John Cochrane on Krugman on Friedman: The Austrian Approach Vs The Keynesian
John Cocharane argues:
Paul Krugman, in a most recent post, argues “Backward moves the macroeconomic debate” with “the result that our economic discourse is significantly more primitive now that it was 70 years ago.” Per Krugman, this backward movement is apparent in the use by some opponents of active demand management policy, such as Amity Shlaes, and of the “supposed legacy of Milton Friedman.”
Then he follows up with:
While Keynes’s verbal analysis in the General Theory continued to emphasis the role of investment, interest, and money in determining output and employment, his abandonment of the natural rate concept masked the intertemporal coordination issues at the heart of fundamental economic problem, made it easier to ignore the important capital theory issues involved in the original Hayek-Keynes debate, and facilitated the morphing of the economics of Keynes into the IS-LM single macroeconomic output aggregate Keynesianism.
Relative to most quantity theorists, old or new, and most modern macroeconomics which model the economy with a single aggregate production measure, Keynes, even in the General Theory, continued to stress the importance of the distribution of production and resources between present uses, consumption, and the future oriented uses, investment. The single aggregate approach makes it nearly impossible to even recognize intertemporal coordination problems. Keynes does recognize potential problems. But a major factor differentiating Keynes from the Austrians is Keynes’s lack of any well defined capital theory compared to the Austrian use of structure of production capital theory, a capital structure -based macroeconomics (Cochran and Glahe 1999, pp. 103-118 and Horwitz 2011). Hence, “In the judgment of the Austrians, Keynes disaggregated enough to reveal potential problems in the macro economy but not enough to allow for the identification of the nature and source of the problems and the prescription of suitable remedies” (Garrison 2001, 226).
To which I replied:
First, Krugman has a political agenda and Keynesian policy supports that agenda. Everything he says and does is in support of that political agenda. It has absolutely nothing to do with any moral assumption of meritocracy or the common good implied by economics as a tool for assisting in policy decisions. Second, he never uses prewar data or historical examples which would expose his ideas to scrutiny. Third, he argues that the good that comes from Keynesian spending compensates investors and entrepreneurs for the costs. Fourth, he ignores the misallocation of human capital and the long term social consequences of that misallocation – again, because it suits his political agenda.
Austrians assert that not only are we misallocating capital and human capital, and not only are we creating perverse incentives and moral hazards like confetti at an italian wedding, and not only are we destroying the civic virtues, but that entrepreneurs and investors are not compensated for the impact upon their planning. (Some even make a purely moral argument which I think is specious on all accounts.)
The problem is, as far as I can tell, we cannot produce a mathematical model for an argument either way. I’m sure that we intuit that we are kicking the can down the road and creating bubbles of every possible kind. But I’m not sure that we can argue (yet) that the use of aggregates and all the implied redistribution that the use of aggregates entails, is either good or bad.
It’s pretty clear that the conservative (aristocratic classical liberal) social model is being affected. it’s pretty clear that entrepreneurs are being prevented from solving many social problems like education. But these are difficult causal relations to prove. And to many they’re desirable outcomes. Freedom is and always has been the desire of the minority. Everyone else just wants ‘aristotle’s relishes’: to consume without consequence.