Skip to comments.Monetarists at the Gate: Krugman Vs Austrian School
Posted on 11/30/2012 8:12:46 AM PST by SeekAndFind
New York Times columnist Paul Krugman calls out lots of folks for predicting that our fiscal and monetary policies would produce hyperinflation. Shouldnt these people rethink their basic economic models, he asks?
Thats a fair enough point. If your model was telling you that zero-interest rates or budget deficits at recent levels would produce very high price inflation, theres probably something wrong with it.
Yet the past couple of years have been truly extraordinary. Opportunities for revising the way you think about the economy have arisen over and over again. The only thing you needed to take advantage of these opportunities was an open mind.
This is one of the reasons that heterodox approaches to economicssuch as Modern Monetary Theory and New Monetarismand financesuch as the work on safe assets by Gary Gortonhave been able to garner so much attention recently. People are trying to figure things out, and want new tools to assist them in understanding the way the world works. (Read more: Modern Monetary Theory and Austrian Economics.)
But the Times' famous scribe isnt quite right when it comes to a broader point about the Austrian school of thought, the linchpin of free market economics. Krugman is right that many self-styled Austrian economics mavens predicted high inflation. The Austrian model, however, does not.
Part of the confusion lies in the well-known definitional dispute over what is meant by the term inflation. In general, most people and economists use inflation to mean rising prices. Austrian economics, however, treats rising prices as a contingent phenomenon of an increase in the money supply.
In other words, Austrians will insist that any increase in the money supply is inflationas a matter of definition. But Austrian economics does not insist that this kind of inflation necessarily results in higher prices.
(Excerpt) Read more at cnbc.com ...
There are several ways to mask inflation, I think. If you are offshoring major parts of your industry to low-cost countries, you will not notice the inflation in your currency when the costs are dropping.
Also, if you are in an economic downturn and people are out of work, demand drops radically which causes prices to drop, thus again masking inflation of the currency. Demand can cause prices to rise or fall quite independent of inflation.
Increased automation of production processes have helped to mask inflation for a long time, as well. Again, falling prices due to technology help to mask the erosion of the currency itself.
Then, finally, if the currency you are comparing to is itself in crisis and losing value, you may not see the inflation in your own currency.
An economy has several moving parts (actually, millions of them, technically). Still, its funny to hear them tell us there is no inflation while considering the elimination of dollar bills and small coins because they aren’t worth anything anymore.
They’re completely lying about the cpi. Check out shadowstats.com. Just like every other government issued stat, this one doesn’t hold water. Williams shows 5-6 percent right now if the old method was used. Yes things that you want have not gone up in price. Things that you need like food, energy and basic clothing have gone way up. But the CPI excludes food and energy. Yes you can get a great deal on a home in florida or las vegas. Yeah, the iPad and iPhone have gone way way up in power of their computing and the price has stayed the same, which under the CPI means they’ve actually gotten cheaper in price. But you can’t eat an iPad.
Lately there have been two opposing forces at work that can result in a cancelling effect. In a recession, there is a natural tendency for average prices and average wages to decrease. And when government inflates the money supply, there is a tendency for prices and wages to increase.
Recovery from recession is speeded up when prices and wages decrease because they lower costs which helps increase rate of profit which increases the incentive to invest more.When inflation stops prices and wages from falling, recovery is slowed down.
I really would like to see Paul Krugman respond to your points concerning the masking of inflation. I say this because I’m sure you are correct. In order to respond to your points, Krugman would have to come up with an atrocious lie that would be professionally embarassing for a vaunted Nobel prize winner. We could discover whether or not Paul Krugman is yet devoid of any pride.
While Austrian economics teaches that nominal prices are related to the money supply, they never pretend to predict where this effect will show up.
When Alan Greenspan held interest rates abnormally low in the 1980s, who could have predicted that money would have funded a bubble in tech stocks? Or after the 9/11, who could have predicted that the money printing of the Fed would cause a housing price bubble? Indeed, when we were well into both bubbles, how many Keynesian economists accepted any suggestion that we were in a bubble that was unsustainable?
Thanks to the Austrians, I now know that an economy CANNOT function for long when interest rates are suppressed to zero. And when the Federal Reserve prints money out of thin air to buy 50% of the federal spending, it is indeed bound to cause higher prices, even though nobody at this time can predict where or when.
In other words, either Austrians don't understand Austrian economics so they made bad predictions, OR Austrians are revising Austrian economics because their predictions were so horrible.
You don't need intervention to have a bubble. All you need are speculators to raise the prices. Doesn't matter whether it's tulips, cabbage patch dolls, stocks or dotcoms.