Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014Salerno’s post is unintentionally hilarious, given the quotation that opens his post (comparing the righteous and poor persecuted Austrians with Gandhi!):
“First they ignore you, then they laugh at you, then they fight you, then you win.”Funny you use that quote, Salerno, because it would appear to be a perfect description of how you (and other Austrians) treatment me and my blog.
First of all, arguments stand and fall on their own merits, not on the obscurity or identity of the author. But it appears Salerno doesn’t agree with that and resorts to exactly the tactics described above.
Salerno says the following of my post here:
“Actually, our jaded scribe [sc., Krugman] could not be bothered to train his sites on Mises’s actual views but rather rests content to attack a caricature of Mises’s position as presented in a pseudonymous post by an individual calling himself ‘Lord Keynes’ on the blog Social Democracy for the 21st Century: A Post Keynesian Perspective. Blithely accepting ‘Lord Keynes’s’ claims at face value, Krugman declares ‘von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.’”No, Salerno, I did not say that “von Mises, faced with the reality of depression, basically dropped Austrian business cycle theory.”
Joseph Salerno, “Paul Krugman Attacks Ludwig von Mises: Another Win for Austrian Economics!,” Mises Economics Blog, January 28th, 2014
Here is what I said (with my quotation from Mises following):
“However, it is interesting that Mises thought that his Austrian monetary theory of the cycle could not adequately explain the severity and length of the Great Depression (as also noted by Hülsmann 2007: 617–618):So it appears that Salerno either (1) did not read the post or (2) did not read it properly or ignored what I actually said. Since Salerno later repeats one of my quotations from Mises, it would appear to be (2).“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings. The most recent boom period did not run its course completely, at least not in Europe. Some countries and some branches of production were not generally or very seriously affected by the upswing which, in many lands, was quite turbulent. A bit of the previous depression continued, even into the upswing. On that account—in line with our theory and on the basis of past experience—one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.
The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.” (Mises 2006 : 163–164).
But if Salerno did not read the post properly or “ignored” what I said, then Salerno appears to have fulfilled the first of these failings of his quotation (“First they ignore you, then they laugh at you, then they fight you, then you win”).
It also follows that Salerno’s charge that my post was “a caricature of Mises’s position” is a straw man, though perhaps unintentionally.
This is reinforced when Salerno borrows a quotation of mine from Mises and uses it to prove that “Mises did not deny that the Great Depression was initiated by credit expansion.” That is correct, but then I did not assert that Mises abandoned his business cycle theory.
Salerno’s following charge that Krugman is unable “to grasp a multi-causal explanation of a complex and multifaceted historical episode” that was the Great Depression is so stupid, it’s laughable, and is actually more appropriate for the grossly oversimplistic explanation of Mises himself, who ignored the complex factors in the 1930s that thwarted any strong inducement to hire labour and clear the labour market via lower wages, such as the level of demand for output, the degree of uncertainty of capitalists about the future, business expectations, the general state of expectations, and the state of the financial system and credit markets, and so on.
After this Salerno links to a paper by Ohanian (2009) arguing that Hoover’s “high wage” policy was a major cause of the US depression, which is rather strange because Mises was talking about the Great Depression in Europe, not the United States.
Be that as it may, it is clear that, firstly, Hoover’s “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with. But secondly and more importantly, Jonathan D. Rose (2010) presents some evidence that Hoover’s “high wage” policy actually did not have much effect on the timing of US wage cuts during the depression.
Thirdly, even when wages fell, this induced severe debt deflationary effects, because price deflation was quite uneven, and the burden of fixed nominal debt soared. So the smooth and rapid market clearing as postulated by Mises as the cure for high involuntary unemployment simply could not and did not happen.
Next, Salerno admonishes Krugman to “stop trawling obscure blogs for biased material” on Austrians – referring to my blog.
This seems like a rather good example of the second part of Salerno’s opening quote (“First they ignore you, then they laugh at you, then they fight you, then you win.”).
Even the charge that my blog is “obscure” (though irrelevant) is, I think, wrong. I’ve made it into the Onalytica Influence Index’s “Top 200 Influential Economics Blogs” (August 2013). Even though I am at no. 178 (at the moment), there are thousands of economics blogs all over the internet, so I’m not quite so “obscure” as Salerno thinks.
And, in point of fact, Robert Murphy seems to have already moved onto the third stage (“fighting” me): he promised here to respond in greater detail to me later this week. I look forward to that.
Finally, Salerno’s links to his paper “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” in his attempts to provide Krugman with “an honest and accurate account of the Austrian theory.”
That is priceless, because a “reformulation” implies that there was something inadequate about the original theory, which does not say much for the ABCT if it needs to be regularly reformulated.
I would go so far as to say that the Austrian business cycle theory is a sad history of “reformulations” as Austrians encountered severe and cutting criticisms of their theory.
For example, Hayek’s first version of the ABCT in Prices and Production (London, 1931) encountered devastating criticisms from Sraffa (1932a, 1932b) and others and he was forced to “reformulate” the theory in Profits, Interest and Investment (London, 1939).
If we turn to Salerno’s new ABCT, one of the main purposes of his paper is to address the criticism that the ABCT “cannot explain the positive correlation of consumption and investment that occurs over the course of the business cycle” (Salerno 2012: 5). But such a charge against the ABCT is only one of the minor problems with the theory.
The main problem with the classic ABCT was always its use of the Wicksellian natural rate of interest: an irrelevant and non-existent concept, as Sraffa showed a long time ago (Sraffa 1932a and 1932b). Outside of an equilibrium state, there could be as many natural rates of interest as there are factor inputs. So what natural rate should banks target when setting interest rates?
I will leave a more detailed critique of Salerno’s paper for another post, but for the moment it is sufficient to note that Salerno (2012: 6, 37–38) invokes and indeed needs the non-existent natural rate of interest for his “new” ABCT to work, just like most of the other versions of the theory.
On this point alone, Salerno’s “reformulation” of the ABCT is as worthless as any other of the pathetic “reformulations” over the years.
“Hoover’s High Wage Policy and the Great Depression,” July 30, 2013.
“Austrian Business Cycle Theory: The Various Versions and a Critique,” June 21, 2011.
Mises, Ludwig von. 2006 . “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.
Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University.
Murphy, Robert P. “Multiple Interest Rates and Austrian Business Cycle Theory.”
Ohanian, Lee E. 2009. “What – or Who – Started the Great Depression?,” NBER Working Paper Series, 15258
Salerno, Joseph. 2012. “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” Quarterly Journal of Austrian Economics 15.1: 3–44.
Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.
Sraffa, P. 1932b. “A Rejoinder,” Economic Journal 42 (June): 249–251.
Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843–870.