Thursday, July 17, 2014

Austrianism, wrong? Inconceivable!

I see that Robert Murphy of the Mises Institute has taken the time to pen a thoughtful critique of my gentle admonishment of followers of the school of quasi-economic thought commonly known as "Austrianism." Robert deserves a response, so here is one.

First, Robert takes pains to point out that the image I included in my original blog post was not a picture of an Enterprise crewmember who had been subverted by Khan's "brain worms" (actually "Ceti eels"), but rather of a minor character in an unrelated episode of the original Star Trek series. This is correct, of course. Searching for an image to use in my post, I found the pictures of the actual Ceti eels too visually unappealing, while the pictures of the subverted Enterprise crewmen did not look particularly out of the ordinary (much as a devotee of Austrianism may appear, when encountered in a bar or on a trading floor, to be a normal human being in full possession of his faculties). So I instead chose an unrelated picture that I thought would better convey the general idea of the post, rather than remaining faithful to the canon of the original Star Trek series. Robert might also have noted that the picture used by Bloomberg was not of a Ceti eel, but of a handful of garden-variety earthworms. I apologize for this canonical inaccuracy as well. And before anyone starts giving me a hard time, let me note that the image at the top of this post is actually not a picture of Robert Murphy; it's actually an image of the alien "Balok" from the original Star Trek series episode "The Corbomite Maneuver."

So now that that's cleared up, let's examine Robert's critique. Much of my original article discussed the failed Austrian prediction that QE would cause inflation (i.e., a rise in the general level of consumer prices). Robert reiterates four standard Austrian defenses:

1. Consumer prices rose more than the official statistics suggest.

2. Asset prices rose.

3. "Inflation" doesn't mean "a rise in the general level of consumer prices," it means "an increase in the monetary base", so QE is inflation by definition.

4. Austrians do not depend on evidence to refute their theories; the theories are deduced from pure logic.

This is sort of an intellectual defense-in-depth. Each argument, if true, obviates the need for all the former arguments. For example, if asset price rises really are the same as consumer price rises, who cares if consumer prices rose more than the official statistics suggest? And if QE really is defined as inflation, why does one need to point out rises in asset or consumer prices? And if Austrian theory is not vulnerable to falsification by data, then why bother citing any evidence at all?

In other words, the fact that Robert is making all of these arguments at once seems to me like a tacit admission that each one of the arguments, on its own, is very shaky.

But be that as it may, all of the arguments are either unsupported assertions or deeply flawed. Let's go through the list.

1. Robert:
2) "prices are rising much faster than anyone thinks" There are plenty of people who think the “cost of living” is a lot higher now than it was in 2007. No, I’m not saying we’re living amidst hyperinflation but the government is hiding it; but I do think the official Consumer Price Index is understating things.
Rebuttal: There are plenty of people who think the "cost of living" is a lot lower than it was in 2007. No, I'm not saying we live amidst deflation but the government is hiding it; but I do think the official Consumer Price Index is overstating things.

See what I did there?

2. Robert:
UCLA giants Alchian and Klein argued in a 1973 paper that asset prices should be included in a proper measurement of monetary policy. By that criterion, the Fed definitely has been “loose” and “inflationary” since 2008; indeed that was the whole point. People look at soaring stock prices and say, “Good job Bernanke!”
Rebuttal: Imagine yourself saying this: "Oh, no, the price of stocks is going up! Jeez, how will I be able to afford my weekly purchase of 100 shares of my favorite ETF? I better ask my boss for a raise!" You can't, right? Because when stocks go up, that's good.

Now an Austrian may be tempted to retort: "But this price rise is only temporary; it's going to crash later!"

OK, even if that were the case, it would be the crash, not the rise in stock prices, that would be the bad thing. Whereas if you're worried about increases in the price of say, TVs, your chief worry is not that the price of TVs will subsequently crash - in fact, you probably hope that it does, so you can get a cheap TV.

So you see, stock price rises are not actually good to include in inflation. (Homes are more complicated, of course, since they involve a consumption component.)

3. Robert:
Noah [argues] that the Austrians in response to the modest CPI hikes of 2009-2013 attempted to redefine inflation. No, Noah, this is not some new position. Here’s Mises on page 420 of Human Action:
...What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates...
Now that was originally published in 1949, so I’m pretty sure Mises wasn’t providing cover for Peter Schiff and me in light of CPI after various rounds of QE. 
If Noah doesn’t trust such a dodgy source as Mises, maybe he’ll heed the statements of an official Federal Reserve publication? Joe Fetz provided me with this 1997 Cleveland Fed paper, which says: 
Today, we commonly hear about different kinds of inflation. Indeed, the word inflation is often used synonymously with “price increase.” But there is also a different, more specific, definition of inflation–a rise in the general price level caused by an imbalance between the quantity of money and trade needs. This “inflation” has but one origin–the central bank. It is the latter definition that drives many of those advocating an anti-inflationary policy for the Federal Reserve, and that more closely conforms with the word’s original meaning. 
Oops, sorry Noah. Maybe next time you should do some research before writing on a topic. 
Historically the word “inflation” did indeed mean what (some) Austrians currently insist is a better definition–namely an increase in money rather than an increase in prices[.]
Hmm. First, note that the Cleveland Fed paper defines inflation as "a rise in the general price level caused by an imbalance between the quantity of money and trade needs." For that to exist, you need the general price level to rise. If it doesn't, then by the Cleveland Fed's 1997 definition, there is no inflation. So by the Cleveland Fed definition Robert cites, there has also been very low inflation since QE began.

Let me humbly suggest that perhaps Robert should actually read his own sources before writing on a topic.

But in any case, yes, it is true that Ludwig von Mises also wanted to define "inflation" as an increase in the monetary base (note, however, that the rise in prices that he considered to be an "inexorable" result is looking less inexorable by the day). But so what?

Here's the real point: Defining QE as inflation, no matter who came up with the idea and when, is merely a distraction from the fact that QE has not led to a rise in consumer prices. What kind of prediction is it to say that "QE is inflation, therefore of course QE causes inflation, HA!" No prediction at all.

But this brings us to Austrian Defense #4...

4. Robert:
But Noah’s claim that my prediction about CPI movements has something to do with Austrian theory is nuts. Notice that the mainstream economists like to mock Austrians (Misesians in particular) on two different counts: In the first place, they mock us because we adhere to “praxeology,” which says that pure economic theory is deduced a priori, rather than through empirical observation. (Here’s Noah admitting he knows this, in point #2 of a February blog post.)
This is basically saying "Noah, you can't use evidence to disprove our theories, because you know very well we don't care about evidence!"

Which is sort of the whole problem, isn't it? Austrians are looking at real events and saying "Inconceivable!", make that "Inexorable!" But I do not think that word means what they think it means.

See, most people do care about the evidence, very much. They do not care if Austrian theories were logically deduced from the Human Action Axiom. They care whether their financial portfolios increase or decrease in value. And if they bet on the Austrian predictions that inflation (the real kind) would go up as a result of QE, they lost money. Praxeology might be logically satisfying, or it might not, but it's cold comfort when extant reality is kicking you in the head.

(Incidentally, people also mostly don't care about whether "inflation" means the rate of change of the monetary base or whether it means the rate of change of the CPI. What they care is whether the former causes the latter. Word games are even less comforting than logical syllogisms.)

My article was not intended to point out that Austrian theory failed its own test of validity following QE. It can't possibly fail its own test - it designed the test so that it could not fail it.

My point was that Austrian theory has failed other people's test of validity.

Now, that's obviously not enough to convince a lot of Austrians to abandon Austrianism - once you have accepted a belief system that creates its own criteria for success, you're very unlikely to change (that's what I meant by calling Austrianism a "brain worm"; it is by no means unique in having this Ceti eel-like property). But from where I'm standing, failed empirical predictions are a big deal. And it's not just inflation, either - it's gold, the dollar, etc.

Anyway, there are some other miscellaneous points I could make about Robert's critique (For example, he blatantly overlooked the one point at which my rant was actually charitable to Austrian ideas! Can you find it?). But this is the main thrust. In any case, I thank Robert again for taking the time to write a response to my article.


  1. Daniel3:02 AM

    Mises on his theories

    They are not subject to verification and falsification on the ground of experience and facts.

    If that's not pseudo-science, I don't know what is. If both A and non-A fit your theory equally well, your theory is worthless.

    Of course they'd try to mount an intellectual defence by redefining words and splitting hairs. But so what ? They're charlatans - always have been, always will be.

    1. How Noah Smith Should Have Criticised Austrian Economics

    2. Think of Austrian economics more akin to geometry rather than physics or chemistry. In geometry, one does not verify or falsify the Pythagorean theorem by going out and finding triangles in nature. One does so deductively, by checking to see if the logic is valid and the premises are correct. Of course, if we noticed that many triangles in nature did not fit the Pythagorean theorem, that would give us reason to go back and look for mistakes or incorrect assumptions in the deductive argument. The same can be done with Austrian economics.

      If one is going to criticize Austrian economics, then, as psuedo-scientific, that individual must also do the same for geometry.

  2. Anonymous5:47 AM

    What shocks me is that some folks in the 1920s and 30s had the amazing egos to think they could sit down, logically derive all of economics from ignorant premises of human behavior (that a century later we're still nowhere close to understanding in any serious depth or completeness - neuroscience is in its infancy), think that empirical validation was worthless, and then go around yelling at people for decades about how they should buy gold for the coming collapse.

    Reminds me of the medieval Catholic theologians. Oh, sure, excellent logicians (I'll give von Mises and co the benefit of the doubt here for argument's sake), but when you start from wacked out premises, you can perfectly follow the logic to equally wacked out conclusions. Austrian economics "theory" is like Catholic "angels dancing on a pin" theology.

    Ugh, brain worms was right. Just thinking about it is giving me a headache.


    1. Daniel6:18 AM

      Thing is, Mises failed even his own standard. He sought an axiomatic system, yet he constantly relied on all sort of hidden and questionable assumptions throughout his reasoning

    2. You think it's a coincidence that Robert Murphy is a devout Catholic?

  3. Your critique does not serve Vaal.

  4. Oh no, the picture is causing major burns! I knew Murphy looked familiar from somewhere. Hope he has a sense of humor.

    1. This article turned out to be useful in that it made me realize that Wallace Shawn, who played Vizzini in Princess Bride, and Clint Howard, who played Blalok, are actually different people.

    2. Wally Shawn is a Socialist!

  5. Asset price rises might be different from consumer price rises, but not in the way that you are explaining.

    "Oh, no, the price of stocks is going up! Jeez, how will I be able to afford my weekly purchase of 100 shares of my favorite ETF? I better ask my boss for a raise!"

    Of course, it is a good thing for you if the prices of things YOU own go up. It is also a good thing for you if the prices of things YOU sell (your wage for example) go up. That's not the problem.

    Inflation in asset prices and consumers goods hurts people who DON'T have them and have to buy them at higher prices. In Austrian theory, we have another distortion through the structure of production, but let's ignore that for now.

    If we assume that things are friction-less, then rising prices (for assets or consumer goods) doesn't affect anything overall. But I'm going to go with most economists--yourself not included since you want a 5 % inflation target ;)--- and say that rising prices are harmful to the economy.

    That does not mean they are harmful in the same way as changes in CPI, but there is a least an element of "problem" from rising consumer prices that exists with rising asset prices. There is not this dichotomy that we make for simplicity between consumer goods and assets.

    That still doesn't show whether asset prices have been rising or not, whether it is a problem or not. This is just theory. We still need evidence to understand what forces are at play at any given moment.

    1. Um, no.

      Let's say you own 100 shares in company X. Over time, the price of shares in X rise so that the shares you own double in value (meaning someone has recently paid double what you paid for a share of X). Where is the corresponding loss that someone experienced to facilitate your doubling of your money? There isn't one. There is no zero-sum game, and, in fact, absent someone with a specific need to by shares in X (which is relatively rare), third parties can expect to benefit the appreciation of your shares by selling you good and services that your new found wealth can now facilitate consuming.

      Not so with consumer prices, where an increase in the prices of the good and services I'd like to sell necessarily means a increase in the prices of good and services my customers would like to by. Oversimplifying just a little, inflation (i.e., a rise in the general price level) is a zero sum game where everyone's income is someone else's consumption. Appreciating assets are not.

  6. Philippe7:15 AM


    "But in any case, yes, it is true that Ludwig von Mises also wanted to define "inflation" as an increase in the monetary base"

    Nope, Bob Murphy is wrong about that too:

    Ludwig von Mises:

    “In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.”

    The Theory of Money and Credit, Mises (p. 272)

  7. I think your point about QE being about replacing toxic assets is reinforced by what happened over at the Eurozone:

    "In December 2011 and March 2012, European Central Bank President Mario Draghi dumped nearly 1 trillion euros of public money into the European banking system in the form of Long-Term Refinancing Operations (LTROs). This, plus his promise to engage in outright bond purchases if needed, have kept European banks afloat."

    (press the X if it presses to register)

  8. Anonymous7:53 AM

    Wow, to claim that monetray policy has been loose arround 2008 one must have overlooked, the rise in the dolar/euro exchange, the TIPS spread, falling comodity prices...

    1. Though I very much agree with Noah on everything, dollar appreciation and falling commodity prices are mentioning are perfectly consistent with pretty much any monetary policy with the world falling to pieces, as we the case in late 2008. Also the TIPS spread fell markedly after Lehman.

  9. Compare the inflation of the 70s with the tech stock bubble of the late 90s. The inflation of the 70s became embedded as unions were powerful enough to negotiate inflationary wage hikes into future contract based on rising prices. Volcker needed to induce recession to end it. The tech stock bubble popped because it wasn't sustainable, the fundamentals didn't reflect the prices. There was no "new" economy. A lot of paper wealth was lost which didn't really effect the economy that much because of the marginal propensity to consume and the stock investors were already spending as much as they wanted to, saving/investing the rest.

    The housing bubble was unsustainable, again unlike the 1970s inflation. Bernanke was surprised that its deflating effected the real economy figuring it would be a nonissue like the tech stock bubble. DeLong has discussed this. As the bubble deflated, investment moved to other areas. Then the financial system and credit markets short circuited. There's also the debt aspect discussed by Mian and Sufi.

    This is a timely subject given Neil Irwin's recent piece:

    As Yglesias tweets: Seems like Richard Fisher has been reading @Neil_Irwin without understanding him:

    1. Daniel8:23 AM

      Gee, and I thought inflation was caused by too much money-printing. Good to know it was unions.

      Then the financial system and credit markets short circuited.

      Step 1. Housing "bubble" (which didn't actually exist, but let's get past that)
      Step 2. Magic "short circuit"
      Step 3. Recession.

      Are you even trying ?

    2. Anonymous8:48 AM

      "I thought inflation was caused by too much money-printing".

      If money printing causes inflation in a simple way then why hasn't the massive money-printing of the last few years caused massive inflation?

      There are four variables in the MV=PQ equation, not just one. You can have inflation without an increase in M, or you can have an increase in M without inflation, or causation may go from P to M, rather than simplistically from M to P.

    3. Anonymous12:58 PM

      I thought inflation was caused by too much money-printing,

      The rise of OPEC meant real income had to be diverted to the OPEC nations and standards of living in the United States and Europe should have fallen as a result. Instead everyone tried to pass the buck to someone else and governments ran the presses to finance deficits so no one would have to take the politically difficult haircut. The ultimate result was stagflation.

    4. You had the boomers and women entering the workforce and productivity slowed down. The Fed did the best it could to accommodate. Stagflation wasn't that bad.

    5. Excellent piece. Thank you for the link. I read Interfluidity but had missed that one.

  10. It seems to me though that you are arguing with how Austrian theory has been applied by most contemporary believers, not really with Austrian theory.

    Murphy's best point is that Austrian theory wasn't designed to defend Murphy or Schiff etc. I would date its introduction to 1912, though a lot of it is older than that.

    Austrian theory made a lot of valuable contributions, despite also leading to a lot of annoying crap. The simple point that central bank downward manipulation of interest rates can lead to excess investment in long-term assets was a very valid one. The world would be a better place right now if that point hadn't been so widely ignored in the run up to the 2008 crisis.

    I'd suggest you try to clear your head of Zero Hedge, immerse yourself as much as possible in the economics debates of the early 20th century, and go back and reread that 1912 book. It doesn't have all the answers to life, the universe and everything. But it was a very smart and insightful book that advanced the field of economics.

    1. "It seems to me though that you are arguing with how Austrian theory has been applied by most contemporary believers, not really with Austrian theory."

      Ah - it can only be failed.

  11. PS Take the specific issue of whether monetary expansions should be expected to cause a proportional amount of consumer price inflation. Austrian theory is actually quite modern in allowing that it might not. The stringent monetarism of Friedman or these days Sumner gets that much more wrong. And even mainstream Keynesians generally support the idea that Japan's QE should generate moderate inflation.

    1. Daniel8:40 AM

      Yes, Friedman was wrong in assuming money velocity stays constant.

      With regards to Sumner - you haven't actually read what he says to say, have you ?

      I'll tell you this much - there's nothing new under the sun, it's mostly a throwback to the 1920s macro consensus. Think Irving Fisher, Ralph Hawtrey, Gustav Cassell.

      Before Keynes ushered in the Dark Ages of Macro.

    2. Anonymous9:40 AM

      "Before Keynes ushered in the Dark Ages of Macro"

      why do you feel the emotional need to write this sort of nonsense?

    3. Daniel10:51 AM

      Because it's a fact. The damage the "liquidity trap/zero lower bound" nonsense has done is very real.

    4. Anonymous11:29 AM

      oh I see, you're just saying for exaggerated effect, because you disagree with the writings of some current economists... ok.

    5. I've read more than enough of Sumner. He's dodgy. On one hand he'll argue for the neutrality of money, on the other hand when you show him that M2 grew 40% since the crisis while nominal GDP grew far less, he backpedals and starts saying things like he never asserted velocity was constant.

      The problem with "velocity" isn't figuring out why sometimes it isn't constant. It's a completely useless concept. Spending is not mathematically related to money supply. The only way you can know anything about this supposed "velocity" is to first know both spending and money supply. Velocity is completely unpredictable, because it's an artificial relation.

      While it's not completely clear what exactly Sumner believes about velocity, he obviously believes very strongly that the central bank can calibrate NGDP by calibrating money supply. He's dead wrong. Not just missing the bulls eye. Missing the board.

      I'm not saying that Austrian theory gets everything or even most things right. But Austrian theory doesn't make any mistakes as big and obvious as that.

    6. Daniel7:12 AM

      But Austrian theory doesn't make any mistakes as big and obvious as that.

      See, that's the problem with Austrian theory. It's not that it's wrong, it's NOT EVEN WRONG !

      But it does appeal to austere souls who wish to make others equally miserable.

  12. Daniel8:38 AM

    central bank downward manipulation of interest rates

    Again with this retarded bullsh*t ?

    The Fisher equation, imbecile. Ever heard of it ?

    It's mathematically impossible for money printing to lower interest rates.

    1. Anonymous1:58 PM


      /bq/ The Fisher equation plays a key role in the Fisher *hypothesis*, which *asserts* that the real interest rate is unaffected by monetary policy and hence unaffected by the expected inflation rate.... *Contrary models* assert that, for example, a rise in expected inflation would result in only a smaller rise in the nominal interest rate i and thus a decline in the real interest rate r.

    2. Of course I know the Fisher equation, and it's wrong. Right, interest rates would be zero even if we still had a 2007 monetary base. And you're calling me an imbecile.

    3. Daniel7:15 AM

      Right, I keep forgetting that under Austrian arithmetic 3+2 = french fries.

      No wonder you clowns hate mathematics, since it has the annoying habit of proving your bullshit wrong.

  13. Noah, I think you've gone off the deep end in your hunt for Austrians. What about Bob Murphy's bet with fellow Austrian(ish?) David Henderson? Henderson is an Austrian who did not predict high inflation. Bob is an Austrian who did. Bob's point is that there is no Austrian theorem that says "higher reserves at the Fed, all else equal, creates price inflation." I think they *would* say "higher *circulating base*, money, all else equal, creates price inflation". But a monetarist would say the same thing.

    Does the lack of inflation somehow show that monetarism is a brain worm?

    Does the period of the 90s when inflation fell and unemployment fell show that Keynesian is a brain worm?

    1. Daniel9:14 AM

      Does the period of the 90s when inflation fell and unemployment fell show that Keynesian is a brain worm?

      Yes, it pretty much does. The Keynesian model has been falsified many times over

      - the Japanese stagnation, despite gigantic fiscal stimulus
      - Abenomics, which created inflation despite being at the so-called ZLB
      - the Swiss currency peg, which Keynesian said wouldn't work
      - the fiscal austerity of 2013

      The last one was the most hilarious of all. Keynesians loudly proclaimed that fiscal austerity would slow growth, thus falsifying monetarist models.

      And when the opposite happened, they refused to even look at the data. The GDP numbers were published showing faster growth, and the Keynesians were running victory laps claiming slower growth.

      So yes, Keynesianism is a brain worm, too. A less annoying one.

    2. If only Krugman would respond to you. We could watch you take him down as you disprove his Keynesian positions on the Great Recession.

      As an electrical engineer, I get that some systems fail at the boundaries. So, the ZLB resonates as potentially a big issue. My scientific training tells me that sometimes conclusions are hard to make in multivariate systems. Clearly, there are lots of counter examples to the ones you provided.

      But, then again you are so certain.

    3. Anonymous12:41 PM

      "The last one was the most hilarious of all. Keynesians loudly proclaimed that fiscal austerity would slow growth, thus falsifying monetarist models. "

      The failure was to assume that fiscal austerity would show up in 2013 when there is a lag between cuts and when they actually impact spending. How has growth been going in 2014?

    4. Daniel6:53 PM

      As an electrical engineer, I get that some systems fail at the boundaries.

      You don't understand how this whole scientific method works, do you ?

      Keynesian models make certain predictions. Said predictions have been proven wrong.

      Thus, said models are wrong. End of story.

      the ZLB resonates as potentially a big issue.

      The ZLB as "a big issue" exists only in the minds of Keynesian economists. Central banks can always choose other instruments.

      The failure was to assume that fiscal austerity would show up in 2013

      Always a pleasure to watch Keynesians squirming.

    5. Anonymous7:06 PM

      "- Abenomics, which created inflation despite being at the so-called ZLB"

      I don't believe most Keynesians would say it's impossible for a central bank to to create inflation at the zero lower bound. I think they would say it's very difficult to do so, because the bank must create expectations that it intends to keep the pedal to the floor and the punch bowl on the table for an extended period after inflation starts to rise (yes, central bankers love to mix metaphors). And since Abenomics is expressly designed to do exactly that, I don't see how it refutes Keynesianism.

    6. Daniel7:39 PM

      So let's recap.

      The big thing that defines Keynesianism is the "liquidity trap". The alleged fact that when interest rates hit zero, the central bank is powerless - and thus it's up to the government to run deficits in order to get the economy moving again.

      Now we're told that the ZLB isn't actually the end of the line for monetary policy, it's actually quite feasible to conduct monetary policy even when interest rates are zero. Which is what monetarists have been saying all along.

      So what exactly is the difference between New Keynesians and monetarists ? The label ?

      What exactly was the point of the whole detour into Keynesian nonsense, only to come out on the other side with basically the same model Fisher, Hawtrey & Cassel had 90 years ago ?

    7. Anonymous9:28 PM

      Well, recap all you want. Here's the planet's most prominent Keynesian 15 years ago calling on Japan to do monetary stimulus through the inflationary expectations channel. He's always made clear it was a second best strategy to fiscal stimulus, but has always maintained that it had a shot at working. And he did so within a solid Keynesian IS/LM framework.

    8. Anonymous9:28 PM

      Oops, here's the link.

    9. This comment has been removed by the author.

    10. Daniel5:23 AM

      You do realize you just proved my point - that Keynesianism is another brain worm.

    11. Nobody proves much of anything in a comment stream. Go take down Krugman.

    12. Daniel11:03 AM

      So the predictions the IS/LM model makes are the opposite of reality. Yet Keynesians continue to swear by it.

      If that doesn't prove it's a brain worm, what does ?

    13. The problem in this debate is that Krugman is always right, but that's because whenever the world conflicts with theory, he goes with the world. So the syllogism:
      Krugman believes theory x; Krugman is never wrong; Therefore theory x is good.
      Is valid logically. But premise 1 is false. Krugman believes no theory. All the work is done by "ad hoc modifications". Just the other day he said (paraphrasing) There's me, I'm right, and then there are the "macro equilibrium types" that are always wrong.

    14. Once you realize that it's brain worms all the way down and that everything that Krugman gets right is the result of "ad hoc modifications", then the question becomes: what are the "ad hod modifications"?

      The answer? Good economic history. And Krugman himself has told us this, many, many (many), times. He doesn't have a model of the Great Depression, the 70s stagflation, the Asian financial crisis, and Japan's lost decade. Rather, he just knows what happened in each of those situations.

      Of course, economic history, with good data, is what we would have but for the long and tortured road of general equilibrium.

      Therefore, by looking at the policy choices Krugman recommends and looking at the policies adopted, we can calculate the opportunity cost of general equilibrium theory. Samuelson has a lot of blood on his hands.

    15. Anonymous1:28 PM

      Look, I'll agree that nobody proves much in comment threads. But the actual point here was pretty narrow. The claim was made that the ability of Japan to use unconventional monetary policy to create modest inflation "falsifies Keyensianism." I simply pointed out that prominent Keynesians were encouraging Japan to adopt exactly this strategy *before it happened,* and explained why they believed it might work, in terms of their general model. The policy was subsequently adopted, and it appears to be having at least some success.
      I don't claim to be proving any big points about Keynesian theory, or Paul Krugman's approach to macro. But I do think the claim that Abenomics somehow "falsifies Keyensianism" has be shown to be simply false.

    16. Daniel1:53 PM

      So in order to make Keynesianism work, you have to adopt monetarist insights.

      But that doesn't imply that Keynesianism is wrong ?

      Sure, bro. Also, I have a bridge for sale.

    17. Daniel -- If you can't use a tool, it doesn't make the tool useless. It's only useless to you. I can't speak for Paul Krugman and how he uses the IS/LM graph. You'd have to go to the source to find out if he understands the limits of the tool and uses it in a valid way. He sure seems to have.

      I can't see the downside of upgrading infrastructure at 0% interest. That's good business.

      Thornton -- Your comment is silly. Right or wrong, Krugman is credible. Fools conflate his politics with his economics. Right or wrong, Samuleson was credible as well. The worst economic calamity of my lifetime has been the Great Recession. It's clear that others get the credit for that.

    18. @BradK Now that is an interesting response! If I'm right and the whole general equilibrium enterprise is fundamentally f-ed, then "silly" is exactly the response I would expect. From inside the paradigm the critique makes no sense. Moreover, is "credible" an autocorrection? What on earth could you mean?

      Notice: Krugman is always right; Krugman distinguishes himself from "equilibrium macro" which is "always wrong."

      I like him very much and find him quite credible. It strikes me as significant that he's bugging out of the academic life as the Manchester Revolt takes hold. Before long, he'll have disavowed all you all and will be explaining how inequality is aided and abetted by neoclassical Econ, from his hero on down to the last DSGE dissertation that he supervised.

    19. Thornton -- A lot of your comment threw me off. Krugman is not always right. Nobody is. When you said world, I took that has popular opinion rather than empirical evidence. I am not sure what you mean by Equilibrium Macro? Are you referring to Paul Samuelson?

    20. By equilibrium macro, I am referring to whatever Krugman is in his last paragraph here:

    21. Daniel5:28 PM


      Do you have anything of substance to say ?

      Because "Paul Krugman is a Keynesian/ Paul Krugman is influential/ Therefore, Keynesianism can't be false" is flat-out bullsh*t.

      The predictions the IS/LM model makes are the exact opposite of reality.

      What kind of an idiot do you have to be to still defend it ?

    22. Daniel --
      I found it ridiculous for you to claim that you've refuted Keynesian economics in a comment stream. I think all it amounts to is bomb throwing.

      I am trained as an electrical engineer and a scientist. I commented from those perspectives. Engineers know that systems at boundaries can go haywire. That raises a red flag for me. Nothing more, nothing less. As a scientist, I know that the scientific method is really set up to test one variable. Multivariate system are difficult to test. The point being that all of your examples were multivariate. It's hard to draw conclusions from them without very careful analysis.

      You dissed my perspective based on what exactly? Your knowledge of engineering and science? Your response conflated engineering with science. So, forgive me if I think that was an indication that you have zero knowledge of either.

      You skipped over the multivariate part of comment that makes analysis of economics hard. You skipped over the point I made that there are numerous examples of exactly the opposite of what you claim.

      I find it ridiculous that your argument depends upon Paul Krugman not understanding the IS/LM graph or its limits. I think that's one in a million.

      I think building needed infrastructure financed at 0% interest makes good economic and business sense. I don't see much of a counter argument.

      Finally, I am smart enough to know that I can be wrong. Not you. You drop your bombs with all knowing certainty. That's foolish.

      Are you anything more than a bomb throwing parrot of Scott Sumner?

    23. Daniel1:55 AM

      So because you're an "engineer and a scientist", the IS/LM model can't be wrong, even though the predictions it makes are the opposite of reality ?

      Is that the best argument you can muster ?

      You're pretty dumb.

      And no, I haven't refuted anything. It's reality that keeps on refuting Keynesianism, by insisting on behaving differently than their models predicts.

      It's called the scientific method, moron.

      I think building needed infrastructure financed at 0% interest makes good economic and business sense.

      Except that's not Keynesianism is about, you imbecile.

    24. You've been unable to coherently address anything I've written. The fall back to name calling indicates you are incapable of addressing what I wrote.

      BTW - Infrastructure spending is a very large part of what Krugman has been pushing as fiscal stimulus.

    25. Daniel3:54 AM

      I have to admit, it's very frustrating to deal with morons who claim to be scientists - yet, at the same time, claim their favourite economic theory is exempt from falsification.

      I don't give a crap what Krugman says, can you understand that ? Keynesianism isn't about building infrastructure at low interest rates.

    26. I never claimed that it can't be falsified. That's you putting words in my mouth. Over and over again I've said that a comment stream is a ridiculous place to falsify much of anything and that it's really hard due to the multivariate nature of the economy.

      Yes, I get that you don't care what the leading proponent of Keynesian economics thinks about the application of Keynesian economics. Yes, I get that you believe that you have "falsified" his beliefs without actually taking the time to understand what they are.

      But, I'm with Krugman on the definition and application of Keynesian economics. It's the mainstream. Krugman proposes to build infrastructure and rehire teachers as fiscal stimulus at 0% interest rates. That's exactly how Keynesian economics wants to play out in the real world at the ZLB.

      Yes, I get that you believe that is not Keynesian policy. That's wrong.

      It amazes me to read responses from people like you. So certain. So nasty. No respect for others. It's disgusting. I can't be more opposed to it.

    27. Daniel2:43 PM

      Get over yourself, dumbass. You're nowhere near as smart as you think you are.

      You think saying "multivariate" and appealing to the authority of a former economist (now political operative) impresses me ?

      If so, I'd advise you to hang around smarter people, because your critical thinking skills are very poor.

    28. No, I didn't think you'd be impressed by having someone else point out your lack of comprehension of clear English and of Keynesian economics.

      No, I didn't expect you to be an adult and admit your misunderstanding. I expected you to lash out once again. You've shown no other capability.

    29. Daniel5:08 PM

      Coming from a guy who thinks Keynesianism is whatever Krugman says it is, I'll take it as a compliment.

      And no, I don't expect you to stop being an idiot.

    30. Nick Rowe (noteworthy market monetarist) describes how he teaches IS/LM and the usefulness of it here:

    31. ... not a defense exactly, nor does he trash it. Some interesting reads.

    32. Anonymous6:21 PM

      @Daniel :

      "The big thing that defines Keynesianism is the "liquidity trap"."

      No, the 'big thing' that defines Keynesianism is Involuntary Unemployment.

      That's clear for everyone who took the time to read GT (Chapter 2.II)

      "If, indeed, it were true that the existing real wage is a minimum below which more labour than is now employed will not be forthcoming in any circumstances, involuntary unemployment, apart from frictional unemployment, would be non-existent. But to suppose that this is invariably the case would be absurd."

      Keynes tried to solve a case that he could observe, as well anyone in 30's by walking in the streets.

      Core Keynesianism is then about involuntary unemployment, how it appear and how it can be reduced. Others 'results' like Say's law invalidation or liquidity trap are actually consequences of initial assumption (fact).

      Ludovic Coval

    33. Daniel8:01 PM

      Except Irving Fisher discovered the Phillips Curve in 1927 and spoke of the "money illusion".

      Try harder.

    34. Daniel -- Fisher can't help you. The words in question are yours.

    35. Daniel2:57 AM

      BradK - you're still an idiot.

      Note to self - why am arguing with idiots who don't even what Keynesianism is ?

    36. Daniel3:21 AM

      *don't even know

    37. New Keynesians argue that both fiscal and monetary policy can be effective at increasing aggregate demand in a depressed economy - call it the ZLB if you want (i.e. when the supposed natural rate is negative). Monetarists just assert that monetary policy can do everything and expansionary fiscal policy is pointless.

    38. Daniel8:42 AM

      So you're saying that New Keynesianism has become virtually indistinguishable from monetarism, apart from the ZLB mental block ?

      That's exactly what I've been trying to say.

    39. New Keynesians don't have as much belief in monetary policy 'when at the ZLB'. Krugman seems to argue that it mainly works through expectations of future policy - 'promising to be irresponsible' in the future. This is actually the same thing as promising to make an increase in the monetary base permanent, which is what MMs recommend, though stated in a slightly different way. Also they do not seem to think that monetary policy is always on target or that the cb will necessarily try to sabotage attempts at expansionary fiscal policy, or that the cb can even fully offset fiscal policy,

    40. In summary, NKs usually recommend using all tools at your disposal to get out of the recession asap.

    41. Simon Wren-Lewis:

      "I think it is important to distinguish between two arguments why the Zero Lower Bound (ZLB) for nominal interest rates matters. I will label these the first and second, and economists and statisticians will soon [1] see why these labels have some significance. The first argument is debatable, but the second is I believe very difficult to argue against.

      The first argument why the ZLB matters is that unconventional monetary policy either does not work, or hits limits on what it can do, and these constraints bite. In short, monetary policy at the ZLB cannot fully achieve monetary policy goals. The second argument about why the ZLB matters is that the impact of monetary policy becomes more uncertain. Under the second argument, it is possible for some particular dose of unconventional monetary policy to duplicate what interest rate policy might otherwise achieve, but there is more uncertainty about what that appropriate dose is. The impact of any unconventional monetary policy action is therefore more unpredictable than the impact of conventional policy."

    42. Anonymous11:33 AM


      So yes, if you want to define Keynesianism as everything certain people held to be true in 1936, then it's been convincingly "falsified" at least to some extent. If on the other hand you were trying to say something relevant about the current state of macro, you've failed. I think people have showed a remarkable degree of patience with you here.

    43. Daniel12:25 PM

      Also they do not seem to think that monetary policy is always on target or that the cb will necessarily try to sabotage attempts at expansionary fiscal policy, or that the cb can even fully offset fiscal policy

      Monetary policy isn't on target mainly because the central banks insist on flying blind. You could have an NGDP futures market. Or you could target the TIPS spread. But they don't want to give up their discretionary powers.

      And as long as the central banks have an inflation target, they will be legally required to sabotage fiscal stimulus. THAT is Sumner's point.

      With regards to Wren-Lewis - that's just bullshit. Circular logic all the way.

      Keynesians define "unconventional" as anything other than interest rate targeting. And then they wring their hands about its "uncertainty".

      How about this - monetary policy means managing the supply and demand for base money.

      And regarding the current state of macro - a field is only as good as its practitioners. As post-2008 events have proven, macro-economists simply aren't that bright. When the sh*t hit the fan and cool thinking was required, they tossed their models out the window and went with their gut feelings.

      "Yes, I know our models say fiscal stimulus can't work. But wouldn't it be nice if it did ?"


    44. "And as long as the central banks have an inflation target, they will be legally required to sabotage fiscal stimulus. THAT is Sumner's point."

      If the economy is in recession and the cb is failing to hit the targets of stable prices and maximum employment (in the US), there's no reason why it should raise interest rates in response to expansionary fiscal policy.

      "How about this - monetary policy means managing the supply and demand for base money."

      It's not just about that, as MMs themselves argue that massive injections of base money fail to have much of an effect because the injections are not expected to be permanent. So the theory is really about expectations of future loose policy (allowing higher inflation than normal), which is how NKs like Krugman argue monetary policy might work 'at the ZLB'.

      "Yes, I know our models say fiscal stimulus can't work. But wouldn't it be nice if it did ?"

      Their models don't say that fiscal stimulus can't work. They say the exact opposite.

      You obviously have a hatred of NK economics, but you also don't seem to know all that much abut it.

    45. are you seriously saying that if the economy is in recession, with high unemployment, and the government does some fiscal stimulus, the cb will try to do whatever it can to bring the economy back to the point of recession and high unemployment, so that the fiscal stimulus has no effect? That seems weird to me.

      Personally I'm not sure tightening monetary policy would necessarily reduce private spending by the same amount as the fiscal stimulus anyway, given the initial starting point of near zero base rates.

    46. Anonymous2:45 PM

      ". . . as long as the central banks have an inflation target, they will be legally required to sabotage fiscal stimulus."

      This is untrue. Inflation targets are not written into law. They are adopted at the discretion of the Fed, representing its best judgment about how to fulfill the dual mandate of balancing the tradeoff between full employment and the price level. Nothing requires the Fed to blindly pursue a particular inflation target if it thinks doing so will sabotage contemporaneous attempts at fiscal stimulus.

      You can always argue fat chance the Fed will actually do that, but that's far different from arguing the Fed is legally precluded from doing so.

    47. Daniel -- I find it rather ironic that you called me an idiot for not understanding the definition of "Keynesianism" almost immediately after it was pointed out that your definition was wrong. You do follow the implications, don't you?

    48. Daniel5:31 PM

      BradK - Your definition of Keynesianism is "whatever Krugman says". So just shut up, idiot.

      the cb is failing to hit the targets of stable prices and maximum employment

      Seeing as how we're on a fiat money regime, the central bank can always print more money.

      So when the central bank doesn't hit its inflation target, it's because THEY WANT IT THAT WAY. It simply cannot be otherwise.

      The amount of inflation you get is always the amount of inflation the central bank wants. Therefore, any attempt to generate inflation via fiscal policy will be actively sabotaged (and neutralized) by the central bank.

      You'd think the logic behind this is pretty simple, but you'd be wrong. Keynesian mental blocks are very strong indeed.

      the theory is really about expectations of future loose policy (allowing higher inflation than normal), which is how NKs like Krugman argue monetary policy might work 'at the ZLB'.

      So let me ask you again - what exactly is the difference between Keynesianism and monetarism ?

      Keynesian fixation with interest rates and the IS/LM nonsense ?

      are you seriously saying that if the economy is in recession, with high unemployment, and the government does some fiscal stimulus, the cb will try to do whatever it can to bring the economy back to the point of recession and high unemployment, so that the fiscal stimulus has no effect? That seems weird to me.

      Yes, that's exactly what I'm saying. The NGDP you have is the NGDP the central bank wants you to have.

      Look at how the Bank of Japan sabotaged fiscal stimulus for two decades. Any time it seemed like the economy got going again, they tightened money and pushed the economy back into deflation.

      If you find reality "weird", the problem is with you.

      Personally I'm not sure tightening monetary policy would necessarily reduce private spending by the same amount as the fiscal stimulus anyway, given the initial starting point of near zero base rates.

      That doesn't even begin to make sense. It's not wrong, it's not even wrong.

    49. Daniel,

      "So when the central bank doesn't hit its inflation target, it's because THEY WANT IT THAT WAY. It simply cannot be otherwise."

      That strikes me as a very circular argument: the cb can always achieve any inflation it wants so inflation is always on target, always. It completely leaves out the possibility, by definition, that the cb can ever fail to achieve its goals.

      And then you go further and say that if the economy is mired in a recession, and the fiscal authority becomes more expansionary, the cb will do everything it can to put the economy back into the previous recessionary state. Why would they want to do that? Does their mandate even allow them to do that?

      "Look at how the Bank of Japan sabotaged fiscal stimulus"

      I think the Japan situation was more complicated than that.

      "That doesn't even begin to make sense. It's not wrong, it's not even wrong."

      It's my personal, non-professional opinion. However there are different models which show an increase in interest rates accompanied by expansionary fiscal policy to be expansionary, not neutral. That's not NK though. Furthermore the empirical research on interest rates shows that they do not determine the level of private sector investment or consumption in the simple way assumed by most models.

      "So let me ask you again - what exactly is the difference between Keynesianism and monetarism ?"

      So 'at the ZLB', market monetarists have been arguing that the cb can create expectations of higher inflation in the future by promising to permanently increase the monetary base. Massive injections of base money are said to have not much effect because they are expected to be temporary. This is basically the same thing as the NKs who say that the cb can promise to allow higher inflation in future by keeping interest rates lower for longer than they would otherwise. The difference might be in how each group thinks of expectations, with MMs thinking that expectations necessarily and immediately change behaviour in the present.

      I don't get why you are so hostile.

    50. Daniel7:50 PM

      the cb can always achieve any inflation it wants so inflation is always on target, always

      That is 100% correct.

      Get this - Keynes's "General Theory" IS NOT GENERAL. It is valid only under a fixed exchange rate regime.

      For the life of me I can't begin to understand your mental blocks. The Fed owns the printing presses. They can print as much (or as little) money as they wish. They achieve any nominal target they desire.

      How is that circular ? That is how fiat money works !

      It completely leaves out the possibility, by definition, that the cb can ever fail to achieve its goals.


      the cb will do everything it can to put the economy back into the previous recessionary state. Why would they want to do that?

      What's good for the Fed is not necessarily good for the economy. Welcome to the world of public choice theory.

      Does their mandate even allow them to do that?

      The Fed has been in violation of its mandate for the last 6 years, and they suffered no consequence.

      I think the Japan situation was more complicated than that.

      No it wasn't.

      I don't get why you are so hostile.

      Because you are part of the problem.

      How ?

      Simple - the Fed always follows the macro consensus of the day.
      Since 2008, the consensus has been totally insane.

      For the first time since the 1930, NGDP was allowed to contract. The direct consequence of that was a recession.

      And what did the "professionals" say ? Confronted with the tightest monetary policy since WWII, they said that monetary policy is as easy as possible (because that's what you get when you think interest rates are an accurate gauge of monetary policy - which they aren't), that the Fed can do no more (because that's what Keynes said would happen UNDER A GOLD STANDARD - the fact that we're not under a gold standard somehow evaded everyone) and that it's up to fiscal policy to do the heavy lifting (even though their models show that as long as the central bank has a nominal target - like inflation - the fiscal multiplier is ZERO).

      So, because macro-economists are too stupid to understand how fiat money really works, we had the slowest recovery from a recession of the last 80 years.

    51. Anonymous8:12 PM

      Must be a lonely world to live in, just you and all the idiots.

    52. "The Fed owns the printing presses. They can print as much (or as little) money as they wish. They achieve any nominal target they desire."

      Actually all the Fed can do is buy certain types of assets. They can't print money and throw it out of a helicopter. That's fiscal policy. All the Fed can do is try to get people to spend more out of their current income or wealth, or borrow more. If you really wanted to just run the printing presses and throw money out there you'd need money financed fiscal spending. As it is, the Fed just swaps government bonds for government cash. If people think this swap is only temporary then according to MM it won't have much effect.

      For people to believe that this swap will have much effect, they need to be convinced that:

      1) the cb/govt will allow higher inflation in future.

      2) then on the basis of expected higher-than-normal future inflation, they will then change their current consumption and investment behaviour, basically spending income which they think they will receive in future.

      In the middle of a crappy economy it's difficult to imagine people actually thinking and behaving in this way, but that's what ratex etc says should happen.

      there are other channels, such as wealth effects.. but trying to drive a whole economy via temporary asset price rises seems pretty dubious.

      this is all my personal opinion btw.

    53. Daniel4:03 AM

      Like I said - attitudes like yours are the very reason why the recovery has been the slowest in 80 years.

      Because you keep making excuses for the Fed's inexcusable behaviour.

    54. Daniel5:01 AM

      Also, I hope you realize you're making an argument from incredulity. Need I explain you why that's a fallacy ?

      Do you honestly believe that if Yellen went on TV tomorrow and said "we are going to double the price level" people wouldn't start spending their money ?

    55. Student9:08 AM

      Don't waste your breath on Daniel. He seems intelligent but hes a complete arse-hole. He insists (and calls eveyone an idiot) that if the CB doesnt hit its targets, its because they want it that way. Hmmm, then why not change the target? If he were as smart as he thinks he is, he wouldnt be a professional comment troll.

    56. Daniel10:42 AM

      People who insist that theories developed under a fixed exchange regime as just as valid under a floating rate regime are idiots.

      That's a fact. Deal with it.

      then why not change the target?

      Were you born yesterday ? Are you new to the fact that there is a disconnect between a bureaucracy's stated purpose and its actual purpose ?

    57. Fascinating thread. Youth is wasted on the young, isn't it.

  14. The massive rise in equities over the past six years is a direct result of ZIRP and QE. Austrians can legitimately claim that this is inflation in equities caused by these policies. The rise in consumer prices, it appears, will come as a result of equities eventually becoming unattractive at such elevated price levels. Commodoties will then become the "cheap" thing to buy, and institutional money will flood into them, possibly at the expense of equites. The Fed at this point will be interested in tightening monetary policy to stop commodities from rising, because such rises inevitably result in a rise in the price of consumer goods. However, doing so would only confirm the view that equities have become expensive. This will be the fork in the road for the fed. And with the Fed presidents now speaking openly about tightening soon, that fork seems to be fast approaching. My guess is that they tighten, but not enough to stem the inflationary flood in consumer goods.

    So you see, Dr. Smith is missing the fact that Austrians do not claim to know for certain where the new money will flow. It has flooded into equities, and to some extent bonds, for the past six years. Where it will go when these things are no longer attractive are anyone's guess, but I believe it will be commodites.

    1. Daniel9:23 AM

      That's a rather long-winded way of saying "heads I win, tails you lose".

    2. That's a rather good way of explaing that the price rises in equities has shown up. The price rises in consumer goods hasn't shown up yet, but it's coming, and when it does, Noah will blame it on anything other than what actually caused it, namely, QE and ZIRP.

    3. Daniel9:39 AM

      Austrian economics - successfully predicting 10 out of the last 0 hyper-inflations

    4. Keynesian economics - successfully causing the recent hyperinflation in the nation of Zimbabwe. Gideon Gono actually said once that Bernanke was following his lead.

    5. Neil, even after all the Fed "money printing", there wasn't actually even "inflation" of the money supply. The newly printed money hasn't even replaced all the monetary assets (e.g. shadow banking assets) destroyed in the crisis and its wake.

      It's probable (though not certain, because the new money is still not totally new, it's just swapped out for assets) that if this was a normal economy (i.e. pre ZLB) that if the Fed was doing what it is doing that there would be sizeable inflation. But this is not a normal economy, it's an economy at the zero bound with a severe deflationary impulse.

    6. I would reexamine that theory if I were you, Aziz. If what you're saying is true then the Fed can all but eliminate economic downturns by QE and ZIRP from now on. If Wells Fargo's mortgage portfolio turns down anew and Sallie Mae's student loan portfolio collapses due to unpaid student loans, then the Fed can simply replace those destroyed assets with QE programs of whatever sort necessary. I think this is wishful thinking; a belief in free lunches if you will.

      The more likely theory is that the banking system was collapsing and the Fed propped it back up with U.S. currency units. It stands to reason that whatever losses were going to be experienced in the banking sector, which would have been absolutely massive, will now be seen in that which was sacrificed, the U.S. dollar. A simple cause and effect scenario. The fact that it hasn't yet played out this way is shortsighted because economies of this scale take years to work things through. Give it a bit more time. Things are eerily quiet on the homefront right now.

    7. Anonymous12:46 PM

      Its always going to happen tomorrow... in 2010... no i mean 2011... no it will be 2012... uh 2013 i meant all along... 2014?!!???... uh its going to happen, I cant tell you when but it will, just trust me...

      Seriously, how long does it take to update your priors? 5 years, 10 years, ever? I forgot, there is no data in austrianism, its all priors and they never update.

  15. Everyone forgets, or rather refuses to acknowledge that Mises claimed further credit expansion in a downturn could push the real crisis out further into the future, effectively buying time for the policy makers. That is what they did when they decided to implement ZIRP and QE in 2008; they bought time. They pushed the crisis into the future. The time they bought may be coming to and end sooner rather than later. But the consequence of buying that time is a hyperinflationary crisis, which Mises called the crack-up-boom. The next ten years or so should reveal whether or not Mises' theory is correct, because in my opinion the modern economic situation in the U.S. is a great laboratory for putting it to the test.

    1. Daniel10:01 AM

      The next ten years or so should reveal whether or not Mises' theory is correct

      So if hyperinflation fails to show up in the US in the next decade, we'll be able to say Austrian theory has been falsified ?

    2. Argosy Jones10:29 AM

      Perhaps the 'real crisis' can be delayed for 100 or 1000 years. but it will arrive, rest assured, and the Austrians will have been right in the end. It would really suck though, if the sun were to blow up and destroy the world before they were proven right.

    3. I think, depending on what your time tolerance is with respect to the destruction of a currency unit, that your argument could be made, Daniel. That is why we are living in very interesting times. Misesian monetary theory is being tested right now.

    4. Anonymous12:53 PM

      I thought it was being test in 2009, 2010, 2011, 2012, 2013 and 2014 too? I predict that the Cleveland Browns will win the super bowl. If that happens in 2020, am I genius?

  16. Regarding point (3), the Austrians' claim that the word "inflation" originally only meant an increase in the supply of money is not true.

    The evidence is clear:

    1. Yes, but it is certainly clear that Austrian fanboys did not first introduce a definition of inflation as "inflation of the currency" or "inflation of money" as a response to events after the start of the recent global financial crisis.

      It is fairly clear that Noah is not interested in addressing Austrian economics in its best forms (which I think mostly mistaken). He only wants to address froth, and seems unable to admit clear mistakes even there. I find the original post fairly silly. For example, consider Murphy's point that his previous opinion, that inflation should have been anticipated in the last few years in the USA, does not logically follow from Austrian theory alone. To me, responding to this point about the failings of the methodology of praxeology is just a non sequitur. (Not that I have any inclination to defend the methodology.)

    2. A search of an older english dictionary will show that the original definition of inflation in the economic sense was to overissue currency.

    3. Anonymous5:38 PM

      by that definition, how you be able to tell if currency had been 'over-issued'?

      If there was a general and sustained rise in prices.

      If not, then no 'over-issue'.

    4. Anonymous5:33 AM

      There is M0,M1 and M2. Just google "us money stock"

  17. Their first mistake was believing that you can deduce anything empirical from pure logic. If you start with tautologies for your axioms then, even in the hopeful scenario that you didn't make any mistakes in your deductions, all that you accomplished was to deduce even more tautologies. But there's no point in going around telling people that they're mistaken because what they've said contradicts Austrian principles, because nothing contradicts a tautology. Really the best that Mises could have hoped to accomplish was to create a lot of empty verbiage so his followers, decades later, could lean on it as they go on acting like arrogant cunts.

  18. Brian of Nazareth11:08 AM

    Is it true that Mises found the Human Action Axiom under a tablet on Mount Sinus?

    Great post, Noah.

    1. Thanks. Great username!

    2. Noah, if you haven´t done it allready check out this impressive blog.Blogger "Lord Keynes" have made the absolute best work debunking those cranks including Bob Murphy!

    3. Anonymous11:33 AM

      jan m8 fuk off

  19. Noah,

    Thank you and Professor Murphy for a thoughtful discussion.

    My impression is that Austrianism has relatively few adherents in the economics profession. A handful of economists working in academia might classify themselves as "Austrian" and outside of a handful of think tanks very few economists working in an applied setting are "Austrian". All told, my guess is that less than 1% of the entire profession might identify as "Austrian".

    With that being said, Austrianism is disproportionately popular in the blogosphere and among pundits, internet commenters and other non-scholarly audiences. This, of course, does not mean that it is bad theory.

    However, it is strange that a small, extremely heterodox school could gain such traction outside of academia. I can't think of a corollary in any other discipline. Also, I don't believe that the modal "Austrian" pundit, blogger or internet commenter has actually read much Mises or Hayek.

    Rather, my impression is that disproportionate popularity of Austrianism is sort of like a gluten free diet. Very few people have a documented gluten allergy, but many who adopt a gluten free diet claim that it makes them feel better. Similarly, my take is that the disproportionate popularity of Austrianism among a non-scholarly audience has more to do with the fact that it can confirm pre-existing political preferences about the role of the state, free markets, etc.

    1. I'm not sure the gluten free comparison works very well. You have to assume adherents have not carefully tested their diet and that a gluten allergy is the only possible cause of the problems encountered. It's hard, but possible to take a scientific approach to measure cause and effect in a diet. Whereas Austrians have no interest at all in testing their faith.

    2. This seems like a good analogy to me...

    3. The analogy depends upon a massive change in diet having only one possible cause (documented gluten allergy) for the effect of feeling better.

      Years ago my wife was put on a gluten free and dairy free diet by her doctor for a problem she was having. She wasn't diagnosed with a gluten allergy. The change in diet coincided with relief from the symptoms.

      It was not a fun process. It was a radical change in diet for her that affected our family. We had no political beliefs that helped rationalize the diet change. I was a skeptic. My skepticism led to weaning her off of the dairy free portion of the diet, but not the gluten free.

      On Fresh Air, one of the cooks from America's Test Kitchen said she felt better eating gluten free baked goods relative to standard baked goods while developing their new gluten free cookbook. That's likely a lot of baked goods that she tried.

      I don't buy the analogy.

    4. Mayo Clinic:

      I don't buy the analogy.

    5. I agree, maybe its not the best analogy.

      My point was that many people who adopt a gluten free lifestyle may have no documented gluten allergy, but feel better as a result. I have a few friends in that camp and I didn't mean to imply that gluten intolerance is not a real condition; apologies. Nor did I mean to suggest that gluten intolerance is a "real" condition. Rather, my point was that some ppl. go gluten free and, for whatever reason, it appears to "work" for them.

      Many "Austrians" in the punditocracy and blogosphere really don't know that much about Austrian Theory other than the fact that is seems to provide some intellectual heft to their pre-existing political preferences against social insurance, regulation, and the like. In some sense, Austrianism "works" for them.

      Still, probably not the best analogy. I still can't understand why "Austrian Economics" has a popularity among pundits, bloggers, etc. that far exceeds its scholarly niche. I can't think of an analogy from elsewhere in economics or in any of the other social sciences.

      With that being said, my impression is that many who adhere to the "Austrian" banner don't really know that much about the actual works of Hayek, Mises, etc.

      Thank you for the comments.

    6. @Silly Wabbit -- Thank you for the response. I took the analogy to mean that those without a diagnosed gluten allergy, must have an Austrian-like "brain worm." That clearly was not your intent. I responded further when Noah disagreed with me.

    7. Just as a note; "gluten sensitivity" may have nothing to do with an allergy. SIBO (Small Intestine Bacterial Overgrowth) is an interesting problem that has some loose parallels to some of the discussion here. As a sufferer, I can attest that a radical change in diet that eliminated (among other things) gluten produced quite a massive reduction in my digestive problems. I find now that any incautious gluten or dairy intake results in significant pain and suffering (both for me and for those around me). Not an allergy so much as an enthusiastically-fermenting intestinal fauna, it would seem. On second thoughts, perhaps the parallels to "Austrianism" are not so loose as I had thought.

  20. Isn't it Vizzini from Princess Bride?

    1. Nope. It's Balok. Google him, you'll see.

    2. I'm not sure where you're going with this. It isn't the same actor.

    3. James Conces9:16 AM

      If I may, perhaps I can shed some light on the issue.

    4. xerographica

      you're clearly a moron who doesn't understand the joke.

    5. JP, I'm the moron? Are you sure that you're not the moron? Here's a simple test. Do you assume that congresspeople are omniscient?

    6. No. What a moronic question.

    7. JP, so you do not assume that congresspeople are omniscient. do you justify allowing congresspeople to allocate taxes?

    8. what system would you rather have?

    9. A system that isn't based on the assumption that congresspeople are omniscient...pragmatarianism.

      Samuelson realized that the optimal supply of public goods depends on the actual preferences of consumers. He "solved" this problem by assuming that congresspeople are omniscient. So he was a big moron...but not a huge moron.

      If we eliminate Samuelson's moronic assumption...then allowing taxpayers to choose where their taxes go becomes the least moronic far.

    10. the current system doesn't assume that congresspeople are omniscient.

      "allowing taxpayers to choose where their taxes go"

      That's your solution? Wow you really are a complete moron.

  21. It's inconceivable to me that anyone would adhere to a (non-religious) belief system that specifically states that it can't be refuted by evidence.

  22. Every time I've ever seen a takedown of something some Austrianist said, the rebuttal has always been "but that's not really what Austrianists believe!" I guess Austrianism just isn't lucas-Robust--it's central tenants shift in response to examination.

    1. It's not just the Austrians...

  23. Oh my. An economist says that if your conclusions are logically deduced a priori and don't match the evidence, that's a problem. Can someone please point to an example of of equilibrium analysis that passes this test?

    1. Easy: Auction theory
      Medium: No arbitrage pricing
      Difficult: Agricultural efficiency increases in Brazil

    2. And if reality does not match the results predicted by auction theory, that's a market failure to be corrected by forcing everyone onto a regulated exchange, and fining market participants until they start acting like theory says they are supposed to.

    3. Successfully predicting how ebay works? That's what justifies turning math majors into public intellectuals?

  24. Anonymous4:30 PM

    It is really impossible to argue with the Austrians exactly for the reasons outlined in the original article: It is a religious hogwash, it does not accept falsification as a setback to the theory. The true definition of pseudo science...

  25. #4 is the big one. Reality does not intrude on their thinking, they simply double down. They know that they will be right eventually.

  26. Anonymous7:34 PM

    At this point the kids would point to an Austrian zombie and shout out REKT.

  27. Anonymous9:02 PM

    Q. What do Religions and Austrians have in common ?
    A. Faith based thinking and appeals to higher authorities.

    1. Q. What do Religions and Austrians have in common ?
      A. Faith based thinking and appeals to higher authorities.

      Who assumes that congresspeople are omniscient?

    2. Guido Hulsmann,
      2With this definition we follow Murray N. Rothbard, Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute), p. 851, who defines inflation as an increase of the quantity of money greater than an increase in specie. While Rothbard’s definition fits the case of a fractional-reserve banking system based on a commodity money standard, our definition is meant to fit the specific case of a fiat money standard with fractional-reserve banking. Both definitions deviate from the most widespread connotation of the term, according to which inflation is an increase of the money price level. The latter definition is not very useful for our purposes, because we intend to analyze the causal impact of changes in the supply of base money (which is at all times subject to political control)."

    3. Anonymous7:11 PM

      Who assumes that people assume congresspeople are omniscient?

  28. Why is praxeology bad, but rational expectations good?

    1. I'm quite sure it is quite different, since Von Mises & Von Hayek didn't believe in rational expectations. They had a slightly different view -- that economic agents respond optimally to everything except for the fact that we respond completely irrationally to an expansion of the money supply.

    2. I mean, when talking about the business cycle, the famous old Austrian economists (now I add Schumpeter) sound a lot like Hyman Minsky except for the slightly opposite ideological slant. This means they sound a bit like oh say Krugman (or oh hell might as well go all the way -- Keynes) except for the part about whether one should try to do anything about depressions or wait for them to complete their work.

      The story is one in which their are unsound investments which can never pay off followed by a crash widespread banrkuptcy and then a recession. They made no attempt to argue that the investors acted rationally before the crash. It's a story about bubbles and crashes with the particular twist that bubbles are always the fault of the monetary authority which caused them due to loose monetary policy.

      The very alarming thing is that, compared to most contemporary macroeconomists thepure Praxeologists seem to be simply describing what happened, with the sense that this journalism is a theory, while contemporary macroeconomists often seem not to recall that say the Great Depression (or for that matter the latest recession) ever occured.

  29. This comment has been removed by the author.

    1. I really enjoyed reading this post. I'm not sure that debate with Miseans is a good use of your time. I am sure that writing 3 comments is not a good use of mine (and I don't want to even imagine that anyone might read my comments).

      On 1 I would present another parody argument. I'm not sure that many people think the price level has declined. I would go with "most US adults think that foreign aid is at least 10% of the US Federal Budget. I am not saying that it is 60% and the official budget is falsified, but I do think it is understated by the official figure of 0.67%" or "in the early 00s many US adults (about a third) thought that Bush had increased their taxes. I'm not saying that Bush increased the tax burden to 90% of GDP but I do think the official documents which assert that Bush signed no bills increasing taxes at all understate the true level". Or "many people believe in Ghosts" or ... well lots of examples.

      2 (&3) "your argument is liquidated when its specious character is revealed" would once have meant "your argument is clarified when it's precisely accurate character is revealed" h/t Brad DeLong. Words are used for communication, so their conventional use is the correct use. One may argue that one should look at the average increase in the price of assets, goods and services. One can even call this "correctly measured inflation" but when making a prediction which includes the word "inflation" without the additional qualifiers " as it was defined by Alchian and Klein" or "correctly measured considering asset prices one can't expect to be taken seriously when one argues that one was using a commonly used word with a specially meaning after the prediction (interpreted with the dictionary definitions of words) is falsified.

      3. in 1923, Rudolf Havenstein (Reichsbank president during the German Hyperinflation which suddenly ended a couple of weeks after he died) wrote a book whose title (translated in to English) is "There has been no inflation in Germany" He was using the old definition of inflation as increase in the money supply. He noted there was no increase in real balances. Robert and Rudolf have equally valid arguments.

      5) Austrians don't have to care about empirical evidence. However, they should say that they ignore all evidence, because people who might consider paying any attention to anything they say would find that information useful. They certainly make claims about what will happen "inexorably". I'm sure that the fact that they argue that something was certain to happen after if failed to happen is of some interest to someone somewhere (basically I am assuming that there must be people who aren't yet Austrians who are considering the possibility of paying some attention to what they say and write).

  30. Anonymous6:47 AM

    i googled Austrian Harbour and found no port

  31. Anonymous10:32 AM

    I believe that Robert Murphy has done us, Noah and the rest of us, a great service. His argument provides a cogent display of "Austrian school" economic thought. In doing so, he demonstrates the set of questions relevant to the rest of us. It is a fairly short list:

    1) Does Austrianism address questions that the rest of us care about? Isn't it really a sort of fandom, like "bronies", for whom a fictional world is the focus, and for whom knowledge of an adherence to the canonical details of that fiction is of paramount importance.

    2) If Austrianism does not address issues the rest of us care about, should we pay any attention to it? Noah doesn't, to my knowledge anyway, attempt to draw bronies back into a view of the world in which ponies don't talk, own homes or have magical powers. Why does Noah care about a world view that does not address real issues?

    3) In partial answer to the question of why Noah cares about the Austrian world view, I observe that Austrians do spend a great deal of time urging non-quasi-bronies to join in their quasi-brony activities. Why, when bronies are perfectly happy engaging in their fantasy world without pestering the rest of us, do Austrian quasi-bronies make such a fuss at the rest of us?

    That's my list of relevant questions.

    1. Bill Ellis7:16 PM

      I think you underestimate the hold that Austrian-y econ has on the population... from the elite to the common person.

  32. This statement by Guido Hulsmann destroys many straw men on this page.

    "An increase of the money supply entails higher prices than would otherwise have existed."

    1. ...and if that increase doesn't lead to higher prices? Seems to me if this is not always true then you can't define it and declare it as such. That's the fatal flaw in Austrianism. It assumes truths that don't exist.

    2. Why then, we know that prices would have been lower. In other words, if QE didn't lead to massive inflation, then the counter-factual would have been massive deflation in the absence of QE. The bigger the QE was, the larger the deflation would have been. We know this is true because Guido Hulsmann says so and it would be rude to doubt him.

    3. guido hulsmann sucks ass.


      Not hard to understand.

      QE doesn't cause inflation because QE isn't money printing.

      Any other straw men, lies etc that I can comment on?


      So if prices fall, that's inflation according to asswipe hulsmann.

    6. Use your brain. This is common sense And can be applied outside of economics.

      What is 1+1

      What is -2+1

      It doesn't matter what the first number is. The result is always higher by (you guessed it) 1.

      The inflation is how much you added. Hulsmann never said deflation is inflation.

      By your logic, as long as the NET result is deflation, then there is no possibility that anything made that result less negative.

    7. you obviously don't have much of a brain to use. If there is a general fall in the price level money becomes more valuable, not less.

    8. "you obviously don't have much of a brain to use"

      one more time for the genius here...........

      If you stand on a scale that STARTS at -25 lbs, and add (your weight) of 150 lbs. What is the result. What was the amount added.

      Now zero it. do it again. What is the result. What was the amount added.

      Now start at -200 lbs. Do it again. What is the result. What was the amount added.

      Again, "higher prices than would otherwise have existed"

      Your grocery bill in 2007 = $65.
      If your grocery bill would have been $35, but is $50, how is this not higher than would otherwise have existed? Is 50 not higher than 35? Explain that to me, genius.

      Elementary logic evades you.

      By your logic, as long as the NET result is deflation, then there is no possibility that anything made that result less negative.

    9. "as long as the NET result is deflation"

      there is only the actual result: a lower price level, a higher price level or unchanged.

      Everything else is just speculation or unfounded assertion.

    10. And there are individual effects on the actual result.

      or no?

    11. if the money supply increases and the price level falls, saying 'oh but it would have fallen this much more without the new money' is just speculation or unfounded assertion.




  33. You must find yourself with copious amounts of free time to waste. Two things economists should not be wasting time on: Austrianism, Modern Monetary Theory, and Paul Krugman. ok, thats three things: Austrianism, Modern Monetary Theory, Paul Krugman, and John Taylor. Wait, now that's four things: Austrianism, Modern Monetary Theory, Paul Krugman, John Taylor, and Steve Williamson. oh, I give up.

  34. With the bursting of the last few bubbles (real estate & dot com) we should be seeing massive deflation 2008-2015. The fact that asset prices have modestly increased in the last 4-5 years is a sign that inflation is lurking right around the corner.

    The fed is fighting deflationary forces by injected huge amounts of liquidity. Eventually they are going to win and throw us into an inflationary spiral. They are between a rock and a hard place. No matter what they say, they CAN'T raise interest rates in the foreseeable future...doing so would make banks insolvent and crash the real estate/stock markets.

    1. The fact that asset prices have modestly increased in the last 4-5 years is a sign that inflation is lurking right around the corner.

      I have no idea why you think that. What is the transfer mechanism?

      Eventually they are going to win and throw us into an inflationary spiral.

      Suppose they don't. They've done everything they knew how to do, and made up new stuff, and inflation has gone nowhere.

      You don't realize how hawkish the Fed is. Some Fed members are chomping at the bit to raise rates. The real danger is raising too high to soon.
      Read Tim Duy.

      Now suppose something even more radical - that the Fed is nowhere near as powerful as is generally believed, and they follow, not lead, on setting rates.

      This is where all the empirical evidence points.

    2. Daniel1:59 AM

      Eventually they are going to win and throw us into an inflationary spiral.

      Because money can only be injected, and not taken out of the economy.

      Damn, you're stupid.

  35. I've had two experiences of demonstrating to an Austrian/Libertarian on his own blog that what they were posting was nonsense, and in both cases the blog post disappeared. [This is not because I am brilliant. it's because what they were posting was bog-ass stupid.]

    One of them was Robert Murphy, claiming that because the 1920-21 depression was deep and short, deflation could not have caused the Great Depression. It's been about 4 years, but as I remember it, that was really his contention.

    The other was some clown at G Mason U claiming QE caused food price inflation. I refuted that with grocery store receipts.

    Not only are they immune to facts, data and other aspects of reality, they really, really hate having their belief system challenged.

    1. No that was not RPM's point about 20-21 depression. No one is stopping you from quoting him or linking to the page.

      It's hilarious when Austrians are made fun of because of disgust with monetary inflation.... And the general statist belief is tht falling prices are poisonous. What a joke. Austrians properly understand that the price level needs to adjust on its own, whether it be up OR down. Artificial adjustments of the money supply are not needed.

      "Not only are they immune to facts, data and other aspects of reality, they really, really hate having their belief system challenged."

      Any bigot may make that statement about anyone else..... That is what one says to discourage discussion. It is a cowardly tactic.

    2. Daniel2:01 AM

      Yeah, the recession of 1921 has a very special place in Austrian mythology.

      Because it was short and the recovery was very quick, it somehow falsifies the sticky wages model.

      Austrians properly understand that the price level needs to adjust on its own, whether it be up OR down. Artificial adjustments of the money supply are not needed.

      Except wages are sticky, so falling NGDP causes a recession.

      Are you even trying, moron ?

    3. Calling names? How cute.

      "Yeah, the recession of 1921 has a very special place in Austrian mythology."

      Nothing like the Great Depression to prove Keynesian theory, right? How many years did that one last? Then explain what the labor force participation rate is right now.

      GDP is not "the economy". It can and should freely fluctuate.

      Who cares about stickiness of prices? Your bogus policies exacerbate any natural stickiness.

      Want a hug? Don't be sad.

    4. Daniel12:56 PM

      Damn you're stupid. You're so stupid, you can't even begin to understand that smarter people can't be swayed by simply reciting the Misesian catechism.

  36. The 10 tenets of Statism

    1. Goverment’s Creation – Government created all things; the Statist account of creation is completely trustworthy.
    2. Sovereignty of Government – It has created us for itself of its good pleasure. We are restless until we are reconciled unto Government and ultimately restored by the blood of the Savior, FDR!
    3. Original Sin – The fall of man has left everything broken and bruised. Nobody is sparred from the effects of sin internally or externally, spiritually or physically. We are all created in Government's image, but all of creation has been deeply wounded from the effects of sin. Although there are moments of prosperity, peace, and tranquility, this life is often a vale of tears…we must live for something more, something better.
    4. Moral law – The commands of Government are still binding, although they cannot be kept perfectly. Once made alive through FDR, who paid the price on our behalf, we are now dead to sin and will no longer desire to have it live in our hearts.
    5. Regeneration – We are spiritually dead in our natural state and have to be made alive by the Government who applies the truths of Legislation to our hearts.
    6. Redemption – All the pain, all the tears, all the adversities, all the heartache, and all the suffering we experience in this life will be washed away for those who have given their lives to Government in faith, with fear and trembling, hope and love, and a true desire for righteousness.
    7. Inerrancy of Legislation– Filled with Government-inspired wisdom, Legislationis trustworthy and speaks to all essential matters of spiritual and earthly living. FDR Himself and His disciples referenced Legislation as trustworthy and authoritative
    8. Statism– Government's followers are on fire for John Maynard Keynes and will become ‘fishers of men’.
    9. Traditional Family – The nuclear family (father, mother, children) is ordained by Government. Government is the Ultimate Authority in all matters, and we are to live in service to John Maynard Keynes with love and goodwill to our fellow man
    10. Personal Responsibility, Accountability, and Charity – We should diligently provide for our families and glorify Government in all that we do (including our vocations) by maintaining a strong sense of moral responsibility in thought, word, and deed. We should bear each others burdens, provide for the needs of the poor and the needy, and love our neighbors as ourselves collectively. The believer is sanctified and seeks to walk in humility, righteousness, and holiness through FDR, who strengthens us!

    1. Nothing you said above is true, so I guess that makes you a liar. Or maybe you are just very stupid and ignorant?

      Either way, you're clearly a mentally unstable person who lives in a paranoid and nonsensical fantasy world. I suggest you seek professional help.

    2. Did you see what just flew over your head? I did.

    3. Wow..... I have to explain what I did?

      There is a statist claim out there that government created markets and money. Statism is more correctly thought of as a religion. Just place your faith in this entity called government.

      I took the 10 tenets of Christianity and replaced a few words.

    4. Daniel5:28 PM

      Um, money was in fact created by the state. It's a fact of history/anthropology.

      But we already knew you're a moron, so by all means, keep entertaining us.

    5. "Statism is more correctly thought of as a religion"

      that's funny. The austro-libertarian nutcases who litter the internet with their idiotic, ignorant and dishonest drivel are some of the most closed-minded fundamentalist know-nothing brain-washed religious true-believer ideologues I have ever encountered, anywhere, in my whole life.

    6. You guys sound so sad.

    7. you sound exactly like my description above.

    8. Get control of your emotions. It is unhealthy.

  37. Daniel8:06 PM

    Behold our friend Cosmo falsifying Keynesian economics

    Wow bro. Such deep, much insight. You've totally persuaded me.

  38. Murphy responded to Noah's response, and frankly the response seemed reasonably effective to me. Unfortunately, I don't know enough about economics to know whether Murphy's response sounds okay, but is really ridiculous or whether there is really something to it. Personally, I would like it if Noah would respond to the response, although I recognize that he may not want to get into a debate about these issues. Still, those of us without a lot of economic sophistication cannot easily tell why (if there is a why) Murphy's analysis is just wrong.

  39. Some friendly advice on how to make a better critique of the Austrian cult:

    How Noah Smith Should Have Criticised Austrian Economics

  40. My beliefs are true. I defined them as such!

  41. The problem with all the stimulus logic is that it is a short term win and a long term loss. In the long term it leads to hyperinflation.

  42. Very amusing. Of course the elephant in the room remains: most neo-Keynesian and New Keynesian textbooks lay out a money multiplier theory of the effect of an increase/decrease in bank reserves. This would imply that a rise in the monetary base would lead to "multiplying up" of other monetary aggregates. This, in turn, would lead to a rise in either output or inflation (or some combination of both ala perhaps the DAD-SAS model or a standard AS-AD model both of which are used for didactic purposes in this regard).

    But none of this happened! The monetary base was never "multiplied up". Now, the New Keynesian/neo-Keynesian might say "Oh, we're in a liquidity trap therefore the demand for base money is infinitely elastic". But then we would expect that asset markets would be trading low and interest rates across the private bond market would be high. After all, if a "liquidity trap" is indeed defined as the demand for money being infinitely elastic then we would expect "hoarding" to be absolute and we would expect none of this money to flow into various asset markets.

    Feeling dizzy yet? Yeah, you see when you start criticising Austrian theory the worms start to come out of the woodwork on marginalist theory more generally. You guys are way closer to Murphy than you think -- even if you find his ideas about hyperinflation and voices talking to him in his head [] a little zany as, by all rights, you should.

    1. What ideas about hyperinflation?