Friday, March 15, 2013

Murphy on Keynesianism and Great Recession

His views on the recent crisis in the US are given here.

The problems with his video are as follows:
(1) Romer’s estimates of the level of unemployment with stimulus were wrong, but given that you cannot precisely predict the future or do so with objective probability scores, this is hardly much of a point.

Romer and others underestimated the severity of the recession. This does not disprove the fundamentals of Keynesian theory.

The whole underlying argument of Murphy’s talk is that the stimulus “failed.” If this were so, then why did the US recession end in 2009 and positive real output growth resume? Failure would have been a continuing recession even in the face of fiscal expansion.

(2) It is fascinating how modern Austrians are now driven to extremes so absurd that they appear to deny that government increases in national income can raise output and employment.

In fact, not even Hayek or other die-hard Austrians have denied this. Take this statement by the extreme Rothbardian Huerta de Soto:
What should be done if, under certain circumstances, it appears politically ‘impossible’ to take the measures necessary to make labor markets flexible, abandon protectionism and promote the readjustment which is the prerequisite of any recovery? This is an extremely intriguing question of economic policy, and its answer must depend on a correct evaluation of the severity of each particular set of circumstances. Although theory suggests that any policy which consists of an artificial increase in consumption, in public spending and in credit expansion is counterproductive, no one denies that, in the short run, it is possible to absorb any volume of unemployment by simply raising public spending or credit expansion, albeit at the cost of interrupting the readjustment process and aggravating the eventual recession.

Nonetheless Hayek himself admitted that, under certain circumstances, a situation might become so desperate that politically the only remaining option would be to intervene again, which is like giving a drink to a man with a hangover. In 1939 Hayek made the following related comments:
it has, of course, never been denied that employment can be rapidly increased, and a position of ‘full employment’ achieved in the shortest possible time by means of monetary expansion. ... All that has been contended is that the kind of full employment which can be created in this way is inherently unstable, and that to create employment by these means is to perpetuate fluctuations. There may be desperate situations in which it may indeed be necessary to increase employment at all costs, even if it be only for a short period—perhaps the situation in which Dr. Brüning found himself in Germany in 1932 was such a situation in which desperate means would have been justified. But the economist should not conceal the fact that to aim at the maximum of employment which can be achieved in the short run by means of monetary policy is essentially the policy of the desperado who has nothing to lose and everything to gain from a short breathing space.
Now let us suppose politicians ignore the economist’s recommendations and circumstances do not permit the liberalization of the economy, and therefore unemployment becomes widespread, the readjustment is never completed and the economy enters a phase of cumulative contraction. Furthermore let us suppose it is politically impossible to take any appropriate measure and the situation even threatens to end in a revolution. What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reduced wages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above.” (Huerta de Soto 2012: 452–456).
But these days neo-Austrianism appears to deny even this.

(3) What is important to note here is that Murphy attacks New Keynesianism, and has a poor understanding of Post Keynesianism.

(4) By 18.00 onwards Murphy starts to sound like a New Classical and requires Ricardian equivalence and rational expectations for his idea that people cut their spending as the stimulus was implemented in anticipation of future tax increases. But Ricardian equivalence and rational expectations are not even supported by Austrian economics, and one can only marvel at the breath-taking hypocrisy here.

(5) Regarding predictions and the real world: the trouble with libertarians is that they are so focussed on the US, and rarely look at the rest of the world. In numerous other countries, governments used countercyclical fiscal policy and ended their recessions and kept unemployment low: e.g., Australia, Norway, South Korea, and Germany. Of course we hear not a word about any of this from Austrians like Murphy.

(6) Regarding the success of Keynesianism in the 1930s, Murphy is ignorant. There were nations in the 1930s that successfully used fiscal stimulus:
“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.
(7) Murphy’s analysis of the Eurozone is flawed.

Murphy’s main point appears to be that Europe has not cut enough from government spending. He grudgingly admits that in Greece, Spain and Ireland total spending has been cut, and economic problems have persisted. Strangely, he ignores the countries that pursued much more extreme austerity: Latvia, Estonia and Lithuania. What happened there is confirmation of the disastrous consequences of fiscal contraction.

Murphy attacks bank bailouts in Europe. At this point, the bizarre nature of Murphy’s Austrian analysis reveals itself. Throughout his talk, Murphy is trying to suggest that austerity and liquidationism will cause recovery better than recoveries caused by fiscal expansion: yet allowing the financial sector to collapse is precisely a measure that would induce the worst depression imaginable.

Liquidationism by definition means the worst types of recessions/depressions possible.


  1. Murphy has finally picked up the Ricardian Equivalence argument, eh? Maybe he reads the comments on here.

    Of course, you're absolutely right, RE requires Rational Agents with Rational Expectations (RARE) which are completely counter to Austrian theory. The Austrian theory, when it says anything about these policies, makes the claim that they will lead to hyperinflation and bank-runs. Obviously this isn't working out for some Austrians, so they temporarily turn New Classical when it suits them.

    1. "RE requires Rational Agents with Rational Expectations (RARE) which are completely counter to Austrian theory. The Austrian theory, when it says anything about these policies, makes the claim that they will lead to hyperinflation and bank-runs."

      Can you provide a single Austrian source to back up this statement ?

  2. So that Murphy guy is on it again???And get everything wrong as usual!

  3. A friend of mine studied at University of Chicago under Eugene Fama and Robert Lucas,among others,and certainly the most fanatic freemarket advocate i know.I once asked him what guys like Fama and Lucas thought about the Austrian school ,since to me they pretty much same.He answered:" Fama and Lucas hate this Austrian school thing and their branch,they see them as the worst sort economists on Earth,they see them dangerous for a real freemarket alternative,since their whole branch is so stupid and simplified that it spill over on them to,and the layman don´t know the difference between the schools and it gives us a bad name.No people like Lucas and Fama really hate Austrians,whole heartedly!" I thought about it and found it peculiar.But when i see people like this Robert Murphy,i actually understand what my friend told me.I guess a Robert Lucas don´t want to be mixed up such a guy.

  4. On Romer's prediction, I'd highly recommend you check out 'The Escape Artists: How Obama's Team Fumbled the Recovery' by Noam Scheiber (

    He has discovered that Romer argued for a dramatically higher stimulus, but this was shut down and prevented from being put to the president by Larry Summers for *political* reasons. Romer comes out very well from it.

  5. Even Huerta do Soto is talking thru his rear end. In the first paragraph of his quoted above he claims that the best remedy for a recession is to make “labor markets flexible, abandon protectionism and promote the readjustment…”.

    That assumes that recessions are caused by a sudden decline in labour market flexibility or increase in protectionism. Of course there isn’t a scrap of evidence to support that.

    And just in case some dummy Austrian jumps to the conclusion that I’m saying flexible labour markets, and “adjustments” are undesirable, I’m not. My point is simply that recessions are not caused by sudden increases in labour market inflexibility, protectionism, etc.

  6. @Ralph Musgrave:

    "That assumes that recessions are caused by a sudden decline in labour market flexibility or increase in protectionism."

    No it doesn't. It assumes that lack of labour market flexibility and protectionism are obstacles to recovery.

    Suppose your house is on fire and you've called the fire brigade. Along comes de Soto and points out that a big truck is blocking the way and it will have to be moved in order for the fire engine to be able to reach your house. Would you say de Soto assumes the fire is caused by the truck?

    1. Martin,

      Obviously, the Austrians assume wage rigidities exacerbate recessions, though not necessarily being the cause of those recessions.

      Yet their proposed solution - wage flexibility - is no remedy, since a capitalist economy can suffer involuntary unemployment even with perfect wage and price flexibility. That was Keynes's fundamental insight in the General Theory.

  7. "But Ricardian equivalence and rational expectations are not even supported by Austrian economics, and one can only marvel at the breath-taking hypocrisy here."

    Why is incorporating ideas from other schools of thought "hypocricy" , LK ?

    1. It´s hypocricy since Austrian schoolar´s like Bob Murphy claim they are the ONLY one that get all things right at all time and they are the ONLY ones that has the answers to economic issues what ever it would be, and constantly,often vicouisly attack ALL other schools for be charlatans ,misguided and misleading.Murphy has for years insulted for exampel Paul Krugman,called him all sort of names from fraud,fool a crook etc.Murphy claim the Austrian school is the only true voice of sanity and proclaim he himself is pure Austrian.If you act in that way,and it shows up you made up facts and even use Ad-hoc explanations that is taken from other schools,to support your thesis,that says that the "Austrians was right all the time"!In that case, of course you have to tolerate to be examined and critisized,when someone catch you when it shows you make up things.

    2. Bob Murphy is the David Icke of the Austrian world.

    3. Curiously, I would give him a lot more credit, Neil.

      For example, he thinks that the interest rate is a monetary phenomenon (in contrast to other Austrians who adopt the pure time preference theory) and that all versions of the ABCT that use the unique natural rate of interest are flawed. Quite important admissions for an Austrian.

  8. @Anonymous

    Austrian theory has Knightian uncertainty at the core of its subjectivist approach. This means that it cannot have RARE.

    "In essence, mainstream economics has followed the lead of neoclassical
    theorists John von Neumann, Oskar Morgenstern, Leonard Savage, and others
    (including, arguably, Robert Lucas, Jr.) in classifying uncertainty as merely unidentified risk (pp. 11, 14–15). Non-mainstream schools such as the Austrians
    and Post Keynesians, on the other hand, have insisted on the theoretical distinction
    between the two. An important result of these different approaches is that the
    mainstream position has proven especially conducive to the “strong” form of
    rational expectations, whereby the subjective and objective probability distributions
    of all economic outcomes are identical, while the non-mainstream positions
    have allowed significant scope for the “non-convergence” of subjectively formed
    expectations and objectively determined outcomes."

    Murphy doesn't understand his own theories. But we've known that for a long time.

  9. While it does have the words "rational expectations" in the text that article seems totally irrelevant to the topic being discussed here.

    How does it demonstrate in any way that "Murphy doesn't understand his own theories" ?

    1. Wooo! Look like I'm going to have to go slow with our Anonymous commenter here. Kid gloves, I suppose.

      (1) Okay, that quote shows that in Austrian theory you cannot have agents with rational expectations because this is not in keeping with the Austrian theory of Knightian uncertainty and subjectivism.

      (2) Bob Murphy in his little presentation uses a Ricardian Equivalence argument that states that if consumers see government deficits now they will save to pay for future taxes.

      (3) This is key: we can only assume (2) if consumers are said to have Rational Expectations. If they do not we have no basis to make the Ricardian Equivalence argument.

      (4) Thus is Bob Murphy claims to be an Austrian and at the same time makes Ricardian Equivalence arguments then he does not understand Austrian theory.

      Clear enough or should I draw you a picture?

    2. See comment below.

      And you never explained your comment on Austrians and RARE "The Austrian theory, when it says anything about these policies , makes the claim that they will lead to hyperinflation and bank-runs"

    3. I hope that other readers will note the "infinite regress" style of the Anonymous commenter's argument. First he asks me for a quote proving that Austrians don't adhere to RARE. I give him this. But he keeps asking more and more questions. He keeps asking for more and more substantiation. This is not the argumentative style of a serious person. It is the posture of a child who continuously asks "why?" thinking that they're being clever but they just come across as juvenile and vulgar.

      It is "representatives" like this that make non-Austrian hate Austrians and treat them like the children of the economic world.

    4. I frequently suspect many of the Austrian blog commentators around are not adults but angry teenagers.

      The cult of Ayn Rand too probably has a great deal of attraction for this sort of "everyone-in the-world-is-wrong-but-me!" phase of immature stupidity.

  10. The quote is irrelevant to the discussion in hand. The fact that Austrians (as subjectivists) tend to view uncertainty as subjective scarcely debars them from thinking that people may include expected future tax increases into their plans.

    Essentially you are saying that for Murphy to even suggest that a huge stimulus package may cause people to fear future tax increases and cut back present spending is somehow in violation of the Austrian code of conduct - and for you this is a bigger issue than whether this suggestion is true or not.

    Perhaps you should take off your sectarian goggles and actually try and learn something.

    1. Ricardian Equivalence requires Rational Agents. That's why Ricardo rejected it.

      The Austrians are generally concerned that deficits will result in inflation/malinvestment. That's how they argue. They do not pick up the Ricardian Equivalence argument because they realise that it requires Rational Agents and that this conflicts with their theories in innumerable different ways.

      I doubt I'll convince you on this though. You don't seem like the sharpest knife in the drawer. Like Murphy, you don't seem to understand what being internally consistent actually means.

      Maybe you should stop doing economics and try at something simpler where you can be ambiguous in your theories and speak out of both sides of your mouth and people won't call you out on it? Maybe politics? Or spiritualism? Or something like that. Because if you try that crap in economics you'll just be a laughing stock.

  11. "The Austrians are generally concerned that deficits will result in inflation/malinvestment. "

    I think this sentence captures how little you know about Austrian economics. Austrians think neither of those things. The general unpleasant tone of your comments combined with your ignorance identifies you as someone not worth debating.

    1. I think you have some reading up to do my Anonymous friend. Well that or its time to sign up to Wikipedia in order to clear up all the misunderstandings of Austrian theory over there. Careful though, I think you have to make clear non-contradictory statements to be taken seriously over there...

      "In Mises' view, inflation is the result of policies of the government or central bank which result in an increase in the circulating money supply.Following Mises, the modern-day Austrian School argues that this semantic distinction is critical to public discussion of price inflation, and that price inflation can only be prevented by strict control of the money supply."

      ** Side note: isn't it amusing how vulgar internet Austrians will ALWAYS without fail tell you that you "don't understand anything about Austrian economics" when you call them on their BS? I think its because they're a bunch of 15 years olds myself and this is equivalent to "you don't understand meeee!".

    2. And what does that have to do with deficits ?

      You are describing the typical Austrian view on CB/government money creation. Deficits (as generally defined) occur when the government borrows money to fund spending - this does not change the money supply.

    3. This guy is incompetent. That's that. Good night. More Austrian embarrassment.

    4. You can have have an increased deficit with a unchanged money supply or a increased money supply with an unchanged deficit so these are clearly different terms - and you have clearly muddled them up.

      It would be nice if you would acknowledge that you just made a simple error in terminology (its really not that big a deal) - but that's clearly not your style.