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whereaminow (58.64)

Krugman Attacks the Austrians, And Gets Crushed Again

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33

April 08, 2010 – Comments (17)

Krugman's blog.  Enjoy the responses in the comments section.  I've never seen so many excellent defenses of the Austrian School in a NYT blog.  

And yes, Krugman still can't comprehend Austrian Theory of the Business Cycle.  For Krugman, there is no Capital Theory.  (Keynes famously bragged that he had separated Capital Theory from economics. In other words, it didn't fit his model so he brilliantly discarded it.)  To Keynesians, all money is a homogenous lump and has the same effect everywhere.  So if I say, "you are altering the structure of production" it does not register with them.  Again, it's like trying to teach a witch doctor how to heal an infection.  You're both doctors, so to speak, but it's a completely language.

I wish I had more time right now to go into this. It's always the most fun when the Emperor announces that he has no clothes.  

The sad thing is that Robert Murphy and David Gordon already responded to this attack last time, sliced it and diced it, and Krugman refuses to acknowledge it or respond to Murphy's rebuttal.

The Importance of Capital Theory

Austrians Can Explain the Boom and the Bust

Hangover Theory: How Paul Krugman Has Misconceived Austrian Theory

Notice how all 3 of these responses are written before Krugman's blog today, and yet he clearly hasn't read any of them.

I suppose it's ok to be wrong.  After all, if Krugman wasn't wrong he wouldn't be working for the New York Times.

David in Qatar

17 Comments – Post Your Own

#1) On April 09, 2010 at 12:51 AM, binve (< 20) wrote:

Right on man, Krugman is a tool

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#2) On April 09, 2010 at 4:45 AM, XMFSinchiruna (28.54) wrote:

+1 rec for every post that reveals the fatal fissures running through Krugman's entire conceptual paradigm.

It must be interesting living in his universe, but I prefer the one we call reality.

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#3) On April 09, 2010 at 5:22 AM, FleaBagger (32.74) wrote:

Chris: my favorite universe is the one I made up. Trees are purple and the sky is green here.

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#4) On April 09, 2010 at 8:39 AM, jdlech (< 20) wrote:

Would anyone like to verify this post - (taken from the cited website)?

[quote]
The Austrian school says that the axioms of human action need no empirical verification. I believe that any methodology that rejects empirical testing of theories is flawed. Once the scientific revolution reached the social sciences, any school of thought that denied the empirical method should have been abandoned just as happened in the physical and biological sciences.

One of the central tenets of Austrian economics is that the laws of human action are not falsifiable. But falsifiability is an absolute requirement of a scientific theory. If a theory makes predictions about reality, it can be falsified. All we'd have to do is find what predictions it makes, then test if those predictions are true. If a theory makes predictions that turn out to be false, we know our theory is wrong. Austrians seem to be saying that if we observe one thing and our theory tells us something else, we should ignore what we just saw and continue believing in our theory. Our theory won't be falsifiable only if it makes no predictions, and if it makes no predictions, it's useless for anything.

To paraphrase Russell Kirk, Austrian Praxeology provides sham religion and sham philosophy, comforting in its way to those who have lost or never have known genuine religious faith.
[/quote}

If true, then the whole 'theory' is just a load of crap.

This sentiment is duplicated by others too.

[quote]
As a recovering Austrian economist, I think that the key flaw in Austrian economics is its insistence that economics is an a priori rather than an empirical science. As a result, when empirical evidence supports their positions, they use it. When empirical evidence falsifies their positions, they declare that it's irrelevant because economics is a priori. I don't think that they are always disingenuous about that kind of argument, but sometimes, definitely.

As for Austrian economists' correct prediction of a crash, I note that Austrians have been predicting crashes non-stop since I was a student (and a believer) in the late 1970s. Even a broken clock is right twice a day. Sooner or later, a crash was going to come, and the Austrians were going to be right.

I do not believe that Austrians are conscious tools of big business, but they are, as the 19th-century classical economist J.E. Cairnes once observed, certainly aware of who funds their foundations and their research.
[/quote]

What I'm getting from the debate is that the Austrian Economists seem to agree that a certain level of regulation is required to prevent people from acting along each ends of any particular bell curve in order for their models to work.  But since regulations are anathema to them, they would rather have their theory shot full of holes than to advocate regulation.

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#5) On April 09, 2010 at 9:22 AM, Melaschasm (89.97) wrote:

Every school of economics has basic underlying assumptions about human behavoir.  The difference is that the Austrian school admits to their assumptions, while the Keynesian school does not.

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#6) On April 09, 2010 at 9:27 AM, 4everlost (30.26) wrote:

Maybe I'm missing something - I'm not an econ expert.  How can this be confusing?

"...why isn’t there similar unemployment during the boom?"

Well, maybe it's because during a boom there is greater demand for jobs - afterall, it is a boom, right?

Rec #14 

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#7) On April 09, 2010 at 10:04 AM, outoffocus (24.48) wrote:

Looks like TMF deleted the wrong comments.  Well anyway, the best comment so far was by goodrich4bk:

"Here's my American Debt Peon theory of unemployment in today's slump. Low interest rates and banking deregulation created excessive debt relative to income leaving the consumer with little disposable income. The quickest way to stimulate demand (a Keynesian objective) would be to reduce debt. This is also the most fair as it involves only the creditor and debtor, not third party taxpayers, savers and the prudent. The quickest way to reduce debt is through bankruptcy...."

"Of course, this solution is not in the interests of banks whose earnings come from debt service. Reduce debt and you reduce debt service income for the banks. This solution is also not in the interest of bank investors and creditors whose money has been lent to debtors and would be partially lost in bankruptcy. That is why Congress, which is owned by the banks, made bankruptcy more difficult, expensive and, in some cases, unavailable to debtors in 2005 just prior to the financial collapse. It is also why Congress continues to oppose residential mortgage debt relief --- even though mortgage debt service takes the greatest share of American disposable income."

I couldnt have said it better myself.

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#8) On April 09, 2010 at 10:47 AM, whereaminow (58.64) wrote:

The interesting thing here for me, is that whether or not you agree with the Austrian Theory of the Business Cycle, clearly many commentors on PK's blog do.  The fact that the "little guy" going about his life can understand it (when almost no one had heard of it two years ago) and ivory towered intellectual PK can't speaks volumes about his capacity to admit new learning into his world.

PK in wonderland.

David in Qatar

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#9) On April 09, 2010 at 1:38 PM, jdlech (< 20) wrote:

Argumentum ad populum.

Just because a lot of people can understand it does not mean it, or they, are right.  Tomatos were once popularly thought poisonous.  Anyone who would eat a tomato and live was considered a witch or warlock.  So they killed anyone who survived eating a tomato.

Iodine has been popularly known as a poison for over a thousand years.  As such, it was outlawed by nearly every nation in Europe and the Middle East.  But taking a trace amount cures goiter.  Unfortunately for those who used it to cure goiter were also killed as witches or worlocks or evil sorcerers.  Thus the cure for goiter was supressed on two continents for hundreds of years.

I often find popular beliefs today that make no sense or actually detrimental to the health and/or well being of those holding the belief.

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#10) On April 09, 2010 at 2:40 PM, jdlech (< 20) wrote:

As I read more and more, I find more and more mistaken premises in A.E..  Another mistaken premise is the heavy reliance on the rational utility maximization of homo economicus to form basic premises.  The ideal is nowhere near approached by anybody.  No individual has ever achieved the ideals of homo economicus, let alone large populations.  Once again, I find the A.E. to be a theory ungrounded to reality.

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#11) On April 09, 2010 at 3:05 PM, Melaschasm (89.97) wrote:

rational utility maximization is not exclusive to the Austrian School of economics.  It is an underlying principle of all the different economic schools, including communism.

I am not sure what your exact issue with the theory is, but the basic concept that people tend to make rational economic decisions, based upon the information they have seems logical to me.  To get past the economic mumbo jumbo, the theory basically says that people tend to be greedy and selfish.

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#12) On April 09, 2010 at 3:06 PM, whereaminow (58.64) wrote:

jdlech,

This an example of people talking past each other.  The article cited claims that Austrians reject scientific models.  Austrians claim that modern econ fails because it is scientistic in that it mimics the methods of physical sciences, so it looks like science, but it's complete junk as it ignores the simple that humans are not atoms bouncing around in jars.

From that perspective, it is modern econ that is the sham religion based on positivism.  I talked about this here, here, and here.

David in Qatar

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#13) On April 09, 2010 at 5:12 PM, jdlech (< 20) wrote:

1. the gun is necessary to keep Paul from dying of destitution.  We have 5,000+ years of empirical evidence that proves Peter is unwilling to keep Paul alive at Peters own expense beyond the amount necessary to prevent his conscience from keeping him up at night.  If this were not so, then there would have been no need for most tribal laws concerning orphans and widows 5000+ years ago.  Their existence obviates the need - and thus the point.

2.  Hydraulic despotism is an obvious example where people enter into an agreement knowing they are getting the short end of the stick.  Additionally, I can prove that most people who buy insurance are willingly entering into a detrimental contract - irrationally.  The market is rife with people willingly entering into personally detrimental contracts - knowingly and otherwise.  This puts the lie to the basic premise that such contracts either don't exist, or can be discounted.

Thus, humans CAN and DO behave irrationally either through force or for survival (hydraulic despotism) or out of ignorance (information deficit), and sometimes just plain irrationality (emotional decisions).  Since individual humans can (and we are nothing if not gregarious), so can groups, organizations, and nations.  Thus, water CAN flow upward - when it's a metaphor for human behavior.

3. The holy grail in the marketplace is to obtain and maintain the UNfair advantage.  Monopolies, price fixing, export dumping, ponzi schemes, race fixing; all are illegal because they are so obviously unfair.  The process of discovery finds these strategies and business models as well as the legal ones.  But this is a feature of currently practiced Capitalism.  The assumption you made is that Capitalism is all that exists.  You are not wrong, but you should have specified.
If you want a model of entrepreneurship, just exclude that which would obviously fail.  Even illegal activity is 'entrepreneurship' - the pursuit of an UNfair competitive advantage.  Which, by the way, is why the 'war on drugs' is such a failure.  All it has done was to eliminate most competition to make it extremely profitable for those who don't get caught.  Those who manage to bribe enforcement officers, judges, and other govt. officials have an UNfair advantage over their competition.

Another means other than trying to predict human behavior is to arrange the system itself so undesirable behavior becomes either physically impossible or irrelevant.  For instance, the current system of laws and finance charges my prevent most law abiding citizens from bouncing checks most of the time.  But it does not prevent the criminal or the incompetent.   If you don't like people writing bad checks, you eliminate checks entirely and replace them all with debit cards.

All economic action is purposeful action - Ludwig Von Mises
See #2 for reasons why that statement is false.

Here's two of your own phrases taken from two adjoining paragraphs:

Despite what romantics tell you, scientists and academics, just like every other human on this planet, find praise to be flattering.
But...
You can't model human behavior. 

If the second were true, then the first is false.  The second phrase is completely wrong.  If it were true than genetics would have no influence on human behavior - absolutely zero.  In fact, there would be no such thing as human behavior - no way to define what 'human' means in term of psychology, sociology, behavior, etc..  The statement implies that there is no human behavior to model. One might even take that to imply there is no such thing as a social norm, social mores, or social basis for a civilization to exist.

The trouble with complex models is that we fail to take everything into account.  The same is true of weather models. There is a fallacious argument that goes "it is difficult, therefore it must be impossible".   Because our models cannot predict the weather to a satisfactory degree of accuracy does not necessarily mean that modeling the weather is impossible.  Human behavior is similarly complex, similarly difficult, but no more or less impossible because of it.

If  you can't model human behavior, then we can't tell the effect of all the trillions of dollars we've spent on advertising.  It would be just as likely to all been wasted as not.  Do you honestly believe companies have spent all that money on advertising without knowing exactly how much of what effect it will have on the target audience?  That requires human behavioral models - based upon empirical data - to predict.

There IS such a thing as human behavior.  What most people have a hard time grasping is that human behavior changes when confronted with new information.  Models don't yet know how or why those changes occur.  But there are a few obvious ones that I listed earlier.  Such as when confronted with information deficits and hydraulic despotism or emotional stress.

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#14) On April 09, 2010 at 5:55 PM, whereaminow (58.64) wrote:

jdlech,

1. You'll have to show me the 5,000 years of empirical evidence.  I am aware of 5,000 years of governments slaughtering each other, enslaving each other, and murdering dissidents.

2. It is well known that all tyrannies exist with popular support.

3. This is the Marxist interpretation.  I have addressed this in other areas and will return to it again in the future.

All economic action is purposeful action - Ludwig Von Mises

We're not talking about sneezing here.  We are not talking about coercion either.  We are talking about voluntary exchange.  Tyrannies (actually all governments) that interfere with voluntary exchange distort economic action.

============================================

Here's two of your own phrases taken from two adjoining paragraphs:

Despite what romantics tell you, scientists and academics, just like every other human on this planet, find praise to be flattering.
But...
You can't model human behavior. 

If the second were true, then the first is false. 

======================================

Not at all.  The first is about information.  Praise is information.  I should say that it is generally found to be positive information, i.e. flattery, but I'm sure some people find certain praise to not be so.  It's still information however.

Behavoir, or action, is how someone responds to that information.  That is not predictable and can not be modeled.

You can quibble over how I worded it, but I know my readers understood it. 

David in Qatar

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#15) On April 09, 2010 at 7:52 PM, whereaminow (58.64) wrote:

jdlech,

If  you can't model human behavior, then we can't tell the effect of all the trillions of dollars we've spent on advertising.  It would be just as likely to all been wasted as not.  Do you honestly believe companies have spent all that money on advertising without knowing exactly how much of what effect it will have on the target audience?  That requires human behavioral models - based upon empirical data - to predict.

But how did the first company to use advertising know that it would work?  Companies certainly copy each other when they find methods that work, but how did the first company to use that specific method know that it would work?  How many advertising methods still fail despite the tremendous amount of empirical research?

These problems can't be solved a priori on paper using mathematical models.  Pareto addressed this idea in a paper some 15 years before Mises wrote about economic calculation problems involved in central planning. 

David in Qatar

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#16) On April 12, 2010 at 1:31 PM, nzsvz9 (< 20) wrote:

Whenever I read something from Krugman I can't help but hear a distant voice saying ...

Hi! I'm actor Troy McClure, here with Econostician Paul Krugman. You might remember us from videos such as "Surprise: Unemployment is now 10% for good", and "Politi-Nomics - Not just for Elites" and "Rich Dad. Poor Dad. Just not a Rational Dad." ...

Known as Rational Economic Entity for Self Interest: nzsvz9

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#17) On April 14, 2010 at 2:05 PM, nzsvz9 (< 20) wrote:

All economic action is purposeful action - Ludwig Von Mises

This does not mean you will gain from each transaction - it just means you go about doing economic things because of choices you make. You do things on purpose. You can purposefully perform as random an economic act as you can devise - but you still choose to do it :-)

Known as economic choice maker nzsvz9

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