Paul and the Austrians (again)
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.
> In particular, workers are paid high wages in manufacturing and lower wages in services
Why is that so? Wouldn’t manufacturers try to press wages down to service levels. Or are they more vulnerable to strikes etc.?
Quote: “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”
Is there any evidence for this phenomenon? I would think that in an expansion, when people are working longer hours making steel, that increased fast food consumption would occur, and conversely, during a contraction, less paid dining out would follow. (at least that’s been my approach during my 4½ months of un-employment during the latests contraction)
The answer is that the Austrians are simply wrong when they claim that unemployment during the bust is due to labor market frictions that arise when workers must move from one sector to another. If they were right, then as Krugman notes, you’d have the same unemployment problem during the boom since workers are again moving across sectors. And there’s no need to invoke labor market rents.
Workers are paid according to the productivity of the work, not the worker. Steel being more expensive with higher profit margins and lower labor input allows higher pay while fast food does not.
It is very hard to understand why this is so. The evidence is really very strong. The best evidence comes when factories close. This tells us nothing about individual workers. Of course they suffer unemployment and then when they get a new job tend to have a lower wage. The loss in wages is huge if the lost a job in a high wage manufacturing sector (steel automobiles) and roughly zero if they lost a job in a low wage manucfacturing sector (textiles). The data are basically limited to job losses in manufacturing so there aren’t data on people who lost jobs in the really low wage sectors.
Macdonald’s was a terrible example. I chose it because those are notoriously low wage bad jobs. However, you have an important point. It just isn’t true that employment in low wage sectors grows during recessions. Employment in high manufacturing is more cyclical, but employment is services declines in recessions too.
Now in one way, the idea is to consider what would happen to employment with perfect frictionless labor markets — that is employment *should* increase in consumption goods production and services. In general this doesn’t require an increase in demand for, say, hamburgers for given prices. Rather the idea is that with high unemployment wages drop so hamburgers become cheaper so people buy more hamburgers (and would buy more factories but there is no point since they have excess capacity already).
It doesn’t because workers who worked in manufacturing choose to wait to get their old jobs back and either do (the way things used to be) or give up after a long spell of unemployment (the way things have been in the past 3 recessions).
So I could claim that my model explains why a decline in demand for capital goods (or houses) causes a decline in employment in those sectors even though there is no increase in employment in other sectors. I mean it does aim to explain the decline in total employment.
However, sad to say, when I get down to equations I can’t get it to work without the goods (and service) in the low wage sector being inferior goods so demand increases (for fixed prices) when income decreases. I’m sure someone smarter than me could get it to work, but I can’t.
Lord, you view is absolutely inconsistent with conventional economic theory. In particular, in a standard neoclassical model, workers shift so that the marginal product of a given worker is the same in all sectors. So the wage is the same too.
You observe that wages depend on the average product of labor not the marginal product of labor (which can be as low as zero for any share of labor and any profit margin if the firm is working at 100% really full capacity). Yes indeed. Therefore standard economic theory, including especially the idea that Laissez faire leads to Pareto efficient outcomes, is nonsense.
Oh by the way, this conclusion contra laissez faire is due to Larry Katz and Larry Summers (not to mention Greg Mankiw didn’t express any disagreement when Katz presented the argument).
Rich the whole point of my post is to argue that the symmetry argued by Krugman is broken if there are labor market rents. I too think that the Austrians are simply wrong, but Krugman’s argument (which you quote) is invalid if there are labor market rents.
Also given the solid proof that there are labor market rents any econolmist who hopes that economics will ever be a science must invoke labor market rents. They are needed for realism.
You are assuming that one should stick as close to standard assumptions as one can.
If the direct evidence (on wages) is against the standard assumptions then a model which does not do violence to the evidende is better than a model which is refuted by the data.
This is totally blindlingly obvious. Yet your view is obviously dominant withing the economics profession.
Please attempt to define the phrases “Occams razor” and “scientific method.” then return to the sentence “There is no need to invoke labor market rents.” Try to understand whether you have declared you opposition to the scientific method.
I have just claimed that there is overwhelming evidence for labor market rents. If you doubt this, I will provide you with cites. However, for the purpose of a debate about methodology, I ask you to pretend that there is such evidence. If there is, how could there possibly be “no need to invoke labor market rents.”
First, consider a perfectly spherical Austrian.
No, wait, wait. First, consider a perfectly spherical simple economy.
No! No. Wait. First, consider a perfectly spherical Paul Krugman.
Yes. Yes! First, consider a perfectly spherical Austrian AND a perfectly spherical simple economy AND a perfectly spherical Paul Krugman.
Second, discuss amongst yourselves.
Ernst gets a gold-plated Wet Keyboard Award. Lucky for me it was water, not chocolate milk.
Indeed. Using neoclassical assumptions to attack a neoclassical corruption neo-Austrianism only begs the question of what part of the whole of Austrian theory might actually remain useful were the corruption to be carved out.
At the same time, the very question becomes even more damaging to conventional theories which are actually quite consistent from a logical/mathematical standpoint. Because with greater internal consistency comes an even more wholesome disruption in the face of contrary evidence.
It took me several years after accepting the assumptions of rational expectations, efficient markets, and marginal utility — in order to give a bona fide hearing to some of the conventional explanations of inflation, employment, & business cycles — before realizing how utterly bizarre and metaphysical the notion of inelastic rents actually is. When our civilization returns to “normal times”, we will still have our conventional, coincidental models, taught by many of the same conventional voices, but will we have consistent models explaining times outside the normal frame? Not if arguments like Krugman’s today suffice for disinterested critique.
Firstly, let me say that if normal people didn’t have economists to pick on, then we would not have any politically acceptable group to pick on, and would have no outlet for our sarcasm and snippy remarks, and would probably develop hives, acne, ulcers, or worse. So economists are good for something.
But in addition to that wisdom, I can state a couple anecdotal reasons.
One is union rules. When a union company rehires, they are required to offer the job to laid off workers first. So the ex-Boeing worker dumps his 15k/year MacDonald’s job and gets his 70K/year plus 40% bennies job back.
Different industries have different pay scales for similar training. My brother runs a casino down the road from a GM plant. When GM is down he has no trouble hiring slot machine techs and IT people. When GM is up, they all quit and go to work for GM. He didn’t say what he does then.
Fortunately, I guess, if companies find out their laid off workers make half as much in their new jobs, they do resist the temptation to cut their remaining worker pay in half. Deep down inside they do believe experienced workers may be worth more to the company.
Job experience and skills pay more. If you take that under-employed job, you will dump it as soon as something close to your real skill and experience becomes available.
In a boom, companies are more willing to hire trainess, and train, because they feel they must.
But the problem remains…who will buy a Big Mac if you can make a better one at home for half the unemployment money?
The price of hamburgers does not drop either. For some reason employers like McDonalds cut employment and the output burgers and maintain prices. There is probably some regulation in the franchise agreement. Mind you I did not notice a drop in the price of hotdogs by street vendors either. They just sell fewer hot dogs.
Do labor market rents (is that the same thing as efficiency wages or endogenous enforcement?) cause extra unemployment? Is it like musical chairs, always with one fewer chair than people, or does it all cancel out happily somehow?
Is there anything Austrians “know” that others camps don’t, or are they just different because of what they ignore?
I’ve been reading James K. Galbraith’s “Predator State” in which he argues that the very concept of a “labor market” is fiction. I like his argument. I also generally like Waldmann’s arguments, except in this case where he is taking a fiction (which usually hurts actual workers when it is applied) and further hurtfully extending it with the concept of rents being extracted by greedy workers. I see you can read an academic version of the labor market is fiction argument here:
I see in the blurb that Galbraith also takes a stab at explaining pay differences, unemployment, etc., without the market metaphor.
I suspect much of the loss in the textiles industry was due to plant inefficiencies as opposed to labor cost. Funny thing with tariffs such as the MFA, the proceeds and profits often times are not plowed back into manufacturing to improve efficiency. They are taken as dividends are used for other things. In the end, the plant closes and production moves. http://www.nap.edu/openbook.php?record_id=292&page=57 (read fabric firms and apparel firms)
2003, Workers made between $9-$11/hour. Levis Strauss closed its remaining plants in the US moving all production overseas. http://www.commondreams.org/headlines03/0926-03.htm Not sure if one would call $9-$11/hour low then. This came upon the tail end of the MFA and the signing of NAFTA. Little was done to protect certain US industries the same as what Canada has and other countries have done in signing trade agreements.
You may like this also: http://ntcresearch.com/pdf-rpts/AnRp95/A95A9304.pdf MFA Phaseout: Implications for The US Fibers/Textiles/Fabricated Products Complex
I am not sure what a high labor wage is as there is so little content of labor within the final product and in each of the intermediate steps in between.
Yes labor market rents cause increased unempllyment. Efficiency wages are a theoretical explanation for labor market rents. In a moral hazard model of efficiency wages (model with imperfect monitoring so workers must be afraid of losing their jobs or they don’t work) unemployment is necessary for the capitalist system to work at all.
I really think that the evidence that there are labor market rents is very very strong. However, that doesn’t mean that any particular theory fits the facts. The moral hazard model of efficiency wages has a lot of trouble explaining why all wages at high wage firms are high including wages of janitors and secretaries.
should I assume that I am perfectly spherical too ?
If so, how do I type ?
I didn’t mean to suggest workers were greedy. I don’t use rents as a pejorative term. The point is just to be descriptive. I didn’t say anything about what is fair and unfair.
Actually the rents story is very save the rustbelty. For example, if there are labor market rents, then national wealth can be increased by protecting high wage industries from imports. It might still hurt the country if other countries retaliate, but the standard economists argument that a country hurts itself by imposing tariffs on imports falls apart if there are labor market rents.
Here (as usual) the guy in the street is way ahead of the economist. They all assume that the point of tariffs is to keep the good jobs at good wages here. This argument makes perfect sense and corresponds to the facts which economists usually assume can’t be that way because uhm we assume that they aren’t that way.
Well you could pick on bankers a bit. Also lawyers.
It is very hard to reconcile purchases of big Macs with the hypothesis that people are rational utility maximizers.
Doesn’t considering the marginal cost of each worker get you a sort of Zeno’s paradox? If a new piece of equipment requires two workers to run it, you can’t install it since the marginal output of the first new worker you hire is zero.
But we also know that no nation has ever industrialized without imposing tariffs on imports with or without labor rents. While tariffs might hurt a nation, not industrializing or deindustrializing will hurt more.
Probably the biggest omission in economics is that it ignores the primary basis of economic decision making, power relationships. If you start with the anthropological structure and analyze the power relationships, the economics falls out and matches the real world data. If you introduce “rational actors’, “market equilibria” and other such nonsense, you still have the sun orbiting the earth.
Thanks for that link, interesting paper.
I think he is slowing waking up to what is going on. But it goes much deeper than all this people.
I subscribe to the FFT newsletter at http://www.forecastfortomorrow.com that guy knows what is happening, and he says a bigger event to come in the next few months. If you look back he has been spot on with things over many years, and someone that should be listened too!
Actually, lawyers were my favorite, but have been superseded by bankers. Economists are a distant third.
I make a hell of a taco, too.
Which, of course, there are such rents due to increasing returns to scale and monopolistic competition. Without this we would be living in Ricardo’s world.
“Rents” does not need to mean marginal returns either. Clearly it is the marginal conception of the labor market Galbraith calls dangerous, not wage elasticity per se.
Rents in Waldman’s context (as I see it) are simply bargained consideration in the course of some productive usufruct. This is the conventional paradigm usage. That notions of rationality, completeness or efficiency may or may not apply in any given case does not change the nature of wages as rent. That labor rents tend to be the outputs of complex social processes does not make the null assumption of fixed wage levels in reality any less falsifiable.
The problem unique to Austrianism is not necessarily in its misconception of labor markets anyway. All neoclassicals are guilty of that to some extent. The real problem with Austrianism in the longstanding assumption of perfect dichotomy between “consumer” and “investment” goods in the very first place. It is rather perfectly demonstrable that money does not oscillate between these categories in some indefinite series of efficient cycles. It instead converges from initial conditions of fungibility to some intractable limit of inequity and waste. In practice, the concept is merely a projection of Marxist industrial bloat, only in ideological service of financial capital instead of labor. Here, then is the disingenuousness of the Austrian liquidation remedy as adopted by modern EM, QTM, and/or RE practitioners, an indirect admission that their theory of prediction and control is, still after all these years, one of ancient moral metaphysics rather than of physical or social cause and effect.
It should not be a surprise, then, that Neo-Austrians are able to carry such heavy loads of cognitive dissonance in their daily lives, as these are the very situations for which religions and political ideologies are designed. It is not just frustrating but also very sad, as we all know how effective rational critique can be for persuading hyperreligious persons we might otherwise care about to consider high-definition pictures of plain reality.
Austrian Business Cycle Theory predicts that we are in the end stages of a “crack up boom” which will end with the total debasement of our currency.
So where do you see the economy headed in 10 years?
The Austrian School would call this a crack up boom that will end in the total debasement of the currency.
“It is not just frustrating but also very sad, as we all know how effective rational critique can be for persuading hyperreligious persons we might otherwise care about to consider high-definition pictures of plain reality.”
I imagine it would also sadden Von Mises that for some people an extremely complex set of algorithms and mathematical formulae are required to explain the noses directly in front of their own faces.
That is why you are supposed to consider the marginal cost and marginal revenue product of the marginal worker. The point is that if you have n identical workers, each should be paid the marginal revenue product of the n, that is revenues minus the highest revenue which can be obtained with n-1 of them. Notice the phrase “marginal revenue product” this is only equal to a constant price vector times the marginal physical product (amount of goods and services which couldn’t be produced with one less worker) if there is perfect competition. You assume increaseing returns to scale (over a very small range of scales) so perfect competition would imply negative profits in that case. I mean obviously perfect competition has nothing to do with the real world — that’s why it’s a standard assumption.
More generally the wage = marginal revenue product is a first order condition. In general satisfying a foc is necessary but not sufficient for a maximum. It is sufficient if the production possibility set is convex. In your example (and in the real world) this assumption is obviously false — that’s why it too is a standard assumption.
Note upthread how I totally lose it when Rich S says it is not necessary to invoke labor market rents. Rich S is absolutely applying the standard methodology of economics which asserts that models which are inconsistent with the available data are to be prefered to models which are consistent with the data if both can fit some subset of data of particular interest given the current topic of discussion. So if you can explain why unemployment is higher in recessions than in booms without “invoking” labor market rents, then you shouldn’t “invoke” labor market rents.
Note that “invoke” is a verb which is used when describing religious ceremonies and economic theory. A medium or shaman invokes spirits. Is Rich S saying that economic theory is and should be like a seance ? I’d say that he definitely is.
Nothing personal. That approach is absolutely standard in economic theory.
With a Selectric typeball, obviously. Duh.
The assumption is that you don’t type. If you do type, then the assumption is wrong, therefore identifiably Austrian.
I don’t think there’s any question that “credit cycle” is a reasonable lemma for argument, as opposed to QTM-based theories that populated the 20th century, which happened to be accompanied by some heavy math. But let’s keep in mind that Austrians before and after Mises have bought in fully to the idea of a natural interest rate and monetary accounting on the basis of a central bank supplier of currency. That Austrians believe a central bank even has the power to distort credit is a deus ex machina concept of markets that leaves human beings with less rational capacity than Mises’ own praxeology would require.
And the basic question of unemployment remains, leaving the Austrian accounting scheme stubbornly unsatisfying in the marketplace of serious ideas. Regardless of the level of math, Austrians still cannot expect to fool all the people all the time with such strong conditions of rationality, even while forgoing basic tests of contradiction and equivocation when explaining the bifurcate nature of money and credit to an audience. It is the first of a long line of cliches in the grand cliche of brotherly inquiry over the validity of Austrian theory: If money is not neutral, then why is a central bank such a powerful driver in the Austrian narrative. To answer the question accurately is only to arrive in one of the competing orthodoxies. This gradual equivocation of money and credit in the Austrian theoretical history is as disappointing as that of any of their 20th century counterparts. It is plain to see the ideological passion of Austrians, and I believe it is now simply a matter of escalating commitment in the face of the evidence; In this case the evidence is as clear as it has been since 1913 or earlier, that markets as endogenous sources of credit are indeed beyond the control of any central bank relying on some notion of commodity interest and monopoly control of currency.
“So where do you see the economy headed in 10 years?”
This begs the question of what is meant by “currency,” how one measures the value of currency. Is it by “purchasing power,” as in CPI/PCE indices? “Gold?” If so, I wonder if human beings in Mises’ day were able to purchase a laptop computer or a sport utility vehicle with their “dollars,” which were supposedly much more “powerful” than today’s “dollar.” I do not trade currencies or peg my earnings to gold, so I do not care about what these things look like in 10 years.
In the alternative, should we mark “the dollar” to going market conventions assuming strong or even moderate efficiency? Do we measure the “debasement of the currency” by proxy for money supply on a rational expectations assumption, as in yields on treasury securities? Or are we not talking about currency at all, but rather private credit outstanding, or earnings, or employment, or national accounts, or what. Austrians are as free to introduce a testable frames of reference as anyone, as free to improve on the going interpretations of fundamentals as anyone. But what will certainly not help any legacy is to continue blaming simple inherent contradictions in one’s own logic on someone else’s complex extrapolations of the same. In this respect, Krugman still has a point, though his claims of keynesian sufficiency by comparison are suspect for other reasons. I think Waldman here has identified one of these reasons well, considering the capacity of “blogs” to save humanity from the eternal darkness, generally.
Here is my prediction, anyway. I predict that at some point between 2011 and 2021, the economy will exhibit a chronology of features consistent with several additional years of historical age. Not least of these will be a rise in stocks, and also […]
I think what you’re saying could be “a” factor in recessions, or unemployment, but not that large of one. Empirically and theoretically the evidence is that Keynesian style demand decrease is a far stronger factor.
Along the same line as your explanation is this one I put forward in Krugman’s comments:
I think there are lots of ways to disprove the Austrian conclusions to the real world — why is there unemployment outside the changing sector? Due to decreased spinoff spending? Then why isn’t it that any decreased spending can cause unemployment as Keyes said? — but what about tackling the argument that frictional unemployment is higher after a bubble than it is during a boom into some new technology?
That it’s harder and it takes longer to think of efficient new uses for workers after a bust than it does during a boom, like the IT boom, where people think it’s obvious, quickly hire them laying fiber optic cable, building offices for dot coms, etc. I don’t think this is really a factor in recessions/depressions but it would be nice to see your argument.
Buddy, no offence, but it sure takes you some big words and an awful lot of them to say absolutely nothing.
You could easily become Fed Chairman
Pal, no offense, but ambiguous questions tend to generate reciprocity. “Where do you see the economy in 10 years?”
Please also note that in my saying “absolutely nothing,” the impetus for the comment was Austrian Theory of Business Cycles. I once read a book called “Capital and Wages;” that may be where I picked up the habit.
“You could easily become Fed Chairman.” AndyC, no offense, but if you are an Austrian True Believer, please put all your savings into short positions on the dollar. Be sure to use your “crack-up” model to price before you buy.
Economics will be a science when we have someone capable of the feats of Hari Seldon.
But doesn’t everyone recognize the difficulty of the 3 body problem?
“It is sufficient if the production possibility set is convex.”
The picture here certainly implies basic errors in accounting logic even if there were no mismatch between the assumptions of “one price” aggregatability and “real world” observations. Indeed, Austrians understand as well as anyone the trajectory of logical auto-annihilation that perfect marginal utility implies. If there is a disconnect between savings and wages somewhere in the runup to a bust, Austrians, arguably, should know it best.
So at this point in history I think we can conclude the Austrian phenomenon is not just some cross-section of juveniles going through a stage, but a bona fide death cult from the ages, simultaneously worshipping and blaming the same supernatural entity for the contradictions we/they cannot overcome.
How does one fight this. With a mirror? It only seems to encourage them.
Perhaps one might start in academia by modeling business cycles as dynamic proportions of western labor populations mistaking their savings for earnings in one production period to the proportion of glibertarian a-holes confusing unemployment with leisure in the next…
To model this we could just assume any overlap area becomes a single aggregate fund of capital, and assume a fixed, flat allocation of resources in each subsequent period for all these actors. Then fashion some kind of periodic encapsulation process for this residual capital — what I might call “anti-capital” or “badwill” — followed by self-fueled, self-piloted launchings into the sun. This sun could be angry or happy, it wouldn’t necessarily be relevant for the model.
And yes it would be great if bankruptcy were spherical, but I think we would have some leeway to decide what to invoke here from a design standpoint. Just throwing stuff out there for now. Out of chaos comes order, as the Austrians like to say.
“Pal, no offense, but ambiguous questions tend to generate reciprocity.”
I think the question and the answer to the question from an Austrian stand point that I was able to state are totally unambiguous and very succinct.
I cant speak for all Austrian School advocates but as per my understanding of Austrian Business Cycle Theory we are obviously in a crack up boom of epic and global proportions.
“AndyC, no offense, but if you are an Austrian True Believer, please put all your savings into short positions on the dollar.”
I already have.
I see a lot of dissmissive comments on this web site about Austrian School Theory yet I never see anything from these other theorists that might be useful in determining where we are at and where we are headed economically.
I see a lot of theoretical discussion here about economic minutae, much of it as if viewed through an economic rear view mirror, but very little discussion with any predictive value.
Perhaps this is the reason that economists from other disciplines, including economists at the Fed and Treasury, are seemingly unable to ever anticipate coming events in the worlds economies.
Austrian School Theory is at least unambigous about where we are headed and about why we are headed there.
As an economic theory Austrian School at least puts its money where its mouth is.
Robert – I’m actually not sticking as close to the standard assumptions as possible. Perhaps I should have elaborated further in my post.
I’m a big fan of both Hyman Minsky and Richard Koo. I think what’s missing in modern economics is the incorporation of finance into models of production. Production is not simply the simultaneous exchange of factors for finished goods as standard neoclassical economics teaches. Real investment drives the level of economic activity and employment and real investment has to be financed. Unemployment rises during the bust because of the debt overhang created during the boom.
“I already have.”
So, you’re already losing quite a bit of value then? Good luck staying solvent as you hold these positions to maturity, an important date which you have suggested is around 10 years from now. Surely all you have to do til then is wait, and you will beat the current market’s rational expectations of well below 5% inflation by that time. Because when your definition of entrepreneurship is capital gains on “dollar” holdings, these days, rational expectations is the only market you’re in.
“I think the question and the answer to the question from an Austrian stand point that I was able to state are totally unambiguous and very succinct.”
Sorry, the question “where will the economy be in 10 years” with answer “total debasement of the currency” is neither unambiguous or succinct even on a Fed Chairman’s standard of predictive value. Unless the answer to every economic question is, in fact, debasement of the currency. Now that would certainly be an attractive, simple, and elegant predictive model. What bounty must await in a world where investors can define their own success just by adding more time to the clock. One wonders where all the open-ended credit will come from, in the open-ended interim.
One also wonders what shrewd competitive strategy must underlie such earnest efforts to openly and publicly advertise and promote one’s own competitive investment strategy, constantly and continously with pamphlets, letters, and Web 2.0 commentary. What, praytell, will be your strategy when Austrian investment theory becomes the mainstream, after the Great Correction? Where do you see the economy in 11 years, beyond the given state of your own exorbitant personal wealth?
“Austrian School at least puts its money where its mouth is”
And over time, its practitioners tend to exhibit regenerative properties of youth and masculinity* as well, don’t they.
(Save for those who eventually seek careers in politics.)
Arnold Kling responded to Professor Krugman as follows, and this seems to me a simplified version of Robert Waldman’s explanation about labor market rents.
“The answer is that booms are slow and crashes are sudden. A small percentage of the labor force transfers each year during a boom. When a crash hits, a very large percentage of the labor force needs to find new work….”
He then offers an hypothesis about why booms are gradual and busts are very sudden. Of course, he and the Austrians (Kling is close to being an Austrian, but not quite) don’t want to touch the fall in demand (less steel workers buying less big Macs mean that there is less need for hamburger flippers as well as steel workers) since they want to maintain Say’s Law (although Say, according to Brad DeLong never believed in applied during a slump) that “demand creates its own supply.” That all the history of capitalism belies this after 400 years since this system first reared its head in the Dutch Republic and England is ignored.
There is also the problem of the mismatch of skills. A carpenter who currently has no job due to the residential and commerical construction industry collapse cannot become a nurse assistant or lab tech overnight. An aging population, still relatively affluent in world terms, with plenty of chronic diseases may create an increase in demand for these skills, but the carpenter cannot move into them until retrained (and even then may find he or she does not have the appitude or temperment for the new kind of work). These are the labor market frictions that Keynes discussed and which the neo-classicals and Austrians pretend do not exist.
As the blog “Naked Capitaliism” and “Washington” state, the prediction that we may have a another credit crisis looming is certainly reasonable given that there huge need to reduce debt, sovereign and private, by either restructuring or write-offs and these losses have to be booked, creating huge solvency issues. However, like in the last crisis, a rush to safety will result in an overvalued dollar and high demand for U.S. treasuries, especially since both Euro and Swiss Franc would be at the center of any sovereign debt crisis in Europe.