Wednesday, November 12, 2014

Watch as Robert Murphy’s Analysis of Martin Wolf Implodes before Your Very Eyes

Robert P. Murphy makes a curious set of assertions here:
Robert P. Murphy, “Martin Wolf, Closet Austrian,” Free Advice, 11 November, 2014.

Robert P. Murphy, “Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory,” Mises Canada, November 11th, 2014.
In essence, Robert Murphy reproduces a quotation from a column by Martin Wolf, the British journalist and chief economics commentator at the Financial Times.

In his Mises Canada post, Murphy makes the astonishing claim that Martin Wolf is using an analysis of the causes of business cycles that is “thoroughly Austrian”:
“Now to be sure, Wolf is still a Keynesian in his prescriptions: he wants more monetary and fiscal stimulus. But my point with this post is to show that his diagnosis is thoroughly Austrian. Guys like Larry Summers and (yikes!) Paul Krugman, with their “secular stagnation” hypothesis, are also coming around to the view that Western economies have been bouncing from bubble to bubble, fueled by central bank policies.

At this point, more and more economists and analysts agree on the causes of our problems. Now we’re just disagreeing on the solutions. This is actually progress.”
Robert P. Murphy, “Martin Wolf Unwittingly Confirms Austrian Business Cycle Theory,” Free Advice, November 11th, 2014.
Unfortunately, Martin Wolf’s analysis is not “thoroughly Austrian,” nor are “more and more economists and analysts” agreeing with the Austrians about the causes of the current crisis or business cycles in general. The very idea is absurd. You can see for yourself how the whole substance of Murphy’s post unravels in the comments section of his blog as I point out various inconvenient facts, which I elaborate on below.

Neither in the article in question nor in the rest of his writings does Wolf endorse the Austrian business cycle theory (ABCT). The most positive thing that Wolf has ever said about the ABCT (to my knowledge) was on his Financial Times blog, where he stated that he had “sympathy with” some of the ideas in the ABCT but ultimately rejected it (see Wolf 2010). Clearly, Wolf is not saying banks or a central bank are driving a money rate below the natural rate of interest, and thereby inducing an “unsustainable” lengthening of the capital structure. Wolf is pointing to poorly regulated financial markets and asset bubbles as a driving, destabilising force of modern business cycles, as well as debt deflation and debt overhang in the bust and aftermath, but these things never had a fundamental role in the classic ABCT writings of Mises, Hayek or Rothbard.

Martin Wolf actually takes a maverick heterodox Keynesian/Post Keynesian explanation of the crisis, and even invokes Hyman Minsky’s theories in his writings. In fact, in Martin Wolf’s recent book The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis (Wolf 2014) Wolf commits himself partly to a Post Keynesian analysis, and explicitly endorses Hyman Minsky’s theories (unfortunately he also endorses the global savings glut thesis, which is not generally endorsed by Post Keynesians).

Right in the preface of his book, Wolf notes that there is a superficial similarity between Austrian and Post Keynesian analyses, but profound differences in their explanations of both the causes of and solutions to the crisis (Wolf 2014: xvii).

It didn’t take long for “Major_Freedom” – the most stupid and ignorant commentator on Murphy’s blog – to defend him with a typically desperate and absurd explanation:
“Murphy’s only argument, which is valid and you have not at all refuted or even challenged in your accusations, retractions and rescues, is that the section Murphy quoted, which is a largely self-contained argument, is indistinguishable from textbook, traditional ABCT.”
At first I didn’t think Murphy would actually sink so low as to defend himself in these terms, but – lo and behold! – it seems I overestimated him.

In his subsequent explanation of his purpose in the post in the comments on his blog, Murphy uses that defence:
“You’re right ... [Major_Freedom], my point was that Wolf was indistinguishable from Austrians in his diagnosis, in that column.”
Actually, Martin Wolf’s analysis in his original column is not “indistinguishable from Austrians” at all: it is mostly concerned with the macroeconomic effects of deleveraging and the debt overhang since 2008, and argues that many nations need to bring down private debt levels, reform and recapitalise banks, and implement strong fiscal stimulus.

All one can say to defend Murphy’s position is that only if we
(1) cite a selective quotation from Wolf, and

(2) take the quotation out of context, and

(3) ignore Wolf’s actual beliefs and all his other writings on the causes of business cycles,
then we can just pretend that Martin Wolf’s explanation of the current crisis is “thoroughly Austrian.”

This just stinks of a lazy unwillingness to actually engage with what Wolf or heterodox Keynesians actually think. If you can selectively quote your opponents and ignore what your opponents actually think, then you can pretend that your opponents agree with you. But it is a tactic that is profoundly intellectually dishonest.

Wolf, Martin. “Does Austrian Economics understand Financial Crises better than other Schools of Thought?,” Martin Wolf’s Exchange, April 1, 2010

Wolf, Martin. 2014. The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis. Penguin Press, New York.


  1. Wolf also uses the sectoral financial balances as his favourite macro tool. I'm pretty sure he picked this up at the Levy conferences.

    Unfortunately Wolf has recently jumped on the 100% reserves train. He still doesn't quite get modern money creation.

    Another leading figure in the UK who has come to support PK ideas is Adair Turner. He has put a lot of effort into criticising the natural rate of interest theory and putting Minsky explanations front-and-center.

    We had a discussion a few weeks ago and he has since changed his speech to be even more critical of the natural rate theory. In a speech a few weeks back at Chicago (!) he said:

    "In an advanced economy where existing real estate accounts for the majority of
    all assets, and real estate lending the majority of all credit supply, there is no one natural
    rate of interest rooted in the physical reality of investment returns, but several different and
    potentially unstable expected rates of return."

    I also sent Turner your posts on the history of the natural rate concept, LK. But yes, the Austrians will latch onto people like Wolf and Turner and say that they are Austrian. This is because the Austrians think that they are the only ones with a credit cycle theory. Of course, if they knew their history they would know that Keynes began work on credit cycles in his Treatise on Money and Hayek wrote a critical review of it.

  2. Even the quote Murphy takes out of context has nothing to do with austrianism.

    "Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply"

    1. Right: it assumes Say's law is false. Hardly an "Austrian" viewpoint.

  3. "If you can selectively quote your opponents and ignore what your opponents actually think... "

    That's Murphy on Krugman, Murphy on evolution, Murphy on private law, Murphy on the Bible, Murphy on FDR, Murphy on Lincoln, Murphy on the Kennedy assassination, Murphy on banking. I'm sure I've left some out. Oh yes, Murphy on "chem trails", Murphy on black helicopters, Murphy on Satanists in the federal government.

    1. Ken B!

      Check this out:

      Did you know Bob seems to actually believe in the mythical biblical flood??

  4. btw,

    'market failure' usually means a failure of a market to allocate resources efficiently, resulting in inefficient outcomes.

    Sticky prices and wages, or administered prices, are not a market failure. They might be a reason for or cause of market failure however.

  5. also,

    ancaps redefine 'free market' to mean feudalistic 'private state capitalism'.

    This is a very good critique of 'anarcho-capitalism' from an actual anarchist: