Paul and the Austrians (again)

Robert Waldmann

is still trying to get Paul Krugman to read my answer to his question. Krugman explaines the neo-Austrian view of the business cycle and unemployment during recessions and asks

“why isn’t there similar unemployment during the boom, as workers are transferred into investment goods production?”

I answer (in comments and here)

I think that there is a simple answer to your question. However, the answer implies that market outcomes are not efficient and therefore is abhorred by Austrians.

Labor market rents.

In my view, there is overwhelming evidence that the same worker is paid different wages if he works in different sectors. In particular, workers are paid high wages in manufacturing and lower wages in services. I think that’s what makes the shift from capital goods production to consumer goods and services production painful, while the opposite shift is not painful.

Consider a simple economy with steel mills and fast food joints. In an expansion people make steel and eat bread. In a contraction, they don’t make steel and drown their sorrows in big macs and thick shakes (here the key defining feature of fast food is that production of fast food is labor intensive — that is people eat fast food when there is spare labor because it takes time and I have totally messed up my metaphors and oh hell).

Your argument is “Look if steel mills have no trouble attracting new workers who have to quit their jobs at McDonald’s in a boom, why does it take a long time for workers laid off from a steel mill to get a job at a McDonald’s in a contraction.” I think if you put it that way and say that economists are struggling to find an answer, then you will manage the very difficult accomplishment of making normal people’s opinion of us lower than it is already.

I think the problem with the Austrians is not that they are allergic to equations. It is that they have blind faith that labor markets clear. This makes it, ahem, a bit difficult to explain unemployment. Their problem is that they know what everyone else knows but won’t let it into their non models.