<blockquote>'As I have read countless analysts, including professional economists, offer "solutions" to the financial crisis, I have become more convinced of the importance of capital theory.'
- Robert P. Murphy,
The Importance of Capital Theory, October 20, 2008</blockquote>
'You can't understand Austrian business-cycle theory (ABCT) unless you first understand the Austrian view of the capital structure of the economy.'<blockquote>'You can't understand Austrian business-cycle theory (ABCT) unless you first understand the Austrian view of the capital structure of the economy. In
this article, I showed how Krugman was simply incapable of grasping ABCT because he lacks a rich enough model of capital. For those newcomers who are unfamiliar with ABCT, I strongly encourage you to read the fuller discussion in the hyperlinked article.
For our purposes here, a brief recapitulation of the argument: In a market economy, prices really serve a function; they are not mere appendages of exploitative power relations, but instead market prices signal real, underlying scarcity and help everyone in the economy adjust his plans in light of reality. The interest rates on various loans also mean something; they are not arbitrary.
In particular, the market interest rate coordinates the "intertemporal" (i.e., across-time) activities of investors, businesses, and consumers. If consumers become more future oriented and want to reduce consumption in the near term in order to provide more for later years, what happens in the free market is that the increased savings push down interest rates, which then signal entrepreneurs to borrow more and invest in longer projects. Thus resources (such as labor, oil, steel, and machine time) get redirected away from present goods, like TVs and sports cars, and the freed-up resources flow into capital or investment goods like tractors and cargo ships.
Now when the Federal Reserve
artificially reduces interest rates below their free-market level, it sends a false message to entrepreneurs. Firms begin expanding as if consumers have increased their savings, but in fact consumers have
reduced their savings (due to the lower interest rates). Businesses that churn out durable goods, such as furnaces, cargo ships, and, yes, houses will find business booming, because these sectors respond positively to low interest rates.
- Robert P. Murphy,
Austrians Can Explain the Boom and the Bust. March 19, 2009</blockquote>
'In the real world, erecting higher trade barriers will reduce economic output in both countries, whereas reducing trade barriers will lead to greater output.'<blockquote>'It's one thing to criticize Paul Krugman for
his views on Austrian economics, but only a brave soul would have the temerity to question Krugman's discussion of the Keynesian approach to international trade, right? Since Krugman is the world's most famous living Keynesian, and he won the Nobel (Memorial) Prize for
his work on trade theory, accusing him of a basic error on this score would be akin to telling Madonna she knows nothing of pop music.
...
I have read Krugman's post a few times to make sure I'm not missing something, but I must confess I think he is committing a very basic error. Specifically, he is confusing the Keynesian
accounting identity with a
causal theory of how changes in one of the variables lead to changes in the other variables. It is particularly ironic that Krugman has made this mistake, since
he shredded it when someone else made the same mistake (in a different context).
A final note before I dissect Krugman's error: In this article I am conceding the basic Keynesian framework, just for the sake of argument. Elsewhere
I have shown that the entire notion of trying to artificially "create jobs" through government programs is a bad idea, because recessions are the market's way of reallocating resources after an unsustainable boom. But in order to isolate Krugman's particular mistake, I want to correct him using the standard Keynesian approach.
...
In the real world, erecting higher trade barriers will reduce economic output in both countries, whereas reducing trade barriers will lead to greater output. For a country mired in recession, new trade opportunities raise the productivity of labor and allow unemployed workers to be integrated back into the economy more quickly than they otherwise would be. If the government wants to stimulate job creation, cutting trade barriers is a good idea.'
- Robert P. Murphy,
Krugman Falls into the Keynesian Accounting Trap, December 21, 2009</blockquote>