A few days ago, Mssr. Krugman labeled economists following the Austrian School and favoring the Austrian Business Cycle Theory as “hangover theorists”. The moniker is actually somewhat suiting – Krugman’s rebuttal however is not.
ABCT (or this “hangover theory”) explains that recessions are necessary to correct bubbles created from excessive credit or fiat monetary expansion. The recent Nobel prize winning economist does a good job of building up a straw man representation of this theory, then counters with:
1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?
2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.
Now I’m no economist, but I do have at least an 8th grade education, and I do happen to frequent other economic blogs. For those who don’t already, please check out Mish’s Global Economic Trend Analysis for an in depth look at Krugman’s claims.
Summarized though, Krugman’s second point is obviously flawed – since it’s easy to recognize that one industry’s failure will obviously have implications over others. His first point however demonstrates that he actually doesn’t understand the theory at all. The bubble creation is artificial, so unemployment isn’t the cause for people going into these jobs – false credit expansion and resource misallocation are.
The fact that Krugman felt compelled to publish this column does mean that we’re gaining ground though. We are now past being ignored, and almost past being ridiculed. Statists are starting to sincerely fight us in the open, which brings us even closer to actually winning.Published in