Paul Krugman’s Austrian Obsession
Paul Krugman seems to have a very unhealthy obsession with Austrian economics and especially the school’s theory of the business cycle. More than two decades ago, he attacked it (wrongly calling it a “Hangover Theory” and trying to make a morality play out of it), claiming it had the credibility of the “phlogiston theory of fire.”
Not surprisingly, he got the theory wrong then but has decided to dig that hole of willful ignorance even deeper with a recent attack in the New York Times. Like most Krugman posts, it has more economic fallacies than one can debunk in a short article, so I will stay with one point: Krugman’s belief that inflation is a cure-all to recessions and that anyone who opposes it does so out of ignorance at best and malevolence at worst.
Over the years, Krugman has touted inflation as an economic remedy in the manner that some have pushed Ivermectin as a cure for covid-19, although I suspect that Ivermectin might be the better bet. (I am making an analogy, not a medical statement, so if you send me an angry email about Ivermectin, I will delete the message without reading it.) My larger point is that Krugman is trying to separate himself from the Austrians by promoting inflation, something the Austrians cannot and will not support—and for very good reason.
In typical fashion, Krugman focuses upon a misnaming of the Frankfurt school by Mark Levin of Fox News as “proof” that Austrian economics is false:
It’s questionable how many of these self-proclaimed “Austrians” actually knew what they were endorsing. In general, when right-wingers talk about intellectual history, you want to fire up your fact-checking. For example, Mark Levin of Fox News has a best-selling book claiming not just that the current American left is in the thrall of European Marxists but more specifically that they’re followers of Herbert Marcuse and the Frankfurt School—except that he keeps calling it the “Franklin School.”
The study of logic calls this a non sequitur in which he takes someone who would not be called an Austrian economist under any circumstances and then claims that Levin’s misnaming of the Frankfurt school proves Austrians are not to be taken seriously. (Perhaps this is New York Times logic.)
After opening with a logical fallacy, Krugman goes on to misrepresent the Austrian position on the causes of the Great Depression (and why it lasted through the 1930s) and make false claims about the Austrian version of the “debate” between Austrians and Keynesians:
And the 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.”
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 inevitable difficulties of adjusting to the aftermath of a boom. In their view, excessive optimism had led to the allocation of too much labor and other resources to the production of investment goods, and a depression was just the economy’s way of getting those resources back where they belonged.
I am unaware of any Austrian economics literature that claims there was a “titanic battle” between John Maynard Keynes and F.A. Hayek. In fact, Austrians agree that while there was some interest in the Austrian business cycle theory in the early 1930s, it quickly was eclipsed, at first with the flurry of New Deal legislation in 1933 and later with the publication of Keynes’s General Theory. None of the best-known Austrian economists, from Ludwig von Mises to Murray Rothbard to any of the modern Austrians, ever has made the claim that Krugman attributes to them.
Then there is the actual Austrian analysis itself. Krugman misrepresented it in his “Hangover Theory” article, so we should not be surprised that he does it again. First, and most important
Article from Mises Wire