Rebutting Paul Krugman on the “Austrian” Pandemic
In a recent column for the New York Times, the world’s most famous Keynesian Paul Krugman attacked Austrian business cycle theory (ABCT). In addition to repeating his decades-old claim that ABCT suffers from an internal contradiction, as well as his charge that the Austrians had misdiagnosed the 2008 financial crisis, in his latest piece Krugman argued that the 2020 pandemic really was a “reallocation shock” along Austrian lines. Yet even here, Krugman claims, the Austrian prescription of laissez-faire is dead wrong: as a new paper presented at the Jackson Hole monetary conference allegedly demonstrates, we need easy money from the Fed in order to rearrange labor without causing needless unemployment.
It won’t surprise Mises.org readers to learn that I disagree strongly with Krugman’s column. He makes some casual remarks that mislead his readers on the history of the 1930s, but more seriously, he misunderstands what ABCT actually says. This confusion leads him to reject the Austrian view as illogical, when in fact it is perfectly consistent and explains the data better than a Keynesian approach.
Krugman’s Faulty History
Krugman begins his discussion of the Austrian theory by reference to its place in the 1930s:
[T]he idea that there was a titanic intellectual battle in the 1930s between Hayek and John Maynard Keynes is basically fan fiction; Hayek’s views on the Great Depression didn’t get much intellectual traction at the time, and his fame came later, with the publication of his 1944 political tract “The Road to Serfdom.”
Already Krugman is making stuff up. (As I’ve written elsewhere, when Krugman uses the caveat “basically,” what he means is, “This statement is literally false.”) Although the clash may not have involved dueling rap lyrics, Hayek really was the chief rival of Keynes in the early 1930s. As Bruce Caldwell explains:
In 1929 [Lionel] Robbins had begun what was to become his long tenure as head of the Economics Department at the London School of Economics (LSE). Robbins invited Hayek to London in January 1931, and the next month the young Austrian delivered a series of lectures on the business cycle. The lectures were published later that year (with an effusive foreword by Robbins) under the title, Prices and Production. Hayek’s lectures, though at times opaque, caused quite a stir. By the fall of 1931, Hayek had been appointed the Tooke Professor of Economic Science and Statistics at the University of London. He was thirty-two years old.
Sir John Hicks was at the LSE from 1926 to 1935 and remembers well the impact of Hayek’s arrival. Indeed, he divides his own stay at the University of London into a pre-Hayekian and a Hayekian period…In his article, ‘The Hayek story,’ Hicks reflects on the importance of Hayek’s early work.
“When the definitive history of economic analysis during the nineteen-thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek. Hayek’s economic writings—I am not concerned with his later work in political theory and sociology—are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories of Hayek were the principle rivals of the new theories of Keynes. Which was right, Keynes or Hayek?”
Ludwig Lachmann writes of Hayek’s “triumphal entry on the London stage with his lectures on Prices and Production,” and recalls that when he (Lachmann) arrived at the LSE two years later, “all important economists there were Hayekians” …
It’s undeniably true that in the eyes of the profession, Hayek lost the debate to Keynes. But Krugman is wrong to claim that Hayek was a minor player who was only known for his political writings.
Krugman Oversimplifies Austrian Business Cycle Theory
After downplaying its importance at the time, Krugman admits that there was an Austrian analysis of the Great Depression, and summarizes it in this way:
Nonetheless, there was an identifiable Austrian analysis of the Depression, shared by Hayek and other economists, including Joseph Schumpeter. Where Keynes argued that the Depression was caused by a general shortfall in demand, Hayek and Schumpeter argued that we were looking at the inevitab
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