08 Sep 2011

Attack of the Gnomes

Economics, Shameless Self-Promotion 21 Comments

Krugman has his alien invasion, but now the Austrians can say:

The Keynesian focus on aggregates such as the “stock” of capital and “supply of labor” leads to faulty policy recommendations. The Austrian School has always had a rich conception of the structure of production. Of the major schools of thought, only the Austrians can appreciate what happens to the economy in the wake of a gnome attack — or the collapse of an unsustainable inflationary boom.

Karl Smith has two responses (and counting?) here and here. I am heading out of town, so can’t do them justice until next week. In the meantime, let me just clarify my point: I am not saying that our present recession is due to a physical rearrangement of capital goods.

Rather, what I am saying is that the arguments that Krugman, DeLong, and Noah Smith have been using, to “prove” that we are currently in a slump because of insufficient demand (rather than a Klingian Recalculation story), would also apply to my gnome scenario. Since the gnome scenario is a supply-side depression by construction, the Keynesians should pause when they are so sure that “the evidence” points to their own explanation.

21 Responses to “Attack of the Gnomes”

  1. David S. says:

    Austrianism is a major school of thought? lmao You could’ve fooled me. How many Austrians do you see at most universities? How many get published in non-Austrian journals?

    What a joke you are.

  2. Dan says:

    Dr. Murphy, if you have any pets I would suggest locking them up tight. David S. won’t be ignored.


    • MamMoTh says:

      Does Roddis qualify as pet?

  3. Daniel Kuehn says:

    I have thoughts here: http://factsandotherstubbornthings.blogspot.com/2011/09/gnomes-attack.html
    The pictures at the end make it worth click through if nothing else.

  4. Bob Roddis says:

    The “gnomes” causing the disarray are, in fact, Keynesian policies themselves which distort the pricing process, especially the pricing process for the zillions of factors of production for long term complicated capital and durable consumer goods. “Long term” and “complicated” are the key concepts here along with “the pricing process”.

    I note that Kuehn and Smith both fail to focus on the core Austrian insight and concerns.

    • Daniel Kuehn says:

      Is this not the core Austrian insight and concern: “Austrians basically say “capital is specific – distortions of price signals lead to unsustainable capital investments which will have to be worked out down the road” (the prime distortion of interest being, of course, the distortion of the time structure).”

      Because I thought I presented that pretty fairly.

      My point was not to criticize Austrians – I think they have a lot to contribute. My point was to show how Bob’s criticism didn’t quite hit the mark.

      • Daniel Hewitt says:

        More importantly Daniel, you neglected to include a photo of an alien gnome in your post.

        • Daniel Kuehn says:

          apologies – I fixed it

          • Daniel Hewitt says:

            Perfect….now you’ve covered everything!

      • Bob Roddis says:

        This reminds me of “You vant heterogeneous capital? Ve got heterogeneous capital! You vant subjective expectations? Ve got subjective expectations! Just like you guys! See, ve’re not so dumb!”


        • Daniel Kuehn says:

          And Hayek said the sky was blue, Bob (a Caplan-Boettke debate reference).

          All I’m saying is these are pretty widely agreed upon points. I’m not the one with the compatriots that are on record saying goofy things like “only we talk about the opportunity cost of capital” (yes, Austrians have said this), “only we talk about capital heterogeneity” (yes, Austrians have said this), “only we talk about subjective preferences” (yes, Austrians have said this). This sort of thing should embarrass you Bob Roddis. It shows a complete disconnect from the rest of the discipline.

          • Bob Roddis says:

            DK, you should be more disciplined than to suggest that the statist concepts that attach to that nomenclature are the same concepts as the Austrian versions. The statist versions are the result of either undisciplined analysis ignorant of Austrian insights or purposeful dissembling. And the Keynesians sure have no familiarity or understanding of our versions, do they? That should embarrass you, DK.

            • Daniel Kuehn says:

              Keynesians generally have little understanding of the Austrian mechanism of choice – the elongation of the capital structure. I personally don’t see that as all that much of a liability for them, although certainly it would be a good thing to know.

              But they certainly understand factor heterogeneity, subjectivism, etc. Claims to the contrary usually say more about the Austrian making the accusation than the Keynesian being accused.

              What does statism have to do with any of this?

              • Bob Roddis says:

                What does statism have to do with any of this?

                As I recall in the first chapter of my father’s 1948 edition of Samuelson’s magnum opus, we start off with this strange concept of “national income”. The basic Keynesian programs of money dilution and government spending debt fail to warn the mush-brained sophomore students that these concepts completely obliterate centuries-old concepts of private property, due process of law and English common law. The authors of these concepts were either undisciplined or knew exactly what they were doing in setting up a Milgram Experiment where the obliteration of the old protections could be justified as “scientifically” based and morally neutral and the victims intimidated to go along by the men in white jackets.

  5. MamMoTh says:

    Gnome attack? Ha ha ha!
    Yesterday it was virtual CPI inflation, today it’s a gnome attack, this is fantastic.
    Seriously guys, I couldn’t make it up.
    Keep the good job. This is the most entertaining site I’ve ever seen!

  6. Gnome Liberation Front says:

    We are aware of your mischievous plan to use gnomes to destroy the productive capacity of our great country.

    I have, myself, full confidence that if all do their duty, if nothing is neglected, and if the best arrangements are made, as they are being made, we shall prove ourselves once again able to defend our country, to ride out the storm of war, and to outlive the menace of Austrian tyranny.

    We shall go on to the end, we shall fight in the Mises site, we shall fight on blogs and facebook, we shall fight with growing confidence and growing strength in the internet, we shall defend our fatherland, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills.

    We shall never surrender!

  7. Martin says:

    Sushi, Gnomes, Slushy drinks, have you thought about bundling some of your columns? I really like the metaphors as an intro to Austrian economics.

    • MamMoTh says:

      Don’t forget coconuts!

  8. Martin says:

    Sushi, Gnomes and Debt,

    Having thought about it in conjunction with your sushi post, whilst reading Koo, I think you have a point: this is a supply-side recession. Koo describes the current situation, the situation in Japan, Germany in the 2000’s and the Great Depression as balance sheet recession. What does he mean by such a term? Well it means it is a recession due to players that have to rebuild their balance sheet by minimizing debt. Just think of it as an inter-temporal budget constraint where agents want to leave a bequest at the end. Asset prices have dropped and it is now less likely that they will be able to leave said bequest, so their consumption declines (Utility is determined by consumption).

    Now where do the Gnomes and the Sushi come into this? Well that’s the point its debt that tricked the entrepreneurs. Debt of other people is non-observable for entrepreneurs and they will invest based on the assumption that the people that come along have real purchasing power not due to debt. The rising asset prices however allowed people to take on more debt, to consume more and entrepreneurs, like the sushi-restaurant owner were tricked by it to invest in capital goods. When the asset prices collapsed, people’s balance sheets were underwater and they had to cut back consumption and this affected the value of the capital goods.

    What do Gnomes have to do with it? Well the Gnomes are debt. They have re-arranged capital goods all over the country when people were (unsustainably) financing their consumption with debt. When the gnomes disappeared and consumption could not longer be debt financed because asset prices had dropped and balance sheets were under water, the pattern of production no longer matched the pattern of consumption. Debt is what makes it a supply-side problem. Every consumer is a producer and when one producer relies on a debt financed consumer, all producers rely on a debt financed consumer to consume.

    Now why do we call this a demand-side problem? Once the balance sheets are restored, the patterns of consumption will partially match the patterns of production again apart from that part that was debt financed. Hayek’s (actually it was Roepke) secular depression is due to the decline in consumption by those producers that relied for that part of their income on directly or indirectly debt financed consumers. This is what makes it a ‘demand-side’ recession, because after the liquidation is complete those patterns of consumption and production that remain are those that a clean balance sheet can support.

    Say’s law still holds, the cause is the mismatch between production (sushi restaurants) and consumption (sushi eaters), a mismatch due to debt (gnomes). The depression is the solution, but because the mismatch was due to debt you have a secular depression that needs to be prevented or dealt with in some sort of way.

  9. Scott says:

    Really great article!

    Don’t listen to the other guys — I liked the gnomes! It’s a great way to get across a complex idea — for anyone who actually was trying to understand what you meant, as opposed to just looking for something petty to pick on.

    That’s always the danger of sticking your neck out and being creative.