I explain at Mises.org. However, we Austrians must always engage in product differentiation and so:
[B]ecause the Austrians have a rich model of capital, they can explain why a painful bust, or recession, is necessary. In other words, after the central bank backs off and lets interest rates rise to their correct level, the entrepreneurs and workers can’t simply slap their foreheads and say, “Whoops, let’s try that again.” The economy can’t simply revert to its position on the eve of the boom, because irrevocable investment decisions have been made.
This point actually shows the deficiency in the focus on worker retraining, exhibited by Plosser in the quotation above, or by Chicago School economist John Cochrane, who argued in late 2008, “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”
By focusing primarily on skill/occupation mismatch, Plosser and Cochrane overlook the important role of capital consumption during the boom period, which Mises emphasized. If a recession were merely about retraining workers, then Krugman’s critique of the Austrian theory would make more sense: after all, it presumably took some time to train the new construction workers (and investment bankers) when they went into their occupations during the housing boom, so why are we stuck with an awful recession when they need to leave those industries?
But as my simple sushi story demonstrated, we can easily understand a large surge in unemployment when we realize that the underlying capital structure — the tools, equipment, and goods-in-process — of the whole economy went along for the ride too.
For a snappy quotation to supplement Cochrane’s, I’d say this: After the housing bubble burst, the problem wasn’t just that some construction workers should have been busboys; the problem was also that some backhoes should have been ovens.