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? …

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