Paul Krugman quotes Milton Friedman dismissing the Austrian theory of the business cycle:
Friedman’s 1998 comments on Austrian economics:
I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse.
I know the Austrians accuse Friedman of crudely caricaturing their views — but I don’t see how you can read the extended quote from Hayek I presented yesterday and not read it as saying exactly what Friedman claimed the Austrians were saying.
Krugman does crudely caricature the views of Austrian economists, frequently creating strawman arguments to debate with himself. But in this case, he’s not wrong: The Austrians do say that the recession is the cure, not the disease, and that it was the artificial boom that was the disease, hence doing more of the same thing that caused the bubble in order to prevent the bust will just set the stages for the next business cycle.
Krugman should have learned from the housing bubble that the Austrians are right. He should have learned from his own mistake (as I document in my book) of calling for the Fed to prevent the recession by inflating to lower interest rates in order to create a housing bubble to replace the dot-com bubble that this just prolongs the agony and sets the stages for the next boom-bust cycle . But he’s too arrogant and willfully ignorant to admit that his entire economic ideology is a farce and his own policy prescription helped throw the economy into the Great Recession.
How does Krugman address what Hayek wrote in that quote he linked to about how the bust is the cure for the artificial boom? He doesn’t! No need for him to try to illustrate in any way how Hayek was wrong. No need to point to a single error in fact or logic that Hayek made in explaining the Austrian view. It’s enough for him to just quote Friedman giving his own “caricature” of the Austrian theory of the business cycle, in the hopes that his readers are unknowledgable about the Austrian school and will think from what Friedman said about it that it must be a really bad theory.
In the same blog post, Krugman writes: “In today’s column I described Friedman as a man trying to save free-market ideology from itself. ” How did Friedman want to “save” the free market? Same way we have to save the village: by destroying it. By having the government try to centrally plan the economy. Krugman has been blogging a lot about Friedman lately, and I just so happened to post on that very topic a little bit ago, so click here to see what I mean. This kind of self-contradictory nonsense is repeated towards the end of his post, where Krugman professes:
I’ve always considered myself a free-market Keynesian….
Which is an oxymoron.