Krugman Refutes Krugman Refuting the Austrians
I’m mostly posting this to make a note to myself…
I am not certain he has me in mind, since I haven’t been following the comments on his earlier posts, but it is entirely possible I am the anonymous target today in Krugman’s post on “Barbarous Economics.” For your convenience, let me reproduce the steps in the argument, and then you’ll understand why I claim Krugman just refuted himself.
(1) Way back in December 1998, Krugman apparently blew up the “hangover theory” of depressions with the following argument (among others):
Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
(2) In October 2008, in my “sushi article,” I responded to Krugman like this:
I have done my best to paraphrase what I understand to be Krugman’s [point]. I must confess that even while typing out the above, the non sequitur in [the] objection jumped out at me. …Krugman[‘s] argument relies on a static conception of income and spending. Just using that accounting tautology — without indexing for time — Krugman could also argue that real income can never change in an economy, even if the government announced that the most productive 10% of workers in every firm would be shot. (After all, total income would still equal total spending.)
(3) Yesterday, Krugman linked to that very same sushi article, and said I was interesting but dead wrong (and a partisan hack).
(4) Today, Krugman writes of Barbarous Economics:
So I see a number of people saying things along the lines of, “If income always equals spending, then real income can’t possibly change” — and imagining that they’re being wise! More evidence of our descent into a Dark Age of macroeconomics.
To see what’s wrong with this, read a good intro text (pdf) (much updated in new edition, but this gives the flavor). Anyone who believes the above statement literally doesn’t understand the first thing about the subject. Just saying.
===========
Does everyone see how funny this is? Not Chris Rock funny, I grant you. But for macroeconomics, it’s chortle-worthy.
>Does everyone see how funny this is? Not Chris Rock funny, I grant you. But for macroeconomics, it’s chortle-worthy.
No, I don’t get the problem. His post contradicts your interpretation of his argument in your own blog post, not anything he actually wrote himself.
At any rate, to prove his point, he cites his own textbook…which was written before your exchange with him. So it’s going to be pretty hard for you to claim this is a new view he took on just yesterday.
No, I don’t get the problem. His post contradicts your interpretation of his argument in your own blog post, not anything he actually wrote himself.
No, it doesn’t. Go re-read it. I was saying that Krugman was committing the fallacy of using the “spending=income” identity, in order to prove that total spending must be the same. (I.e. Krugman says “Austrians think spending on investment goes down, therefore Austrians must believe spending on consumption goes up.”)
So it is Krugman (in 1998 ripping on Austrians) who implicitly believed that “spending=income” must mean “total spending can’t change.”
And now, he is saying anyone who thinks “spending=income” implies “constant spending and income” is a dope.
I just noticed something even more profound in comparing Krugman’s 1998 article with his latest one:
If his position is that a slump in investment spending MUST be accompanied by a boom in consumption spending, since “spending=income” necessairly implies “total spending cannot change”, is it not the case that Krugman just completely contradicted perhaps the mainstay Keynesian fetishism that applies in the opposite direction, namely, that a fall in consumption spending (saving) does NOT imply a rise in investment spending, ergo the need for government deficits so “soak up” the alleged “savings leakage”?
In other words, anytime consumption spending drops, *for whatever reason*, Krugman’s 1998 logic suggests that he cannot complain about it at all, because according to him it must mean that investment spending will rise!
I think you not only hit on a contradiction between two of Krugman’s articles, but you also exposed Krugman completely denying the fundamental essence of Keynesian economics!
What do you think?
>I was saying that Krugman was committing the fallacy of using the “spending=income” identity
Yes, precisely- YOU were saying he was. Because YOU misunderstood his point in the first place. You’re not showing a contradiction between two things he said, but rather what you THOUGHT he said and something he actually did. You mistook a rephrasing of the hangover position and a rhetorical question with his own position.
First to clear up the positions- To return to his piece on the hangover theory. His argument is:
1) The Hangover theory states that recessions are caused by misallocations of labor and capital.
2) His argument is that “Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole?…”John Maynard Keynes’ realization [was] that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.” As usual, his position as a Keynesian is that the recession is caused not by the misallocation of capital and labor, but by the resulting reluctance on the part of consumers to spend…which lowers demand in other industries, where the misallocated workers should presumably now be able to find new jobs.
To explain why he thinks the Austrian view is wrong, he asks the following RHETORICAL QUESTION, asked under the assumptions of hangover theory:
>Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Krugman is offering an answer under the hangover model. He already thinks he knows the answer- the crash causes a crisis in consumer confidence, which causes people to anticipate that their future disposable income will decrease as hard times set in. As a result, they save more and spend less of their incomes. This causes a downward shift in the aggregate consumption function, which causes a sag in demand, which causes and retains the recession.
If you just see the recession as a result of the misallocation and not a demand issue however, this doesn’t follow. If the recession isn’t a matter of reduced demand for real goods and services, but rather a lack of workers and stock for those goods due to the misallocation, demand for those goods should remain high even after the crash, which would mean that there would be a demand for the laid off workers in the misallocated field, and employment would pick up in those fields promptly. Furthermore, if the those goods are scarce due to the misallocation, you should see inflation in their prices until the workers and supply side moves back to meeting demand.
But you don’t. Instead, you see a fall in demand not just for the bubble products, but for everything. And rather than seeing inflation during those slumps while demand for “real” goods and services remains unmet due to diminished/neglected capacity in those areas, you see deflation, which is what you would expect if there was a demand problem rather than a supply one.
And at any rate, he is not just NOW saying spending=income does not imply “constant spending and income”. He’s saying that the opposite is clear from textbook economics- and proves it by linking to his own textbook, and shows how higher anticipated future income can cause upward shifts in the aggregate consumption function, and how lower anticipated future income causes downward shifts.
You seem to think he’s constantly changing his views as arguments unfold. Actually, everything he says remains unchanged from textbook economics.
jjrs,
You are not reading what Krugman actually WROTE. You seem to be trying to attribute a position to Krugman that you WANT him to have, in order to defend him, instead of understanding his actual position that his statements reveal.
His textbook makes the argument as to why REAL income can fall. That is a *different* topic from his 1998 claim that “income=spending” implies “constant income and spending”. His 1998 claim IMPLIES that real income can never change.
The problem with your understanding here is that the implicit assumption in the “RHETORICAL QUESTION” that he asked is NOT an assumption that is made in the “hang over theory”, nor in any other Austrian principle.
It is certainly NOT the Austrian position that income and spending are necessarily always constant throughout the economic system, such that a rise or fall in investment spending should necessarily be accompanied by a fall or rise in consumer spending, or vice versa.
Krugman’s assumption that total income and total spending are constant is KRUGMAN’S assumption. HE made that argument because HE said such a thing follows from “a matter of arithmetic”. He used that assumption in order to defend HIS position, which is that the Austrian “hang over theory” must be wrong, because it is KRUGMAN’S position that if investment spending falls, it SHOULD be accompanied by a rise in consumer spending, but we don’t see that. Thus, he holds that Austrian theory cannot be correct.
Krugman is using his own assumption of constant income and spending as a premise to defend HIS position. It is not rhetorical or parasitic off Austrian theory.
Furthermore, the Austrian position on why consumer spending falls during recessions, even though Austrians say that the problem is capital misallocation, is fully and completely answered in Austrian business cycle theory.
It is NOT true that just because consumer demand falls during recessions, it somehow represents a problem to Austrian business cycle theory.
That consumer demand should fall during recessions is what Austrian theory actually EXPLAINS. If consumer demand DIDN’T fall during recessions, then that would actually represent a critical problem for Austrian theory, because Austrian theory predicts a fall in consumer demand, indeed aggregate demand, during recessions!
You have the very wrong belief that declining consumer demand during recessions somehow refutes Austrian theory, when in reality it strengthens it.
The reason, in case you wanted to know, of why consumer demand should fall during recessions, is because of the simple fact that the investment and production process takes TIME.
The economy’s capital structure, should it be thrown off by monetary manipulation from the government (Federal Reserve), requires TIME in order to be re-oriented, it requires TIME for the resources and labor to be taken away from currently malinvested production lines and put into production lines where and “when” the consumer truly values them to be, “when” meaning the time horizon of capital goods which determines when consumer goods are finally ready for consumption.
Resources and labor cannot be put from one place in the production structure to another place instantaneously at the snap of one’s fingers, or, in your terminology, “promptly”. Workers need to learn new skills, as well as new job opportunities, and capitalists need to find out the updated value of malinvested capital goods, and existing capital goods, as well as the particulars of available labor. During this time, production in general necessarily FALLS. Because production in general falls, because workers are laid off, because capitalists and workers remove their investments from where they were just before the recession hit, all this generates a fall in consumption spending, because money flows when labor and capital goods are traded, and if labor and capital goods trading falls, then so will the money, and thus so will consumer demand!
Consumer goods cannot be just wished into existence out of thin air if money stops flowing in capital goods and all of a sudden flows to consumer goods. It takes time to produce new consumer goods. Spending on consumer goods of course depend on the production and sale of capital goods, and the payment of wages. If the production and trade of capital goods and payment of wages declines, then of course consumer spending will decline. How can workers spend as much money on consumer goods if they are either laid off due to a realization of them being *misallocated* during the boom, and how can capitalists spend as much money on consumer goods if they are suffering lower profits, or outright losses because they realize their capital investments have been *misallocated* during the boom?
Austrian theory CALLS for a fall on consumer demand during recessions!
Capital reallocation is not instant. It takes time. And the more the government tries to halt the recession, the longer will the cleansing and reallocation process take, and thus the longer the economy will be in recession, and thus the longer will aggregate demand be.
The process that takes the quickest time to reallocate capital and labor after a recession is of course a laissez faire market, but even the free market takes time to fix the errors. The time required to fix the misallocations cannot go down to zero, or not much more than zero. It will always take some time to go through the fixing process. After all, it took time to build the bubble and exacerbate the misallocation of capital, it should take time to undue it as well. During this time, OF COURSE consumption spending will fall.
That spending “for everything” falls during a recession is fully explained in Austrian theory, and it is explained in more detail and in better words than me by not only Murphy, but many other Austrians as well. You appear to have not even read any Austrian literature.
The problem with the Keynesian position is that it is not able to explain why the economy would crash in the first place, and/or why consumer demand would fall. In Keynesian theory, a fall in one or the other is just taken for granted. Either an in explicable fall in consumption demand generates an economic crash, or an inexplicable economic crash generates a fall in consumption demand. Austrian theory is superior because it explains BOTH.
Finally, as for your claim that Krugman never depended on or believed in “constant income and spending”, then why would he use it in his argument against Austrian theory? It MUST have come from him. KRUGMAN, well, at least the 1998 Krugman, was the one who said that the problem with the Austrian theory is that it ignores the “simple matter of arithmetic”, that “total spending necessarily equals total income”, so if spending and income goes down in one place, then spending and income should go up someplace else. That was KRUGMAN’S argument in 1998. He argued in 1998 that since we also see a fall in consumer demand, the Austrians must be wrong to say that the problem is one of capital goods misallocation. He believes that if Austrians say investment spending falls, then they are logically required to accept that consumer spending will rise, that “logic” of course being Krugman’s, not the Austrian’s.
Krugman wants to explain why AGGREGATE spending falls. He rejects Austrian theory because of its focus on capital goods misallocation. Krugman believes Austrian theory is wrong to “ignore” consumer demand. He believes that because there is a fall in demand in BOTH capital goods AND consumer goods, then a correct theory should not focus on capital goods only, but on both. The Austrian theory is wrong to him because if it were a capital goods issue, then why would there be a fall in consumer demand as well? His thought process is “shouldn’t a fall in capital goods spending take place alongside a rise in consumer spending, because spending and income are constant?”
>His textbook makes the argument as to why REAL income can fall. That is a *different* topic from his 1998 claim that “income=spending” implies “constant income and spending”. His 1998 claim IMPLIES that real income can never change. The problem with your understanding here is that the implicit assumption in the “RHETORICAL QUESTION” that he asked is NOT an assumption that is made in the “hang over theory”, nor in any other Austrian principle….Krugman’s assumption that total income and total spending are constant is KRUGMAN’S assumption. HE made that argument because HE said such a thing follows from “a matter of arithmetic”.
LOL, you guys don’t even know what you’re trying to argue anymore. Are you trying to say that he’s deliberately mischaracterizing the Austrian position, or do you REALLY BELIEVE that a Nobel Prize and John Bates Clark medal winner didn’t think real income could change? How much do you want to bet I can find a quote of Krugman mentioning shifts in the aggregate consumption function before that date?
You guys are the ultimate example of the Dunning-Kruger effect. Not only are you so ignorant you think you know as much, you’re so ignorant you think you can kick his ass in an argument, But you don’t even understand what he’s saying well enough to pick it apart.
jjrs,
>LOL, you guys don’t even know what you’re trying to argue anymore.
Weird, since “our” argument hasn’t changed since the start. We are pointing out the fact that Krugman’s arguments are contradictory.
>Are you trying to say that he’s deliberately mischaracterizing the Austrian position, or do you REALLY BELIEVE that a Nobel Prize and John Bates Clark medal winner didn’t think real income could change?
It’s now clear you have no argument at all, because your entire premise for why you think Krugman is right is because he has a Nobel Prize. That’s a logical fallacy of argumentation. Nobel Prize winners can be, and often are, wrong.
Furthermore, our argument in this particular issue is not that Krugman is mischaracterizing any Austrian position (although he does do that).
His arguments are self-contained and follow from his own logic. In 1998, he claimed that income and spending are constant.
> How much do you want to bet I can find a quote of Krugman mentioning shifts in the aggregate consumption function before that date?
How much do you want to bet that I can find Krugman making more than one argument that contradicts another argument he made?
Krugman is a Keynesian, and Keynesian economics is full of contradiction. A non-contradictory Keynesian would be a novelty.
>You guys are the ultimate example of the Dunning-Kruger effect. Not only are you so ignorant you think you know as much, you’re so ignorant you think you can kick his ass in an argument, But you don’t even understand what he’s saying well enough to pick it apart.
You are the ultimate example of the Dunning-Kruger effect. Not only are you so ignorant you think you know as much, you’re so ignorant you think you can kick our ass in an argument, but you don’t even understand what we’re saying and what Krugman is saying well enough to pick it apart.
See? Anyone can play your desperate, contentless game of intellectual capitulation and ad hominem.
So to recap- we point out the question is rhetorical. You insist that it is not.
I point out that the guy is a nobel prize winner, and that shifts in the aggregate consumption function are typical textbook economics…including his own textbook. You label this point a “logical fallacy”. You insist he didn’t know.
I offer to link you to him mentioning a shift in aggregate consumption sometime before 1998 to prove the point. You insist this wouldn’t change your mind one bit, because he’s “a Keynsian, and Keynsians are full of contradiction”.
Got it. Thanks, I think I understand the typical “Austrian Economist” a bit better now.
>So to recap- we point out the question is rhetorical. You insist that it is not.
You’re confused again.
When you first said “rhetorical”, it was, or at least I took it to mean, he was imitating Austrians and trying to assume an Austrian understanding in order to try and refute it.
When I say his questions are rhetorical, I mean he is actually just making an argument, he has answers already and is trying to lead his readers into making the same conclusions he made. So in that sense, his questions are rhetorical.
>I point out that the guy is a nobel prize winner
Which is the fallacy of authority if you use it as a premise to support your argument, or his argument, which you did.
>and that shifts in the aggregate consumption function are typical textbook economics
Krugman does not explain adequately why that should happen. Austrians do explain it.
>including his own textbook.
Which is irrelevant to his statement in 1998 which implied constant spending and income.
>You label this point a “logical fallacy”.
There is no need to put that in scare quotes. Your implying that he is right, or not wrong, because he has a Nobel Prize, is a logical fallacy.
>You insist he didn’t know.
I am saying he contradicted himself.
>I offer to link you to him mentioning a shift in aggregate consumption sometime before 1998 to prove the point.
No need.
>You insist this wouldn’t change your mind one bit, because he’s “a Keynsian, and Keynsians are full of contradiction”.
I never made that argument.
>Got it. Thanks, I think I understand the typical “Austrian Economist” a bit better now.
I know I know what YOU think, which is creating straw men and then knocking them down.
You got refuted. Give it up.
Wait a second….”Captain_Freedom”?! Aren’t you the troll Sage_Advice from Reddit?
http://www.reddit.com/r/TrollAlert/comments/cexi6/captain_freedom_aka_sage_advice_private_freedom/
>”Captain_Freedom (formerly Sage_Advice, Private_Freedom, Katpoop10) is a well-known troll of reddit. He baits people with outrageous and extreme libertarian/anarchist viewpoints, but quickly turns to insults, willful ignorance, strawman arguments, and various other tactics to rile people up and waste their time. He deletes his accounts and most of his most obvious trolling posts whenever his accounts become so tainted with the troll label that he can’t continue to troll.
If you have had a run-in with this guy, please vote this up and post a link to the thread and summary of your experience with him as evidence of his trolling. The only way to get rid of trolls like this is to keep people from responding to him.”
Thank god I noticed your username, I might have gotten stuck in a loop of this for days!
Without a third party, it takes you “days” to tell if you are debating someone who is wasting your time?
Give me some credit- He’s your #1 fan and commenter, and apparently you still haven’t figured it out.
jjrs,
>Wait a second….”Captain_Freedom”?! Aren’t you the troll Sage_Advice from Reddit?
No, that is definitely someone else. I don’t actually visit Reddit. “Captain Freedom” isn’t a very original name. There’s probably many “Captain Freedoms” roaming the net. I made it up as a sardonic play off of “Captain America”, the statist nationalist champion of liberty.
I mean, there’s even a “jjrs” on reddit as well! Or is that you?
uh-uh, it’s definitely you dude. You even submitted Bob Murphy articles to the site. Denying it doesn’t even change my certainty much, as you have a habit about lying about your other identities too, as is evident by all your alter-egos and deleted comments.
But your character is too unique to mistake. Passionately dedicated to Austrian economics, multiple epic 1000-word replies written within minutes, complete denial of own arguments once they fail, reduction to insults soon after…there is no other.
After reading a few exchanges, I thought there might actually be another guy just as bad…then I noticed its the exact same name.
>His post contradicts your interpretation of his argument in your own blog post, not anything he actually wrote himself.
Not only did Krugman say
“As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa)”,
right after he went on to say
“So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
In other words, Krugman not only holds that spending is always equal to income, which if that was all he said then your point would be plausible, but he also claimed that a fall in spending and hence income in one part of the economy (in his example it was investment spending) ipso facto implies an equal and opposite rise in spending and hence income someplace else (in his example it was consumption spending).
Therefore, according to what he actually said in his course of trying to refute ABCT, he claimed that real income can never change, because no matter how much spending and hence incomes decline in one part of the economy, there must be an equal and opposite rise in spending and income in another part of the economy.
This is a complete contradiction to Krugman’s article posted today, where he says that it is actually a false statement.
Murphy and Captain Freedom quote Krugman out of context: Krugman is asking a rhetorical question in the December 1988 Slate article, which he answers in the next two paragraphs.
To quote the rhetorical question:
“Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
See what Krugman is doing? He is stating a simple truth “spending equals income,” and then asks the interesting question, how can slumps occur since if people are not spending on investment they must be spending on consumption.?
To quote Krugman’s answer to the rhetorical question one paragraph down from the rhetorical question:
“As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory.”
In other words, a consistent position taken by Krugman based on mainstream economics.
To understand Krugman, it is necessary to read at least at the level of a college freshman
Summary, if spending always equals income, how can recessions occur? Recessions occur when people hoard their money rather than spending it. Thus, less spending and less income. For example, I might hide my money under the mattress. or the bank I put it in might decide to stop making as many loans.
See why the banks all getting “tight” with money might be a problem that manifests in people losing their jobs?
I don’t know about anyone else, but I notice a very pronounced desperation among Krugman’s followers to defend and rationalize this blatant contradiction he committed.
“Poster”, your claims here are the funniest, if not the most tragic.
>Murphy and Captain Freedom quote Krugman out of context: Krugman is asking a rhetorical question in the December 1988 Slate article, which he answers in the next two paragraphs.
>To quote the rhetorical question:
>“Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
>See what Krugman is doing? He is stating a simple truth “spending equals income,” and then asks the interesting question, how can slumps occur since if people are not spending on investment they must be spending on consumption.?
That “rhetorical question” manifests and implicit assumption on Krugman’s part, which is that spending and income must be constant.
That is HIS assumption, not the Austrians.
You are misunderstanding Krugman’s quote.
The “simple question” Krugman asks CONTAINS his own assumption concerning aggregate spending and income which nobody but him prompted, which is that they should be constant. That is, he is rhetorically asking how slumps can occur IN THE AUSTRIAN FRAMEWORK, if it is true according to Krugman that total spending and income must be constant.
He is saying that recessions cannot take place in the Austrian framework because it emphasizes slumps in investment spending. He is saying that recessions cannot be explained by the Austrian framework because if it really were primarily a “slump in investment” problem, then, according to Krugman, we should also see a consumer spending boom. But because we don’t see a consumer boom during a recession, then it must mean the Austrian theory is wrong. It is wrong because it is not assuming what Krugman thinks everyone should assume, which is that a fall in spending and income in one area of the economy must be matched by an equivalent rise in spending and income in another area of the economy, “because of the simple mathematical fact that total spending equals total income”.
Krugman is assuming that total spending and income are constant, and this is why, according to him, Austrian theory fails. Austrian theory says the problem is primarily in capital, but Krugman says if investment spending fell, then consumption spending should rise, but we don’t see that, ergo Austrians are wrong.
>To quote Krugman’s answer to the rhetorical question one paragraph down from the rhetorical question:
>“As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory.”
The problem is that Krugman doesn’t actually answer the rhetorical question he asked. All he is saying “one paragraph down” is an UNRELATED claim, that is, his belief that recessions are not caused by capital misallocation errors, but rather “for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time”.
Krugman is claiming that because there is a general increase in the demand for money during a recession, which reduces BOTH investment spending AND consumer spending, then the Austrian “hang over” theory must be wrong, because according to Krugman, Austrian theory argues that the problem is in capital investment, which experiences a slump in spending. Krugman says that if it really were about a slump in business spending, then we should see a boom in consumer spending, but we don’t, so Austrians are wrong.
>In other words, a consistent position taken by Krugman based on mainstream economics.
His arguments are not consistent, they are INCONSISTENT. He implied in 1998 that spending and income are constant, such that if investment spending falls, consumption spending must rise. This constancy assumption is contradicted by Krugman in 2011, when he claimed that such thinking is wrong.
>To understand Krugman, it is necessary to read at least at the level of a college freshman
Hahahaha. Dr. Robert Murphy has a PhD. Is that sufficient? I won’t say what I have, but lets just say it’s more than a freshman’s level.
To understand Krugman, it is necessary to read at least at the level of a 3rd grader.
>Summary, if spending always equals income, how can recessions occur?
If you ask Krugman, for he was the one who said in 1998 that spending and income have to be constant, such that a fall in investment spending must be matched by a rise in consumption spending, then he will say exactly what you even quoted him as saying, which is that “for whatever reason, private spending falls and everyone hoards money and lowers their spending, the bastards!”
>Recessions occur when people hoard their money rather than spending it.
No, that is not why recessions occur. A hoarding money requires B to dis-hoard his money. If everyone tried to hoard, then not only do we have to ask WHY, rather than just say “for whatever reason”, which by the way Austrians explain whereas Krugman does not, you yourself have to realize that everyone hoarding money just lowers prices, revenues and costs, leaving the remaining money more valuable. Sure, it reduces aggregate demand and hence aggregate profits since costs only fall with a time lag, but the sudden reduction of spending is due to government policies that Krugman thinks solves the problem.
>Thus, less spending and less income.
And higher and higher purchasing power.
>For example, I might hide my money under the mattress. or the bank I put it in might decide to stop making as many loans.
You can’t do that with 100% of your money, because you need to consume at some positive level in order to even live.
Personally, I’d rather you put as much money under your mattress as you can, because then you will present a lower demand for goods and services in general, which may lower the prices for the things I buy, if we buy in the same market. That benefits me. You will spend SOMETHING, because you are proving yourself to be alive.
The more you spend in money terms, the higher your demand will represent, and the higher prices will be, all else equal. That is against my interests.
I’d rather you work your ass off, produce as much as you can, and then spend next to nothing on yourself, so that you put into the economy lots of real wealth, but take out very little. I want you to present a very small monetary demand for goods and services, but maximal physical, real productivity, and in so doing allow me to take more out of the economy than would otherwise be the case.
You aren’t going to hoard 100% of your money, and neither will anyone else, because everyone needs to spend their money on SOMETHING, and if prices are low enough, which they will be if the price system is not manipulated by the government, then everyone can find employment, production can be maximized, and no recession will take place.
>See why the banks all getting “tight” with money might be a problem that manifests in people losing their jobs?
That banks are “tight” now is not why people lost their jobs. People lost their jobs because they were put into the wrong jobs due to prior “loose” money from the banks.
People hoarding their money does not cause depressions. Depressions are caused by the government trying to fix what they perceive is the cause, which is, among other reasons, cash hoarding.
His point in 4 contradicts his point in 1.
GNP=C+I+G is an identity – it doesn’t mean GNP is a constant and that changes in one component must be balanced by offsetting changes in other conponents – which is pretty much what he says in (1).
No, he doesn’t say that in (1). He (falsely) accuses Austrians of saying that. You have to read the whole thing in context.
No, it is not even a false Austrian attribution, for the first sentence he says is his own, “As a matter of simple arithmetic…”. The fact that the very next sentence starts with a “So”, implies that the first sentence is the premise, NOT any supposed Austrian position.
1. Let’s go the the National Accounts. Keynesian economy is based upon the concepts of the magnificent (albeit not perfect) system of the National Accounts, not the other way around.
2. In this system, for the very reasons which Krugman cites, an increase in (nominal) spending leads to an increase in (nominal) income and the same for decreases.
3. Introducing real time (indeed, Keynesians should have done that decades ago): the combined changes in nominal spending (exports, government, investment, consumption) from one year to another lead to an equal change in income – it’s the circular flow of money. The water flowing from the canal into the lock is the same amount as the water flowing into the lock from the canal – the canal spends, the lock has income.
4. Next period. Now, the lock spends its water and the river receives ‘income’. If income from the previous period is not spend, but saved, the water level in the lock rises – spending and therefore income is less than spending in the previous period. But even then, the amount of water which leaves the lock is equal to the amount received by the canal.
That’s the idea.
I also do not see your point.
He does not contradict himelf in 1 and in 4. In both statements he claims that total income equals total spending. He does NOT claim that they both have to stay constant. In fact, you can raise both sides of the equation, and still maintain their equilibrium (as in 2=2 and 3=3).
Frankly, I think you are being petty, and taking his words out of context. Btw. your Sushi article does you no credit, depicting PK as a caricature in a hammock. Just because I disagree with someone on an intellectual level, I will not try to accuse him of lazyness and parasitism.
Luka,
The Austrians are saying that consumption and investment both go down during the “bust” phase because income goes down. So Krugman is implicitly relying on a constant income in his critique (in 1).
I believe that you don’t accuse your opponents of laziness or parasitism, but Krugman doesn’t extend the same courtesy to his opponents. I think my treatment of him was obviously “in good fun” as opposed to what he regularly says about free-market economists and what really motivates them.
PARASITISM!
*That’s* the term I was looking for to describe such a debate tactic!
Thank you!
As noted by Krugman’s minions in the comments to his blog, I’ve always been motivated by allegiance to Sarah Palin. In fact, that’s what motivated me to record Hayek on “Meet the Press” in 1975. When Sarah Palin was 11.
The fact that you know Palin’s birthday by heart is proof enough.
Quick, Bob, who is going to win the Superbowl?
No, I don’t see how funny this is. There is no contradiction in 1 and 4. He’s actually pointing out the same misinterpretation of what the S=I identity may mean. So he’s in fact repeating, not contradicting, himself. Did you actually read the question marks? You have shown here, as in your sushi post, that you really did not get Prof. Krugman’s logical points. No, it’s not funny, it’s very sad indeed to see this from someone calling himself an economist (that’s M, not K).
Here:
http://consultingbyrpm.com/blog/2011/01/krugman-refutes-krugman-refuting-the-austrians.html/comment-page-1#comment-10487
Actually, Krugman said your “sushi economy” was interesting, and correct regarding the Great Leap Forward, which really was a case of misallocation and destruction of underlying productive capacity (with Chinese agricultural ouput analogous to your dilapidated fishing boats and nets).
The question is, where is that evident today? What sectors suffered a destruction of underlying productive capacity during the recent bubble?
I think you just misunderstood Krugman’s 1998 piece.
What he said back then is that _ from an Austrian point of view_ total income could never decline and that you cannot explain unemployment if you follow that (supposedly Austrian) logic. He didn’t say he himself thought total income couldn’t change; he accused Austrians of thinking that.
Now, I have no idea why he thinks total numbers are fixed according to Austrians, and I think his whole piece from 1998 proves that he hadn’t really read any Austrian literature. But he never said total income couldn’t change. In fact, he said the exact opposite. In his world the cause of business cycles is nothing but a decline in demand (i.e. total income). So there is no contradiction between what he said back then and what he says now.
>What he said back then is that _ from an Austrian point of view_ total income could never decline and that you cannot explain unemployment if you follow that (supposedly Austrian) logic.
That isn’t Austrian “logic”. That is Krugman’s logic. HE claimed, implicitly, that if Austrians say that investment spending falls, then HIS assumption that income and spending are constant must mean that Austrians are logically obliged according to Krugman’s logic to then accept that consumer spending will boom.
It is Krugman’s own position that spending and income are constant, not Krugman’s interpretation of the Austrians. He said that the alleged existence of constant income and spending somehow represents a problem for Austrian theory, because it fails to take into account this alleged truth. Austrians say that recessions are caused by problems in investment. Krugman says if the problems really were in investment as the Austrians claim, then a fall in investment spending should see a rise in consumption spending.
He never accused Austrians of thinking that income and spending are constant. He introduced that assumption himself in order to refute Austrian theory.
Again, I will repost what he wrote, and add commentary to show you his thought process:
This is the full quote:
“As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
Broken down with commentary, we get:
“As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa).”
This is, I am sure you will agree, Krugman’s own claim. It is neither rhetorical, nor parasitic, nor “borrowed” from the Austrians. It is just a claim that Krugman says is true.
“So…”
Meaning, what he is going to say next is something he thinks logically FOLLOWS from what he just said prior. In other words, since what follows is logically derivable from his own initial truth claim, then what follows must also be what he thinks is true…
“…if people decide to spend less on investment goods…”
Which is the question Krugman is considering for judgment,
“doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
Here is where you think Krugman is mimicking, so to speak, the supposed Austrian position, which is, supposedly, that a rise or fall in spending here has to be accompanied by a fall or rise in spending there. But that is not what he is saying. Everything he said in that paragraph explicitly and intentionally follows from his original claim, which if you recall was:
“As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa).”
This remember is his own non-rhetorical claim. If he then says “So”, then everything that follows follows from his own argument, not the Austrians. Thus, if he says
“So, if people spend less here, then they must be spending more there”
then he is saying that this logically follows from his original personal statement, which if you recall was “a matter of simple arithmetic”.
In other words, Krugman’s argument is fundamentally backed by what he considers to be “a matter of simple arithmetic”. It is NOT backed by what he thinks the Austrian position to be.
This is why you are so confused and why you are asking yourself where in the world he could have gotten that constancy idea from the Austrians. The reason you don’t understand where he could have gotten it from the Austrians is precisely because it is his own personal claim that he thought was true in 1998!
Clear as mud now?
A lot of people have been talking like this – I doubt he’s referencing you.
I’m surprised you thought (in your sushi article) that that is his position. I would agree with him that if that’s what you think he’s saying, you don’t understand what he’s saying.
Which isn’t to say you don’t understand what he’s saying – just that your sushi article didn’t do it justice.
DK where you been? I am sincerely asking for Krugman sympathizers to make sure I don’t misrepresent him. I thought you (and Desolation Jones etc.) would be all over that post. Don’t let Captain Freedom be the only to interpret Krugman for me! 🙂
It was enticing, but it’s been an insane week – two reports to get out, a site visit, and finishing up grad apps. Hope my email to you helped – I just haven’t been following this particular thread closely enough to say.
Pete Boettke has a discussion up on Tyler’s recent criticism and I have thoughts there – I’m not sure Tyler’s being entirely fair to you guys either.
Intelligent people read this blog?
Shocking but true. I think it’s their guilty pleasure. Sort of like listening to Abba.
Money, money , money…
I read this blog.
This is the statement that nails Krugman:
“So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods”
This means that Krugman thinks that the level of real income or real spending cannot change. If those could change, then if people decided to spend less on investment goods, they could also spend less on consumption goods!
Apparently, some illogical commenters aren’t seeing this, and thus they fail basic logic.
Oh right, basic logic. Wait, I found another one basic logic riddle for you!
“A purely “real” story has no explanation for this, so it’s more fruitful to think that the changes in NGDP are pulling down, or pulling up, real GDP with them.” – Robert Murphy, Jan 19th
This is the statement that nails Murphy. The quote is clear evidence that Murphy changed to the monetarist camp. He refuted everything he ever said before.
Nonsense? Right! Murphy obvisously took Krugman’s point of view when he wrote that. Just as Krugman took the (alleged) Austrian position when he wrote that total spending couldn’t fall. The only problem with Krugmans post is that he didn’t make it very clear what he was doing and that he made up this alleged Austrian position.
His position is:
1. Total spending equals total income
2. Austrians think that total spending can never fall because it’s all just about allocations, not about aggregats (this alleged Austrian position is obviously not an Austrian position at all but a misunderstanding on his part.)
3. If Austrians think that total spending can never fall it follows that total income can not fall either.
4. Hence Austrians have no explaination for high unemployment.
5. I (Krugman) have an explanation namely a decline in aggregate demand.
The only thing you can complain about here is that Krugman doesn’t understand Austrian economics and is under the impression that they think aggregate numbers can’t fall. But that’s all.
http://consultingbyrpm.com/blog/2011/01/krugman-refutes-krugman-refuting-the-austrians.html/comment-page-1#comment-10487
Okay, I see your point. And I have to admit that the way he puts it is misleading. The word “so” indicates a logic conclusion, but then he puts questions marks after each sentence.
So I’ll give it another shot, tell me what you think:
He says:
1) Income = spending
2) People have a certain income at a certain time. If one agrees that income equals spending, one could assume that people must spend their income in one way or another. This seems like a genuine deduction but this logic would lead to the absurd result that income and spending can never change. So aparently something must be wrong here.
3) Austrians can’t explain what is going on, because they only think in terms of allocations. Hence if demand for certain good declines it must lead to increased demand for something else or at another time. But if you only think in terms of allocations, you can not explain why the logic pointed out above is wrong. (his words: Most modern hangover theorists probably don’t even realize this is a problem for their story.)
4) I can explain what is going on. People suddenly have excess demand for money. It’s not about allocations, it’s about aggregate demand. Only if you think in terms of aggregate demand, can you explain why total spending can drop despite the fact that income = spending.
>Okay, I see your point. And I have to admit that the way he puts it is misleading. The word “so” indicates a logic conclusion, but then he puts questions marks after each sentence.
No, it’s not that his statement is misleading. His statement is perfectly clear.
Yes, he puts question marks at the end of each sentence, but he does so as a method of rhetoric, to lead his readers into making a conclusion that Krugman clearly believes must be the case. He said:
“Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa).”
Then he said:
“So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
All those “questions” are rhetorical in the sense that Krugman already has answers, which make up the “problem” in the Austrian theory.
>He says:
>1) Income = spending
>2) People have a certain income at a certain time. If one agrees that income equals spending, one could assume that people must spend their income in one way or another. This seems like a genuine deduction but this logic would lead to the absurd result that income and spending can never change. So aparently something must be wrong here.
I’ll stop momentarily at this point.
Yes, it IS absurd that his logic implies the absurd conclusion that total spending and income can never change. THAT’S WHAT’S FUNNY. Krugman clearly implied this much in 1998, but then in 2011 he said such a view is wrong.
>3) Austrians can’t explain what is going on, because they only think in terms of allocations. Hence if demand for certain good declines it must lead to increased demand for something else or at another time. But if you only think in terms of allocations, you can not explain why the logic pointed out above is wrong. (his words: Most modern hangover theorists probably don’t even realize this is a problem for their story.)
You are again making the mistake in assuming that Krugman’s 1998 constancy assumption is him trying to copy or interpret or understand the Austrian position.
>4) I can explain what is going on. People suddenly have excess demand for money. It’s not about allocations, it’s about aggregate demand. Only if you think in terms of aggregate demand, can you explain why total spending can drop despite the fact that income = spending.
“Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa).”
THIS QUOTE, which is his own, which is not prompted, not Austrian theory, it is not an understanding of Austrian theory, it is his idea plain and simple. It is THE fundamental premise in Krugman’s hilarious logical syllogism where he argues that a fall in investment spending (which is part of the Austrian allocation argument) must, according to that same fundamental premise, imply a rise in consumption spending.
This, again, is not Krugman’s understanding of Austrian theory, it is HIS argument. It is his argument because it is based on that initial “As a matter of simple arithmetic” statement.
If you were right, and Krugman was trying to understand Austrian theory (incorrectly), then he would not have written that original statement, for it would be a completely irrelevant premise. It would be like me trying to understand your ideas in writing, and precede my understanding of your ideas with the premise “As a matter of simple astronomy, the Sun is the closest star to the planet Earth.” It would be completely useless.
This is why that whole paragraph MUST be his own ideas, and not his understanding of Austrian theory.
I just realized that my comment seems as if I was just repeating myself. So I’ll try to clarify how I changed my interpretation.
Before I said that Krugman thought Austrians thought ….
After reading Captain_Freedom’s post I think that was not entirely correct. Instead it is more likely that Krugman himself thought that if you just apply income = spending and think it through you come to the conclusion that total income can never change. This conclusion, however, cannot be correct, so one needs to explain why it is wrong. Then he says that Austrian ideology lacks an explanation for the fact that spending can decline despite it equaling income. The only explanation in his opinion is excess demand for money leading to a reduction in aggregate demand. But this aggregate demand story refutes the Austrian misallocation idea.
I think this is his argument in a nutshell. Just to be clear, I don’t think he is right. I am just trying to understand what he meant.
See above
http://consultingbyrpm.com/blog/2011/01/krugman-refutes-krugman-refuting-the-austrians.html/comment-page-1#comment-10510
I have not kept up with all of your guys’ arguments on this. Let me just clarify my own position:
(1) I do not, and never did, think that Krugman would have announced, “Spending and income are always constant.” That would have been ridiculous and he wouldn’t have said something so dumb.
(2) Krugman’s critique of the Austrian position implicitly relies on holding spending and income constant over time. I pointed out that this is dumb, and gave an obvious example of how spending and income could fall (due to a “real” shock).
(3) Since Krugman’s critique of the Austrians relied on an implicit mishandling of the spending=income identity, I thought it ironic when he later said that anybody who thinks that identity implies constant income is a fool.
>(2) Krugman’s critique of the Austrian position implicitly relies on holding spending and income constant over time. I pointed out that this is dumb, and gave an obvious example of how spending and income could fall (due to a “real” shock).
In his example (posted recently), spending goes down due to less consumption on the part of consumers…in other words, a demand issue, not a supply one.
But your fable is about supply problems (poorly maintained boats etc). If you want to make it all about supply, its perfectly fair to point out the islanders could have then just spent their money on the “real” goods again. In real life, its not like the entire economy was working in construction.
And even if it was, shouldn’t skyrocketing prices for the neglected, scarce goods in real demand facilitate employment for the laid off workers?
JJRS, you need to make up your mind. 🙂 Are you saying spending is constant for Austrians, but not for Keynesians?
The quick answer for the asymmetry (from boom to bust) is that workers are voluntarily quitting to take better jobs during the boom, when they get sucked into the unsustainable niches. Then in the bust, yeah they eventually will get reabsorbed elsewhere in the economy, but they will be worse jobs. The reason is that the economy is poorer (at least relative to what everyone expected) because the boom was unsustainable. So real income goes down, and that’s why real consumption and real investment can both drop at the same time.
I took Krugman to be saying that this story makes no sense, since spending=income and therefore total spending can’t drop. At which point, I noted that spending need not be constant over time.
Since I think you agree with me on that last point, you should agree that Krugman’s critique makes no sense. Especially since he later ridiculed people who didn’t see that spending=income is consistent with variable levels of income.
>JJRS, you need to make up your mind. Are you saying spending is constant for Austrians, but not for Keynesians?
I’m saying if demand for the “real” goods and services stays constant, and if the depression is no way related to consumer confidence and how much they feel is safe to spend, there’s no reason why sales should fall off for those other products after the bubble bursts, just for the bubble ones.
The only answer I can see to that point is that everyone is supposed to be laid off from the bubble industry. In your story, nearly everybody ran to get re-employed in the bubble industry and are now penniless. But in reality construction only accounted for a fraction of employment.
The main point I can make is that under your model, there should be skyrocketing inflation for the goods from the “real”, “neglected” industry. And indeed, going through your old posts you have been predicting inflation.
But instead, prices are flat, even in the face of a massive expansion of the monetary base by Bernanke. That’s what we would expect if the recession was a product of a demand issue, not a supply one.
>In his example (posted recently), spending goes down due to less consumption on the part of consumers…in other words, a demand issue, not a supply one.
Which is both unexplained, and different from his 1998 implicit argument that consumer demand should rise if investment spending falls.
>But your fable is about supply problems (poorly maintained boats etc).
Murphy was explaining the basics of a proper capital theory. He wasn’t trying to use it as a perfect analogy for the market. It is a way of thinking about the market.
Supply distortions are generated by Fed induced inflation and low interest rates. These distortions cannot be made permanent and noncorrected with monetary policy. Eventually, real physical reality sets in.
>If you want to make it all about supply, its perfectly fair to point out the islanders could have then just spent their money on the “real” goods again.
They can’t do that right away if the “real goods” take time to produce, and the higher stages of production are messed up, and require fixing.
They could not have just eaten sushi like before because that would imply all the boats, nets, and labor allocations to have been corrected before they were corrected.
>In real life, its not like the entire economy was working in construction.
Which is why true Austrian theory does not focus on sectors and industries, but entire stages of economic production.
>And even if it was, shouldn’t skyrocketing prices for the neglected, scarce goods in real demand facilitate employment for the laid off workers?
Not if they are not employed because their previous employments are not correct according to real consumer demand over time!