28
Jan
2014
My Response to Krugman on Mises on the Great Depression
My latest post at Mises Canada. The intro:
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 Krugman…I am pretty much contractually obligated to write a response.
Incidentally, I’ll respond in greater detail to “Lord Keynes”‘ specific post later this week. I wanted to distinguish my reply to Krugman, since he made a much more generic (and weaker) attack, using LK’s post merely as a springboard.
Quote: “other interventions–such as raising the minimum wage and extending unemployment benefits–that have kept the official unemployment figures so high”
In 2006, there were 409,000 working at the minimum wage. In 2012, there were 1.5 million working at the minimum wage.
where is the evidence that raising the minimum wage in 2007 drove up unemployment? Minimum wage workers tripled since 2007 and they’re only a small percentage of payroll employment.
Table 1. Employed wage and salary workers paid hourly rates with earnings at or below the prevailing federal minimum wage by selected characteristics, 2012 annual averages
http://www.bls.gov/cps/minwage2012tbls.htm
Table 1. Employed wage and salary workers paid hourly rates with earnings at or below the prevailing federal minimum wage by selected characteristics, 2006 annual averages
http://www.bls.gov/cps/minwage2006tbls.htm
Why is the ratio of job openings to unemployed so high if extending unemployment benefits drove up unemployment? Why aren’t wages rising if there is a labor shortage due to extending unemployment benefits?
“In 2006, there were 409,000 working at the minimum wage. In 2012, there were 1.5 million working at the minimum wage.”
Imagine a tall cone standing with its apex (note to joe: its point) on the table. Draw a circle on the cone parallel to the table at 6.15 cm. measure the length of that line. Now draw one at 7.85 cm. Measure.
By the way, if you cut along the lines, at through away the part with the apex, which will discard more cone?
… cut along the lines, and throw away the part with the apex …
FWIW I think it’s too late to discuss this rationally, either we have another war and the statists can claim a win, or we manage to avoid a war long enough that people start to understand that repression is bad.
By the way Krugman in a fan of inflation, which essentially is just a way of dropping the minimum wage in real terms (by stealth). So Krugman hates the minimum wage as well, he just won’t admit it.
Ehhh, most people caught up in that particular c(k)ontradiction are supposedly in favor of indexing the minimum wage to the CPI (that’s what they do in my home state of Oregon).
That way you can have your cake and eat it too! Lots of great inflation (that we all know benefits the economy because of keynesian magic) as well as regular increases in the minimum wage to keep the ignorant masses happy and believing they’re getting ahead.
Nevermind that the government controls the CPI numbers and can cook them to say whatever they want. I’m sure that’s not important at all.
“By the way Krugman in a fan of inflation, which essentially is just a way of dropping the minimum wage in real terms (by stealth). So Krugman hates the minimum wage as well, he just won’t admit it.”
This is his answer to sticky prices, and he literally says this in his debate with Pedro Schwartz.
“where is the evidence that raising the minimum wage in 2007 drove up unemployment? Minimum wage workers tripled since 2007 and they’re only a small percentage of payroll employment. ”
Post Hoc Ergo Propter Hoc.
Doesn’t your analysis go any further than this?
If I stomp on your foot, you can still progress forward. Forward motion isn’t proof that my initiated violence did not hinder you. The difference between what your forward motion WOULD HAVE BEEN OTHERWISE and the now hindered motion is the calculated effect of the assault.
“Why aren’t wages rising if there is a labor shortage due to extending unemployment benefits?”
Because, absent of intervention, the wage level would be lower than it now is?
Try to sell 1 million shares that you hypothetically own of an illiquid penny stock. What happens? The bid has to drop to absorb the volume, no?
Now what happens when you want to dump the same volume and there is a regulated minimum price that you cannot sell below? You are left with shares that you cannot sell.
Switzerland has no minimum wage and has an unemployment rate of 3 percent. Also, you cannot show what the unemployment rate would have been without the minimum wage in place. Also, government imposed minimum prices in all other markets causes surpluses. The labor market is not some special thing that does not conform to the laws of economics.
What is the Austrian explanation as to why flexible wages reduces unemployment? To me at least its not intuitive.
Stat from a position where workers would work at the current wage rate, but employers won’t hire them all. Sounds like we need to reduce the wage rate to clear the market.
But:
The only reason that employers hire is because they think they can sell their end product at a profit. If they reduce the wage rate then they are (in the aggregate) reducing both their cost of production and their potential market (since workers are a large part of demand for goods). So hard to see how reducing wages will increase the amount of goods bought by workers themselves.
Its possible that reducing wages may increase sales in other ways. Perhaps if wages fall more than prices then profits will rise and the people to whom these profits accrue will buy more ? This sounds feasible in theory except that (probably) people who earn profits tend to save rather than spend a large part of increased profits so this might not work in .
A more feasible explanation is that as wages fall so do all other prices. And as prices fall so the value of money increases and as this in turn increases the value of people’s savings they eventually start to spend more and this allows final sales to increase as a direct result of falling wages. This seems to make sense (but is rejected by Krugman because falling prices increase the real value of debt and allegedly makes people worse off not better off).
I know that Austrian’s don’t like the concept of AD but in a world where spending out of wages makes up a large percentage of demand for final goods its hard to ignore it.
I’m genuinely curious how Austrian theory explains how falling wages would increase employment.
Transformer how do falling prices ever clear a glut? Let’s say there is a big inventory of water bottles. You might say, “Cut the price of water bottles.” But then the sellers of water bottles have a lower income, and they all drink water. Damn.
When the demand for water declines then (assuming flexible pricing) one would expect its price to fall. This will lead to a decline in its suppliers income. However under normal circumstances this will be accompanies by slightly increased demand for all other products and a slight increase in the income of their suppliers so overall income will probably stay the same.
In theory this could be the same for wages:
When wage rates fall then this reduces wage earners income. If prices don’t fall then capitalists income will increase. However .this increased income can only be realized if capitalists collectively spend all that additional income (on either consumer or production goods).
In a recession I think this would be unlikely to happen. Hence my curiosity as to how Austrian get around this problem.
Perhaps they just ignore it and talk about water bottles.
Transformer I admit I was flippant in my response. I will elaborate on this in a future Mises CA post. But in the meantime: What is it specifically about wages that causes this problem? What if the sellers of hot dogs (street vendors) are really living on tight budgets during a recession? Doesn’t that mean flexible hot dog prices would contribute to the problem? etc.
Or, what if wages just in 10% of occupations became more flexible? Would that help? Is it just that at some critical point, wage flexibility (applied to x% of workers) then goes from helping to hurting?
Do you at least see the problem of saying:
(1) Aggregate Demand matters because prices and wages are sticky,
and
(2) If prices and wages were flexible, Aggregate Demand would matter even more.
?
I can see that if all prices are fully flexible and all markets had to clear (no inventory build-up) then the problem goes away. The labor market will always clear and we will have optimal employment levels (the price and wage levels would be the things that did all the adjusting)
You only can get these kinds of “deficient AD” type problems if you assume some price stickiness in some markets (that is: When faced with lower demand at current prices suppliers will increase inventories and reduce output rather than reduce prices to market-clearing levels). In such case its possible to design a model where falling wages don’t increase employment. And real world-economies appear to have some of the attributes of these kind of models in terms of price stickiness for final goods.
It is this kind of scenarios that I am not really seeing Austrians addressing beyond the view that “price stickiness” would not exist in a truly free market, and I just don’t think this is a realistic view since price stickiness is probably a feature and not a bug in such a free market.
See my response to your inquiry below. I think I addressed it.
So employment is zero then. We start from a position where no one is employed. Interesting, but probably not relevant to any discussion.
Would it help if I said not everyone’s wages will fall?
Should I mention the concept that an economy has a structure to it, division of labour, exchange of goods not for identical goods but for different goods, because how the heck can an economy be based on people exchanging identical goods? Would you exchange an asparagus for another asparagus, when you already have a perfectly good asparagus?
Your confusion might come from:
[A] reading Krugman in the first place,
[B] thinking for a brief moment that Krugman is honest enough to actually outline what he is arguing against,
[C] even trusting Krugman to accurately represent LK’s argument (which he doesn’t),
[D] expecting LK to accurately represent what Mises was saying (which he doesn’t).
Tel:
I’m not siding with Krugman here.
I just thought this through and do see see a problem with the claim that falling wages can always cure unemployment that does seem worthy of explanation.
I was kind of hoping that I had missed something simple but if that is the case neither you nor Bob have identified what that is.
Hi Transformer,
I am not sure about everything you just typed but I long for the days when business could afford to pay somebody to clean door knobs, etc.
Nowadays, all the menial task are simply ignored, cost prohibitive.
“The only reason that employers hire is because they think they can sell their end product at a profit. If they reduce the wage rate then they are (in the aggregate) reducing both their cost of production and their potential market (since workers are a large part of demand for goods). So hard to see how reducing wages will increase the amount of goods bought by workers themselves.”
Hazlitt dealt with the theory you are espousing here:
mises.org/books/economics_in_one_lesson_hazlitt.pdf
Chapter 21: “Enough to Buy Back the Product”.
————————–
But there is an even bigger problem with what you said. You are assuming total wage payments necessarily fall with a fall in wage rates. But that doesn’t necessarily follow. In a recession/depression, there are many postponed investments, awaiting a fall in prices before they can be profitable, as well as larger cash balances relative to “spending”. With a fall in the price of labor, it is very likely, especially in a recession/depression, that it will be accompanied by higher total wage payments.
But let us suppose, for the sake of argument, that total wage payments did not rise. A fall in wage rates is accompanied by a fall in total wage payments. What would happen? Yes, consumer goods expenditures would likely fall. But so what? Consumer goods are not the only goods that are sold, generate revenues, and generate profits and provide profitable investment opportunities. Capital goods investment, production and sales also generate revenues and profits. If wage rates fall, and more workers are employed, what will happen is that the prices of capital goods will fall. This is because of two main reasons. One, wage costs are a major determinant of capital goods costs, and two, with more workers working, the production of capital goods rises and hence the prices of capital goods are otherwise lower than they would have been.
So with lower consumer prices, lower capital goods prices, how is there any “demand side” downward pressure on employment here? There isn’t any in fact. Lower selling prices accompanied by lower business costs means there is not a permanent reduced profitability.
You are a hypocrite, Murphy:
http://socialdemocracy21stcentury.blogspot.com/2014/01/austrians-rush-to-defend-mises.html
Wow Lord Keynes, you “predicted” that Austrians would rush to defend Mises after you and Krugman attacked him? That’s astounding.
Hey, at least he gave you a formal bibliographic citation. That’s pretty classy. I’m lucky if I get the hyperlink pointed to the right post.
You’re a bonobo Kuehn. http://factsandotherstubbornthings.blogspot.com/2013/01/as-usual-in-reading-ken-b-comment-i.html?showComment=1357876147971#c2789072475386496333
You are really that impressed? Why? He made no predictions about the length and depth of the Austrian defense…
Heh.
Is this a joke?
You are a hypocrite because your work here:
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
https://files.nyu.edu/rpm213/public/files/Dissertation.pdf
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf
entails that that you himself should accept that the **classic Austrian business cycle theory** per se (using the natural rate) cannot explain recessions or depressions because that theory is badly flawed.
You say it needs to be reformulated using dynamic intertemporal equilibrium models.
So isn’t Krugman right that Mises’s ABCT as in 1931 was in essence wrong? — even if not for the exact same reasons that you would give.
That surely depends on how many rates there are. Bob might believe that there are THREE rates that matter. Then he’d be fine, since three are one.
Or any cluster of rates with a tight enough spread that the central bank can push their artificial rate lower than the bulk of the spread.
Ask yourself what happens if there is a natural spread of rates and the central bank only interferes in some of those… still implies manipulation of investment, so it still implies interference with the economy, and thus malinvestment which ultimately will need to be liquidated.
The best argument that LK has is central bank interference may only effect some of the economy, rather than all of it.
I might also point out that central banks are not even handed about who they bestow their cheap loans unto, so they actually redistribute wealth at the same time as they manipulate interest rates. Thus, an additional source of malinvestment appears.
Bob Murphy linked to a free session of one his Mises.org courses where he explained in detail objective and subjective value.
It’s sad that these anti-Austrians refuse to learn basic stuff.
http://www.flickr.com/photos/bob_roddis/9646722001/
So isn’t Krugman right that Mises’s ABCT as in 1931 was in essence wrong? — even if not for the exact same reasons that you would give.
If Bob agrees with Mises that the business cycle is due to credit expansions intertemporally misallocating real goods, but disagrees aspects of Mises’s interest rate theory, how does this commit Murphy to agreeing that ABCT is “in essence” wrong?
If you think Krugman can agree with Murphy that ABCT is (supposedly) wrong, but not for the same reasons Murphy does, why can’t it also be possible that Murphy agrees that ABCT is correct, but not for the exact same reasons Mises does?
“If Bob agrees with Mises that the business cycle is due to credit expansions intertemporally misallocating real goods, but disagrees aspects of Mises’s interest rate theory, how does this commit Murphy to agreeing that ABCT is “in essence” wrong?”
Because adding an “s” to all instances of “natural interest rate” completely, totally, and utterly changes the entire “essence” of classic ABCT.
I mean, it’s pretty devestating evidence against ABCT that during the housing bubble, Jones was paying a 1.836% mortgage rate, whereas Smith was paying 1.837%.
Therefore, we are not allowed to argue that artificially low interest rates and credit expansion had anything to do with the housing bubble as per ABCT. The “essence” has been destroyed.
This is why I always say that our opponents do not understand the BASIC concepts of non-intervention vs intervention and economic calculation.
Voluntary transactions produce observable objective information produced nowhere else. We can have deep philosophical arguments about the PRECISE nature of that information (Rothbard/Salerno vs Hayek; a single rate vs multiple rates of interest)) but such disputes and analysis do not impair the importance of the BASIC concepts themselves.
Our opponents are fearful of the BASIC concepts (because they can see where the argument is going if they are stated clearly), so they spend lifetimes engaging in obfuscation and context changing.
I’d go so far as to submit that the ABCT is not a “BASIC” Austrian concept. From the basic concepts, we can discern that artificial price distortions will impact longer term and more complex projects more than less complex and shorter term projects. How that plays out in the real world is an empirical question of fact.
OMG. More LK nonsense about the single “natural” rate of interest. Zzzzzzz
This is more pathetic hair splitting and vigorous hand waving just to make it appear to the unthinking statists that there really is something somewhere wrong with Austrian analysis (without actually understanding Austrian analysis). See see see, the debate really isn’t over!!!
Bob Murphy:
Heh this is actually funny. I had always assumed Roddis was being unfair when accusing LK–who has read a ton of Hayek–of not knowing the Austrian concept of economic calculation. But, based on LK’s angry retort, turns out Roddis was right.
http://consultingbyrpm.com/blog/2012/09/tom-woods-keeps-krugmans-feet-to-the-fire.html#comment-45198
Right to work states do not suppress freedom of association, they merely do not allow unions to block non-union labour getting employment. But wait, long ago it would have been considered perfectly normal that no person could prevent another person from taking employment, when did this change?
That would be the “National Labor Relations Act” of 1935 where right at the worst part of the Great Depression, the FDR government decided to take a decidedly pro-union position and allow the majority of workers at any plant to negotiate on behalf of all workers at that plant, even those who did not want to be in the union and furthermore allowed the union to either exclude non-union labour or at least demand payment from non-union labour and force them to accept whatever collective agreement was negotiated, nominally on their behalf.
In other words, government coercion worked in favour of the unions, not against it. That’s the historical fact of what happened.
In other, other words, this was repression of supply, absolutely no different from an economic point of view to the US government ordering farmers to kill their piglets or destroy their crops. Strangely enough Krugman will talk the legs off a table on matters of the Great Depression, but never gets around to mentioning killing the piglets. Why would that be? There’s a reason for everything in economics, so why doesn’t Krugman mention what everyone knows happened? Self interest is the first thing that comes to my mind.
“That would be the “National Labor Relations Act” of 1935 where right at the worst part of the Great Depression,”
No, that is rubbish. That wasn’t the “worst” part of the depression at all.
There was a recovery from 1933 and in 1934, 1935, 1936 and part of 1937, and unemployment was falling and continued to fall right up until Roosevelt adopted contractionary fiscal and monetary policy in 1937-1938.
The artificial expansion stopped because it was unsustainable absent further violent artificial measures and it was unsustainable because it was generated by the violent, artificial, unsustainable and thus temporary snatching of the wealth and purchasing power of others by the government, as opposed to real savings and the plans of free people. And all to solve a problem generated by the previous violent interventions of the statists but which they themselves cannot even bear to describe or think about.
Don’t you love how the statists cannot even wrap their minds around a simple concept like intervention vs. non-intervention, much less slightly more complicated concepts like Cantillon Effects and economic calculation? Don’t you love how these simple basic concepts which we repeat and repeat and repeat ad nauseam are always absent from their lying smears about us?
I love it.
much less slightly more complicated concepts like Cantillon Effects and economic calculation?
To have significant Cantillon Effects requires a world of highly flexible prices.
Yet most prices are relatively inflexible mark-up prices: so wouldn’t these alleged Cantillon effects be greatly reduced?
Let us see if you can display basic powers of reasoning here.
Another demonstration of a deep understanding how the terms of voluntary transactions produce essential information.
Another demonstration of a deep understanding of the difference between a voluntary and coercive transaction.
“To have significant Cantillon Effects requires a world of highly flexible prices.”
LK is right everyone. Prices were completely rigid:
http://research.stlouisfed.org/fredgraph.png?g=rtA
“A contemptible straw man.”
“LK is right everyone. Prices were completely rigid:”
Yes, still a shameless lair, I see.
Nah, just showing your claim of inflexible prices to be as bogus as your accusation Murphy is hypocritical.
“No, that is rubbish. That wasn’t the “worst” part of the depression at all.”
LK you’re blind. He didn’t say the National Labor Relations Act of 1935 was the worst part of the Great Depression. He said it was passed DURING the worst part of the Great Depression.
” He said it was passed DURING the worst part of the Great Depression.”
Exactly as I interpreted his words. Read what I wrote again.
I thought I gave the benefit of the doubt because I thought it was conventional widsom that 1935 was the worst year.
http://upload.wikimedia.org/wikipedia/commons/5/58/US_Unemployment_1910-1960.gif
It didn’t even register to me that you would be referring to the year 1935. The way you said “at all”, as if it is ludicrous to claim 1935 was the worst year.
1935 was not the worst year of unemployment at all:
http://1.bp.blogspot.com/-W_cVcCKfeMY/UdRIClfKthI/AAAAAAAAAI4/Wdb-795jCXo/s488/US+Unemployment+BLS.bmp
1932, 1933 and 1934 were worse
http://upload.wikimedia.org/wikipedia/commons/5/58/US_Unemployment_1910-1960.gif
I like this chart better because it is more consistent with my existing beliefs.
You are right, I was not trying to quibble about small differences from year to year. I don’t for a moment believe that the problems of the Great Depression can be either caused or cured within the short space of a few years.
Make is 1933 as the worst year if you think that makes a big difference. Point is that government use of force during the hard times came out on the side of the unions, so this statement is deliberately missing the obvious:
There never was an Austrian economic movement for the “suppression of trade unions”,. it was the power of government that supported the trade unions, allowing them powers that regular individuals do not get. The only thing the Austrians asked for was that people be allowed to have nothing to do with a union if they so chose to, and still be allowed to work.
Trade unions are in the business of repressing supply, just like any cartel is in the business of repressing supply. When you repress supply you reduce economic activity. This should not be controversial, it’s just bleeding obvious.
It’s much more fun to ignore the main argument, and split hairs instead.
That way, we don’t have to seriously question our core convictions in the face of challenges.
Let me get this straight.
Wages are so flexible downward that we need coercive unions and minimum wage laws to keep them up. And if you don’t agree you are an idiot who hates the poor.
AND
Wages are so sticky that we need funny money dilution and unlimited government spending on anything and everything to cure the problem. And if you don’t agree you are an idiot who does not understand “economics”.
That’s a good point. You highlight their fairy tale of employers only wanting to pay $0.01/hour and it is the selfless government and unions that allow us to earn enough money to be able to purchase goods.
Austrians don’t say that there is “no” stickiness in prices. Of course there is stickiness. We are resistant to price increases of goods and resistant to decreases in hourly wages.
But this is where the statist fairy tales come in.
We are “forced” to accept whatever wage rate the employer offers us.
We are “forced” to buy goods at whatever price the producer sells goods for.
They ignore supply and demand. They ignore the stock market; where bids/asks disprove statist economic theory minute-by-minute.
There is never a lack of demand for jobs that provide sub-living wage rates… isn’t that something!!! But of course, those employed at these minimum skill jobs want more money. They just don’t voice this demand at their job interview….. I wonder why…
Yet I make multiples of said wage and there is very little demand for my position. My employer spent months SEARCHING for someone to fill the position that I now occupy. Why does this scenario never get mentioned in statist economics? Why did my (now) employer not offer the minimum wage?
I believe some 97% of American workers make more than the minimum wage. The statist scaremongers still need to provide an explanation as to how that can be the case – if the minimum wage is the only thing preventing us from all making two cents an hour…
They operate on theoretical spirals. E.G.
Deflationary spiral, Ever lower wages ^ , etc
From Wiki Great Depression page:
and the continuing reluctance of people to borrow meant that consumer spending and investment were depressed.[13]
Debt based money systems that rely upon continual expansion, are the pits…
If price and wages are so gosh darned sticky, why do factories move to China and why do people shop at Big Box stores and not small town hardware stores?
If prices are so sticky, how do we have asset bubbles? And when the bubble ends, how is it that we have the collapse of asset bubble prices and require bailouts for the elite?
If prices are so sticky, why do we always see line-ups at gas stations that have unusually low pump prices?
If prices are so sticky, how can there be price gouging in emergencies and why are there laws against it?
http://www.timesfreepress.com/news/2014/jan/27/georgia-executive-order-blocks-propane-price-gougi/
Prices are sticky because of reasons.
“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.”
But we’re the cultists, Murphy. Not someone who gives himself the title of “Lord”. haha
Hey, you appointed yourself a Major! Not LK’s fault that he has the loftiest of ambitions, while you settle for the title of a junior Army Officer.
Didn’t Murphy give MF his promotion?
I was actually given that title by Murphy. He promoted me from “Private”, after I listed a bunch of Krugman quotes. But yes, I chose to promote myself officially.
No you were Captain at the time of the promotion. If you had called yourself “Private Freedom” I would’ve thought you meant private sector, not a military rank.
Bob,
Have you considered that giving out promotions based entirely on merit runs contrary to normal military procedure?
It’s a brevet.
You’re right, I forgot.
I used the comic book character monicker.
What the heck? Every time Daniel Kuehn quotes Krugman, which is every time he says anything, you guys call him an enemy of freedom!
🙂
(Sorry DK, couldn’t resist)
So what?
Whoosh.
You and MF should form a club.
Some people just don’t/won’t get a) the simple distinction between intervention and non-intervention and b) that intervention, by definition, is violent.
We constantly try many different methods in our attempt to get this simple point across.
No no no Roddis, Ken B said “woosh”. That means he wins the argument.
wasnt you promoted colonel at ZH by a commenter?
He wrote that in 1931?!?
As in, 4 years ago if translating to our current depression?
If consumer prices are this sticky (nevermind that that sounds like a monetary phenomena) then why even get out of bed in the morning?
Someone tell the Fed that can’t affect prices…because we are depressed…because prices are sticky…because we are depressed…because the Fed can’t affect prices…because…
And that this has nothing to do with anything other than (1) prices are sticky and (2) we are depressed and (3) The Fed can’t affect prices.
For coming up on a decade.
Depression is a relative term and only matters to monetary systems that depend upon perpetual expansion…
Out here on the farm, 6 cows this year is just as good as 6 cows last year. If we for some reason have 8-9 cows next year, we may decide to conceive another child.
See how this all works.
“…even Krugman’s loyal readers would be a bit creeped out.”
I loled.
These are my favorite blog entries; where LK misunderstands the most basic Austrian concepts and we have to constantly remind him what we actually mean. After years of failure, you’d think someone would attempt to correct their position. We don’t hide! We are happy to explain in Great detail what our beliefs are.