Krugman on Mises on the Great Depression

Krugman on Mises on the Great Depression
Profile photo of Robert P. Murphy

Paul Krugman recently piggybacked upon a critique of Mises’ views on the Great Depression. There’s really nothing new in Krugman’s post, but as an ardent Misesian with a book on the Great Depression and a public vendetta against breadlines1Krugman…I am pretty much contractually obligated to write a response.

In the first place, it’s interesting that Krugman refers to the source of his information as “The blog Social Democracy for the 21st Century,” rather than listing the actual author. This is presumably because the author lists his name as “Lord Keynes,” and Krugman realized that if he said, “The blogger Lord Keynes has written a fascinating account…” then even Krugman’s loyal readers would be a bit creeped out.

I also draw your attention to one of Krugman’s favorite rhetorical ploys when he wants to ridicule someone. Krugman writes, “First of all, as the blog tells it, von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory…” Krugman often uses that caveat “basically,” so that he can make his charge stick, because nobody can ever prove him wrong. Watch, I’ll demonstrate: Paul Krugman did some good work in technical, peer-reviewed economics, but on his NYT blog he basically applauded every expansion of State power and rejected every argument for limited government put forth by libertarians. See how that works? Don’t even bother trying to refute me, because I just need to point out a few examples and my “basically” goes through enough so that I’m not demonstrably lying.

Anyway, back to Krugman. He says, “ABCT is essentially a story about the excesses of the boom; it offers no clear or plausible story about how that boom leads to a sustained slump. And von Mises was in effect already conceding that point by 1931.

Mises did no such thing. In “Lord Keynes”‘ post, he quotes Mises as writing (in 1931):

The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media….Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.

The first three sentences are crucial: Does this sound like Mises is “in effect” abandoning Austrian business cycle theory, as Krugman alleges, because it can’t explain how booms lead to sustained slumps? Of course not. Mises was simply saying that something qualitatively different was happening this time around, making the depression in the early 1930s different from the typical boom/bust cycle for which he had developed his business cycle theory. (Incidentally, here I have answered Krugman’s critique of the “hangover theory”–which he links in his current post.)

Krugman then goes into his familiar discussion of inflexible prices. According to Krugman, the market economy is so fragile and prone to involuntary unemployment because of “sticky” wages and prices; it is the acknowledgment of this empirical fact that separates the scientific Keynesians from the ideologues in the profession. And yet, even though it is sticky wages that make the “classical” reliance on markets so wrong, Krugman always makes sure to tell his readers that making wages more flexible (by taking away union privileges and abolishing government unemployment assistance) would make things even worse. Only government and central bank stimulus can save the day. Besides my noting how slippery the argument is–remember, Krugman says sticky wages mean markets don’t work, but even if we make wages flexible then markets will work even worse–I also point readers to my lengthier response to this standard Keynesian argument.

As I said at the beginning, there’s really nothing new here, except Krugman’s bogus charge that Mises threw in the towel on his own business cycle theory. To repeat, this is not at all a correct reading of the quotes from Mises that the blogger “Lord Keynes” produced. On the contrary, Mises was simply showing how (a) artificially low interest rates caused an unsustainable boom followed by an inevitable slump, while (b) government price-fixing and other distortions prolonged the slump. I have written a similar analysis for our own times: The Fed contributed to (or arguably caused) the housing bubble, which necessitated a crash. But it was the Bush/Obama “stimulus” programs and other interventions–such as raising the minimum wage and extending unemployment benefits–that have kept the official unemployment figures so high, and have turned this fiasco into the second Great Depression.

  • Rob Mews

    Krugman's ravings are not even worth a cracker. His later problem solving ideas includes minting a trillion dolar coin to sole the country's debt problem. He doesn't even understand that the problem isn't "not enough currency". The problem is production is not enough to satisfy existing demands at a specific price. Government interventions only places another party between the production and demand forces so that this third (government) party tries to guess what the other two parties balance business is and the ideal price of goods end services and constantly gets the whole wrong. Not really any difference from what happened in the USSR. The short of it is that the only way government "knows" what wages and prices should be is by going to the market, but they are constantly messing up the market by making stupid price related rules. All you have to do is ask them how they are going to actually specifically determine a price without going to the market. There is no rational or logical other way. If anyone knows please explain it and I am safe asking that since nobody can. Krugman's idea is like a mad dog chasing it's tail.

  • Garrett M. Petersen

    It's baffling to me that anyone would try to explain the Great Depression as a consequence of forces that are always present in the market system. Abstracting entirely from economics, don't special cases deserve special explanations? Keynes is the guy trying to explain the sinking of the Titanic entirely in terms of common shipbuilding conventions, when what really needs to be explained is why the Titanic sunk while all those other ships didn't.

  • Lee Waaks

    This is a convincing reply. However, there are some neo-Ausrians (e.g. Steve Horwitz) who believe that sticky prices do matter. In his book on macro, Horwitz makes a good argument that if the demand for money increases, price adjustments can be very difficult due to the "who-goes-first" problem, i.e. should the individual retailers or wholesalers cut prices first? Neither one has a bird's eye view of the economy and cannot tell whether or not they are confronted with a decreased demand for their particular products or an economy-wide increased demand for money.

  • Mario Rizzo

    I am glad you posted this. But keeping up with Krugman can be a full-time job. Whew! The equivocation of Krugman on flexible wages and prices has been with the Keynesians for decades. Keynes emphasized the argument that flexible prices will do no good. I have always thought that the argument is weird and indeterminate on its own grounds. Must we wait for the *point* of full employment to have a price system. Price flexibility at ANY other time, by Keynes's logic, would lead to cumulative decline. So, until full-employment, no resource allocation??? No transmission of knowledge???

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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