indeedy, there’s nothing particularly “Austrian” about all this. I’m having trouble coming up with any classical economist of merit — say Say, Senior, Mill, et al. — who would have disagreed. They weren’t nuts. They knew that production required labor, and capital was key to get production going. It’s all very basic. I mean, this should be covered in Econ 101, right? (I’ve read scores of Principles texts from the 19th century, and I’m pretty confident nothing of what I’ve said, above, would be controversial c. 1860.)
So where do Austrian insights come in?
Well, Austrians had a notion of the natural (equilibrium) rate of interest, understood in terms of stable money. And then when new money (from a central bank’s creative accounting) goes into “the economy” rates dip, and this signals to businessfolk that they can make a profit by taking that cheaper money to take on new projects.
Interestingly, every new cycle tends to exhibit a slightly different (sometimes: completely different) sector of the economy where the focus of new investment focuses. This new money creates problems not merely in general price levels, but the particular industries into which new money has funded new productive processes, leading to problems of relative pricing, malinvestments in one sector over another, in one business over another. It turns out that, after being “primed” with new money and low interest rates, the likelihood of the consequent new processes bearing out to profitability has actually diminished, since there’s been a fakeout. People have been deluded by the new, lower interest rates to invest in unsustainable processes, processes that won’t make good.
I could go on. In fact, I’ve a few heresies in my closet of economic concepts that some Austrians wouldn’t like. But I’ve just indicated where Austrians differ from others. And Krugman doesn’t even mention these distinctly Austrian insights. Instead, he gets caught up in some really basic nincompooperies, errors that the Classicals wouldn’t make. He harps on the difference between individual demand and aggregate demand. Sheesh.
And yes, Laureate Krugman, you are right: Austrians don’t use the phrase “aggregate demand.” But then, neither did the Classicals. But both groups had an idea of aggregation. Both, when dealing with, say, the glut controversy, considered how aggregation of demands and supplies led to observable trends.
Perhaps I’m too drunk, now, to conjure up the memory of why, in particular, Keynes felt it necessary to add the modifier “aggregate.” Did he like, especially, the letter “g”? Did he think it sexy?
I’ve read a lot of Classical stuff, and the earlier economists seemed to navigate the waters without needing a bailout from the Keynesian pail, that word “aggregate.”
Could Keynes have liked the word because so much of his aggregations had little to do with understandable individual action, and played into the hands of the growing econometrics industry, hordes of specialists who would soon be employed by governments to give data of questionable validity for models of questionable salience to back up policies of more-than-questionable wisdom?
I’m not sure. I’ve found, generally, Keynes’s General Theory to be an unreadable mishmash of buncombe and a few flashes of insight along with tons of weighty math and light-in-the-loafers rhetoric. I’ve read a lot more early stuff, and a lot of later stuff. Keynes’s stuff? Not so much.
So, when a madman, hands waving in the air (or merely gesticulating on a blog) identifies Keynes again and again, but without much reference to earlier writers, or competent critics, I wonder. Krugman has written some brilliant economics. Why, on his blog, does he seem so unbrilliant, so ill-read? When I sober up, I’ll probably regret not giving him some benefits of doubt. Surely he’ll explain to me the exact meaning of Keynesian aggregation. He’d better have some good response, otherwise, take away that Nobel.
But there is no excuse for criticizing the Austrian approach to business cycles and not reading Mises or Hayek or Garrison. They’ve written citable books on the subject under discussion. I’m pretty sure Mises.org has the classics of the literature, available for free. So there’s no personal economic reason to refrain from taking at least a peek.
Once again, consult the masters. Don’t take my word for it. My eyes are blurry, after all, with perhaps a few too many shots of Mr. Boston’s Anisette.
Still, I rub my eyes and Krugman remains as he was: Clueless.