16 Aug 2013

Even Krugman Doesn’t Believe Krugman on Hayek

Krugman 60 Comments

In this post, I walked through just how absurd it was when Paul Krugman recently said “…back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes…”

What’s funny is that Krugman himself blew up that silly claim two days later, without even realizing it, in a contradictory (or at least Kontradictory) post making fun of those nutty Austrians:

Still thinking about the Bloomberg Businessweek interview with Rand Paul, in which he nominated Milton Friedman’s corpse for Fed chairman. Before learning that Friedman was dead, Paul did concede that he wasn’t an Austrian. But I’ll bet he had no idea about the extent to which Friedman really, really wasn’t an Austrian.

In his “Comments on the critics” (of his Monetary Framework) Friedman described the “London School (really Austrian) view”

[MILTON FRIEDMAN:] that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

and dubbed this view an “atrophied and rigid caricature” of the quantity theory. The Chicago School, he claimed, never believed in such nonsense.

I put the important part in bold above. Do you see the significance? In his zeal to rip Hayek, Krugman is admitting that Hayek spoke for the London School as well as the Austrian economists. So, unless Hayek’s mom was the only other person in the econ faculty, I think we can safely declare that Krugman (and his apologist, Kevin Donoghue) are wrong about Hayek’s influence at the time.

Moreover, von Pepe in the comments pointed out yet another inconsistency in Krugman’s beef against Hayek’s (seemingly) liquidationist writings of the early 1930s (with mild edits from me for clarity/typos):

[T]his is why I get frustrated with arguments that the Austrians were wrong or caused the Great Depression:

1. Hayek was irrelevant in the ’20s and ’30s; no one took him seriously. He was not even a footnote to Keynes.

2. Hayek’s advice was followed religiously to liquidate everything and Hayek only allowed medium-level deficit spending. If he had allowed bigger deficits, no Great Depression.

3. Hayek’s monetary policy caused the Depression–yet no one even paid attention to him.

4. Sticky wages were a problem. Hayek thought if you let the market adjust it would fix many problems. But, AD people thought that keeping wages high would get us going: AD, AD, AD…
So, we did the opposite of Hayek’s theory–Hayek’s fault…

60 Responses to “Even Krugman Doesn’t Believe Krugman on Hayek”

  1. Edward says:

    We didn’t exactly follow AUSTRIANISM, but we followed AUSTERIANISM, which is, while not the same, part of the same school of hard money tight budget nonsense

    • Major_Freedom says:

      Yeah, the Fed was super duper tight throughout the 1930s:


      • Edward says:

        You are an ignoramus, the monetary base is an unreliable indicator. The only reliable indicator is MV or NGDP

      • Edward says:

        The monetary base is an unreliable indicator. The only reliable indicator is NGDP

        • guest says:

          Would you be willing to watch this?:

          The Birth of the Austrian School | Josep T. Salerno

          You shouldn’t be trying to measure “output” – it’s vague.

        • Matt Tanous says:

          “The only reliable indicator is NGDP”

          Yeah, sure buddy. Never mind that NGDP could rise by 5% every year by paying ever more money for one guy to dig a ditch.

          $10 billion horse and buggy industry replaced by $5 billion automobile industry. NGDP falls drastically. CRISIS! RECESSION!

        • rayray says:

          This number doesn’t justify my theories! Try new number!

      • Edward says:

        It WAS super duper tight.

        • Joseph Fetz says:

          If by “tight” you mean that they, “didn’t have enough tools of intervention to reach their aims”, then I guess you might be right. But then, isn’t that always the case?

          • Dan says:

            Maybe he is using tight in the slang way like “that shit is tight.” Otherwise the word has lost all meaning.

  2. Edward says:

    And Hoover’s early deficits, were minuscule, pathetic, as a percentage of gdp, and quickly turned into a surplus. The Fed did indeed cut rates, tis true, but we have two ways of looking at things.

    1. REAL interest rates were extraordinarily high during the credit collapse.

    2. “Low interest rates are generally a sign that…….”

    • Major_Freedom says:

      1. Which is one of the reasons why the slump was postponed.

      2. The Fed is loosening.

      • Edward says:

        1. That’s why the economy prospered in 1929-1933 (what universe are you living in?)

        2. It’s like you neverending even heard of Scott Sumer

      • Edward says:

        1. What the heck are you talking about? Are you saying the Great Contraction of 1929-1933 was a prosperous period?

        2. It’s like you’ve never even heard of Scott Sumner

    • Matt Tanous says:

      “And Hoover’s early deficits, were minuscule, pathetic, as a percentage of gdp, and quickly turned into a surplus.”

      There was no surplus after Coolidge left office….

  3. Edward says:

    Apologies about the “percentage of gdp” comments, (I was wrong about that) deficits under Hoover actually ROSE as a percentage of gdp because of the collapsing economy, even though the absolute number shrank, while Roosevelt increased the deficit in absolute terms, but the economy rose with it

    • Major_Freedom says:

      The economy shouldn’t include government consumption. It is inaccurate.

      • Edward says:

        Private C and I rose along with G

        • Joseph Fetz says:

          Wow! You spotted a correlation. Everybody, please give this man Edward a round of applause.

          :clap clap clap:

  4. Edward says:

    “part of the same school of hard money tight budget nonsense”

    I’m understating myself here. Tight money and hard budgets in Germany brought the rise of Hitler. (Among other things) Nonsense?


    • Major_Freedom says:

      Germany’s economy went through massive deflation beceause of prior massive hyperinflation.

      Anything looks like tight money after hyperinflation.

      It was hyperinflation that helped bring about Hitler, not the inevitable deflation thereafter.

      • Lord Keynes says:

        “It was hyperinflation that helped bring about Hitler, not the inevitable deflation thereafter.”

        MF wins another prize for gross ignorance.

        Hitler came to power in 1933 after the deflationary depression of 1930-1932. That deflationary depression was not caused by, or any inevitable consequence of , the hyperinflation that ended *10 years* beforehand.

        Nazi power had in fact collapsed during the 1920s and only soared on the onset of the German depression:

        “the Nazi Party was catapulted to national importance in the Reichstag elections of September 1930. After receiving 6.6 percent of the popular vote, or 32 Reichstag seats, in May 1924, the Nazis had won only 2.6 percent of the popular vote, or 12 Reichstag seats, in the elections of May 1928. In September 1930, they increased their support to 18.3 percent, for 107 Reichstag seats.”

        Peter Hoffman, German Resistance to Hitler, p. 10.

        Even after the hyperinflation from 1919-1923, the Nazis only managed to secure 6.5% of the vote. Contrast that with their soaring popularity after the depression hit Germany:

        Election Date | % of vote | Seats
        May 1924 | 6.5% | 32
        Dec. 1924 | 3.0% | 14
        May 1928 | 2.6% | 12
        Sep. 1930 | 18.3% | 107
        July 1932 | 37.3% | 230
        Nov. 1932 | 33.1% | 196
        March 1933 | 43.9% | 288

        • Ken B says:

          This is a religious point for some posters here LK. Their causal history is: Lincoln caused Wilson caused hyperinflation caused Hitler.

        • Bob Roddis says:

          There was certainly enough prior inflation to cause prices to reach unsustainable levels or else there would have been no tendency for a general deflationary price reduction.

          The problems are always caused by the prior credit/money expansion which distorts prices from their unadulterated levels.

          For forty years I have preached that the time to prevent a depression is during the preceding boom; and that, once a depression has started, there is little one can do about it. My advice was completely disregarded as long as the boom lasted. Now suddenly, when my prediction has come true and we have reached the stage where, in my opinion, little can be done about the inevitable reaction which has set in, people suddenly turn to me and ask for my opinion. I am very much tempted to answer, “Well, if you had listened to me before, you wouldn’t be in that mess”. Hayek 1975

          • Edward says:

            10 years should be enough to liquidate any non-existent mal-investment.

            • Bob Roddis says:

              The businesses that could not sell their stuff (which is why there is a depression) are malinvestments. Good grief.

              People were led by intervention and artificial credit expansion to invest money and labor into lines of production that were not sustainable absent further injections of artificial credit.

            • Bob Roddis says:

              And you know this already because otherwise you would not be chomping at the bit for further injections of artificial credit.

            • K.P. says:

              What about existent mal-investment? How long *should* that take to be liquidated?

              • Bob Roddis says:

                Who knows? When debts are not paid, creditors sue. When judgments are not paid, creditors seize and sell assets. When creditors have liens and debts are not paid, they foreclose. That’s all up to the parties involved. Since the entire problem was created by the false and distorted prices as the result of funny money, it’s pointless to inject a new round of funny money onto society and create even more false and distorted prices.

        • Bob Roddis says:

          After a few decades, it gets disheartening to realize that our opponents will always refuse to focus upon the pricing process, price distortions and the economic miscalculation caused by their “cures” for the problems caused by their policies in the first place.

          • Edward says:

            Here we go again. You’re. Like a bad cartoon character.

            • Bob Roddis says:

              Because nothing you have ever said suggests that you understand the concepts. And it obvious that you don’t understand them.

              • Bob Roddis says:

                TYPO: And it IS obvious that you don’t understand them.

              • Edward says:

                And you’re a whiner too.

              • Bob Roddis says:


                Lord Keynes knows much much more about Austrian economics than you do. But he still does not understand the concept of economic calculation.


                And Ken B knows 18 billion times as much as you do.

              • Lord Keynes says:

                So is convergence towards market clearing prices by human action a key aspect of the Austrian idea of economic calculation, bob?

                Or are you still ignorant beyond words of your own *basic Austrian concepts*?:

                I do not like the term “market clearing prices”. I don’t use it and I do not think it is particularly helpful in understanding reality. When I see the term used, my reaction is always “WTF are you actually trying to say”?”


              • Lord Keynes says:

                Or if you have retreated in embarrassment from your ignorant statement, does this Salerno quote accurately reflect the important role of convergence towards market clearing prices in Misesian economic calculation?:

                “Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).

              • Bob Roddis says:


                We’ve been over this 57 times before. You are either unable to comprehend or else you don’t want to.

              • Lord Keynes says:

                Translation: you’re running away, because on every occasion when you accuse me of not understanding Austrian economic calculation, it’s quickly demonstrated that you’re talking rubbish and also that you yourself have no proper understanding of it, just as in your ludicrous admission above, where you announced that when you see the term “market clearing prices,” your “reaction is always “WTF are you actually trying to say”?”!!

              • Richie says:

                Ah, another day the sun rises in the east, which means that LK and Roddis are going to type the same crap over and over and over and over and over and over and over. I wish you guys would do a duel and get it over with.

            • Bob Roddis says:

              I’m going to the beach. There is nothing left to say to LK.

        • guest says:

          I don’t know if you’ll accept that they are related. Apparently, Hitler talked about the Treaty of Versailles and inflation influencing his activism.

          Check this out, too, regarding the Dawes Plan:

          Dawes Plan

          At the conclusion of World War I, the Triple Entente included in the Treaty of Versailles a plan for reparations to be paid by Germany.

          The Dawes Plan relied on capital lent to Germany by a consortium of American investment banks, led by the Morgan Guaranty Trust Company, under supervision by the US State Department.

          The Dawes Plan provided short-term economic benefits to the German economy and softened the burdens of war reparations. By stabilizing the currency, it brought increased foreign investments and loans to the German market. But, it made the German economy dependent on foreign markets and economies. As the U.S. economy developed problems under the Great Depression, Germany and other countries involved economically with it also suffered. The Allies owed the US debt repayments for loans.

          After World War I, this cycle of money from U.S. loans to Germany, which made reparations to other European nations, who paid off their debts to the United States, locked the western world’s economy into that of the U.S.

          So the hyperinflation was stopped by investments from a more stable, *yet still inflationary* currency (remember, the Fed was inflating the money supply in the 1920’s.

          So, it’s like the hyperinflation never really stopped – it just got exported to the U.S. in the form of investments from another bubble economy.

          • Edward says:

            NGDP was not running at super high levels during the 20’s in the US though.

            • Bob Roddis says:

              Why would any sane and/or moral person suggest a policy which purposefully employs “nominal” [fake, lying, phony, distorted] prices in the first place? Who appointed you God?

          • Bob Roddis says:

            Central banking and going off “the gold standard” enabled the war while the massive statist/interventionist scheme distorted prices and markets. There is no evidence whatsoever that the problems leading up to and/or causing the Great Depression (or the 1920 depression) had anything to do with “market failure”.

            • Edward says:

              The gold standard enabled the depression

              It was a government failure

              • Matt Tanous says:

                Yep. That’s why there hasn’t been any sort of economic trouble since we went off the gold standard.

                Except the mid-Depression crash of 1937, the post-war crash in 1945, another in 1948, another in 1953, still another in 1957….

                Plus 1960, 1969, 1973, 1980, 1981, 1990, 2001, and this last one in 2007.

                According to NBER, we had 15 recessions prior to the creation of the FED. 5 more between the creation of the FED and the Great Depression, and 13 after the Great Depression when we lost all vestiges of a gold standard.

              • Lord Keynes says:

                ” another in 1948, another in 1953, still another in 1957….

                Plus 1960, 1969, 1973, 1980, 1981, 1990, 2001, and this last one in 2007.”

                Except none of those were depressions, defined as real output contractions of 10% or more. They were nearly all mild to moderate contractions., and the data shows less output volatility post 1945 than under gold standards.

                And the length of recessions post 1945 shortened significantly while the duration of expansions increased.

                So if bothered to look you would find that modern macro policies have produced greater economic stability.

              • Richie says:

                Why are there contractions at all since ending the gold standard?

          • guest says:

            So, it’s like the hyperinflation never really stopped – it just got exported to the U.S. …

            I take this back. It looks like this had more to do with the stabilization:

            Hyperinflation in the Weimar Republic

            The Agriculture Minister Hans Luther proposed a different plan which substituted gold for rye and a new currency, the Rentenmark, backed by bonds indexed to market prices (in paper Marks) of gold.[17]

            After November 12, 1923, when Hjalmar Schacht became currency commissioner, the Reichsbank, the old central bank, was not allowed to discount any further government Treasury bills, which meant the corresponding issue of paper marks also ceased.[18] Discounting of commercial trade bills was allowed and the amount of Rentenmarks expanded, but the issue was strictly controlled to conform to current commercial and government transactions. The new Rentenbank refused credit to the government and to speculators who were not able to borrow Rentenmarks, because Rentenmarks were not legal tender.[19]

  5. Edward says:

    I was reading about Roosevelt torpedoing the London Economic Conference in 1933.

    He was “magnificently right” to do that.


  6. Edward says:

    “while not the same”

    not EXACTLY the same

  7. Daniel Kuehn says:

    I think von Pepe is confusing claims that Krugman is well known for making and claims that DeLong is well known for making.

    • noiselull says:

      The “dehomogenization” begins!

  8. Bob Roddis says:

    I can sleep so much better knowing LK found proof that Hayek really was a liquidationist.



  9. Kevin Donoghue says:

    Fair dues, Bob Murphy has a point. If I were advising Krugman (not that a mere apologist has any business offering advice), I’d suggest modifying his claim to read:

    In the late 1930s, following the publication of the General Theory, no prominent economist other than Hayek himself and possibly Lionel Robbins thought he could offer a theory to rival that of Keynes.

    There’s no doubt that in the early 1930s Hayek had some loyal followers at the LSE and also, funnily enough, in the ranks of the Labour Party where Keynes was viewed with suspicion.

    Skidelsky’s great biography of Keynes describes the impact of the GT: “The Austrian outpost at the LSE crumbled. Hayek and Robbins offered no reply: the younger members of the faculty – Lerner, Kaldor, Hicks – deserted to the Keynesian camp.”

    • Ken Pruitt says:

      The reason Hayek didn’t reply outright to the GT was because he didn’t like scholarly fights, but of course he did (inadvertently) write a book blasting Keynes’s GT in the form of various articles which was later compiled into a book called “Tiger by the Tail”.

      Of course, the single most devastating Austrian critique of the GT has got to be “The Failure of the ‘New Economics'” by Henry Hazlitt, which is a line-by-line refutation of the GT, and Hazlitt proves beyond all doubts that far from being a great treatise on economics, the GT is nothing more than a hodgepodge of fallacies, contradictions, and factual inaccuracies, and he goes on to say, “There is nothing in the General Theory that is both true and original at the same time; what is true is not original, and what is original isn’t true.”

      • sdfc says:

        Only Hazlitt didn’t understand the GT.

        His inability to understand Keynes simple equation q-c+l suggests he had no idea of the concept of the risk and return trade off and the impact on investment decisions.

        Getting back to the depression, the heart of the problem was huge private sector debt just as it has been since the US mortgage market crapped itself.

        There have been two episodes when the economy did not respond to Fed rate cuts with a sharp rebound as far as I know, the early 30s and the GFC. Both were/are periods of very high levels of private sector debt.

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