20 Oct 2008

The Importance of Capital Theory: A Reply to Krugman (and Cowen)

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OK folks, I know I borrow the Rush Limbaugh cocky narcissism angle a lot in my posts (though he has parlayed it into more $$ than I have, thus far). But honestly, I think today’s article over at Mises.org on “The Importance of Capital Theory” really spells out the nuts and bolts of a boom-bust cycle. It’s more difficult reading than the average article, and for maximum effect you should probably print it out and read it on your lunch break or something, rather than in your cubicle with the guy next to you yelling at his cable provider on the phone.

Strictly speaking, I am writing a response to Tyler Cowen, who resurrected an old Slate column by Paul Krugman after he won the Nobel. Krugman ripped the “Austrian” theory of the business cycle back in 1998, and Cowen was citing this piece as one of his favorites by Krugman. (All links are provided in my article, linked above.)

However, if you’re not an econ geek, you can skip all of the petty infighting. Just scroll down to the section “A Sushi Model of Capital Consumption” in my article and start reading there. If you really give it 10 – 15 minutes, I think you will have a much better understanding of what happens during an artificial boom period, and then why the recession (and unemployment) are necessary afterward.

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