Ep. 80 When Krugman Struck Back at Bob on Business Cycles

31 March 2017     |     Tom Woods     |     15

This week (with Krugman discussing Obamacare yet again) we decided to hop into our time machine and revisit a golden oldie: Krugman’s response to one of Bob’s articles on capital theory and business cycles. Now that’s an episode!

Articles Discussed

The Importance of Capital Theory,” by Bob Murphy
Great Leaps Backward,” by Paul Krugman
My Reply to Krugman on Austrian Business-Cycle Theory,” by Bob Murphy

Related Book

Meltdown, by Tom Woods

Join Us Aboard the Contra Cruise!

Bob and Tom are hosting the second annual Contra Cruise for fans of Contra Krugman! October 15-22 aboard Royal Caribbean’s Oasis of the Seas, and departing from Port Canaveral. It’s an absolute blast, as you’ll see in the video. Check it out by clicking here.

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  • Craig

    What is family feud?

    What is a pictionary?

    Am I missing something?

    • http://www.TomWoods.com Tom Woods

      Did you Google them…?

      • Craig

        If I did that I would not be able to make my little joke. 😉

  • Chase Miller

    Krugman ignores reality, reality ignores Krugman

  • Patrick Studabaker

    I have to say, this one really stretched me and humbled me to realize I don’t know this material well enough. This episode will have to be listen to a couple more times for sure because I know the points are important. I was literally squinting when listening to this to try and make it make sense to me. Hope that either resonates with others or allows other to feel good about their command of the material. Phew!

    • http://www.TomWoods.com Tom Woods

      I think the episode probably does take some knowledge of Austrian business cycle theory for granted. Here’s a reasonable layman’s overview: https://www.youtube.com/watch?v=5K4Os5eXPw4

      • Patrick Studabaker

        Thank you both for your work and patient education

      • Patrick Studabaker

        Thank you for the video. Reading Dr. Murphy’s articles were also, not surprisingly, helpful! I got it! Wow!

  • http://www.economicmanblog.com Roger Barris

    No problems with the content of this episode, but I have to register a complaint over the size of the stomach on the caricature of Bob. If this is anywhere near realistic, it has very negative aesthetic implications for the Contra Cruise, where I assume that Bob appears in swimming garb at least occasionally. You might want to reconsider the artwork.

  • http://www.economicmanblog.com Roger Barris

    I have the same reaction to this episode that I have to many Austrian explanations of the business cycle in general and the sub-prime/residential housing bubble-and-burst in particular.

    The strength of the Austrian perspective is its focus on the ability of monetary policy to cause financial distortions; however, it is not true that only the Austrian perspective on business cycles and capital theory includes this insight. This can be grafted onto almost any macroeconomic theory. In fact, a great many economists who would never identify themselves as Austrian (such as Martin Feldstein from Harvard, the entire team at the BIS, Steven Roach from Morgan Stanley, and my former colleague Dave Rosenberg from Merrill Lynch) were screaming from the rafters about the distortions in the housing market, and the credit markets in general, well before the bubble burst. This was not a uniquely Austrian observation.

    Likewise, the evidence on the “malinvestment” in housing during the boom and the subsequent differential impact that the bust caused, are not uniquely Austrian perspectives, nor do they prove that Austrian economics is correct or the only theory capable of explaining the crisis.

    There are many comments about ABCT that can be made. To me, the central question of the theory relates to the Austrian claim that, in the bust following a boom, the economy can be improved by an INCREASE in the savings rate since this increase in real savings can create better alignment between the real pool of savings and a capital structure which has become overextended during the prior boom. This claim seems to me to involve a great deal of hand waving. I cannot see a tangible pathway for this to improve a slumping economy, although it would obviously be beneficial for an overheating one. Perhaps Bob can answer this?

  • Michael Tabone

    great episode….. a great journal article that might be helpful for those who want to contrast and compare the Real Business Cycle Theory and the Austrian Business Cycle Theory is Robert Mulligan’s article

    “New evidence on the structure of production: Real and Austrian business cycle theory and the financial instability hypothesis” from Volume 86, Feb 2013 pages 66-67 of Journal of Economic Behavior & Organization.

    Professor Mulligan is a professor of econ at Western Carolina University and to throw some Austrian credentials out there the winner of Mises Institute’s O.P. Alford III Prize in 2008.

  • martinbrock

    Great show. I hadn’t read Bob’s exchange with Krugman on business cycles, so the show was very educational and more interesting than the usual rebuttal of Krugman’s partisan commentary on political news. I’ve wondered for a while if the standard format, responding to Krugman’s latest column, is sustainable. I hope you do more of these.

  • Brohemius Meebio-Blaps

    Dr. Murphy speaks an interesting new dialect of English in which he pronounces the short “e” vowel as a short “a”, and the short “a” vowel as a short “e”. It seems this dialect started somewhere near Huntington Beach, California, in the 1960’s, and then underwent slight modifications as it spread East like some sort of linguistic virus. I wonder if Dr. Murphy can surf…

  • Shotgun

    Bob Murphy is killing us, making us wait so long for episode 37 of the LM Report!

  • http://russlamberti.com/ Russell Lamberti

    Jo Salerno deals with this here: https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0

    He calls the Krugman/Cowan view of ABCT the “hydraulic” view and then deals with its shortcomings.