Consulting by RPM || Free Advice Blog

Mises >> Krugman

Jonathan MF Catalan decided I had too much time on my hands, and so claimed on his blog that Krugman is hands-down a better economist than Rothbard, and is indeed comparable to Ludwig von Mises. At Mises Canada I provide part 1 of my response, dealing with Mises vs. Krugman. Later I’ll do Rothbard vs. Krugman.

An excerpt of my response:

Mises solved the technical problems with the Mengerian approach–at first blush it seemed like a circular argument to explain the value of money by reference to its utility–which included his now-famous regression theorem. But he also had to build up a theoretical edifice of classifications and terminology, in some cases rejecting the moves made by Böhm-Bawerk (who had considered money as a “production good” while Mises thought it more appropriate to use a new category of “media of exchange”). By showing that a single value theory could explain all market exchange ratios–even when regular goods traded against units of the money good–Mises united micro- and macroeconomics in this book. That alone is far, far more significant than Krugman’s contribution of refining our understanding of international trade patterns.

==> MONEY & BANKING THEORY. In TOMC, Mises also provided a new classification scheme for thinking through the problems of banking. This involved terms such as “money in the broader sense,” “money in the narrower sense,” “commodity money,” “credit money,” “fiduciary media,” and “money certificates.” It’s not that Mises invented these ideas. Rather, he surveyed the extensive literature and provided a theoretical framework for understanding money and banking with the aim of explaining the purchasing power of money but also to allow economists to accomplish the next major task…

==> BUSINESS CYCLE THEORY. After refining monetary and banking theory, Mises then–almost as an afterthought–explained what we now call the Austrian theory of the business cycle. (This is a topic about which Krugman is very ill-informed.) Because banks could issue fiduciary media, the interest rate could temporarily fall below the “correct” level and invite an unsustainable boom. Once the credit expansion ended, interest rates would rise and the bust would ensue. This explanation relied on the rich Austrian understanding of the capital structure bequeathed by Böhm-Bawerk, the idea of a “natural” rate of interest developed by Knut Wicksell, and also the credit theory of the trade cycle provided by the English Currency School. It is merely through his elaboration of the Misesian business cycle theory that Hayek won the Nobel (Memorial) Prize. Finegold acknowledges this in his post, but it’s still rather amazing to me that someone could think explaining the business cycle is merely comparable to refining Ricardo’s understanding of international trade.

Incidentally, I think a lot of the up-and-coming libertarians really don’t get why so many older folks like Mises so much. If that describes you, no need to be embarrassed; maybe nobody ever explained it to you. But, you’re totally wrong, and you should read my post to see why.