Paul Krugman’s latest dig at FA Hayek has prompted some great responses from economists online, but I think none is better than this post by Mario Rizzo. Krugman’s pathological disdain for Hayek can be explained, says Rizzo, because Hayek’s work attacks the very framework of Krugman’s “scientific” approach to economics:
Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. Hayek does not want to argue that the government expenditure multiplier is 0.5 instead of 2.0, for example. He does not want to discuss just how much fiscal stimulus should be undertaken and what form it should assume.
In short, he does not want to focus of aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. Let us concentrate on sustainable lines of expenditure both during the boom and during the road out from the bust.
Suffice it to say this greatly erodes the intellectual capital of a field of economics – although one not noted for its successes. It mocks the claim that Keynes was a true revolutionary in economic thought. It opens the possibility that he was muddled, inconsistent and unaware of the contributions to monetary and business cycle theory made by the “classical economists” on the eve of the General Theory.
It’s a great post, and you should read the whole thing. As Rizzo says, it’s about competing frameworks, not (as with Milton Friedman’s work) competing theories within the same framework. Hayek may not have said it explicitly, but his work implies that the whole Keynesian approach is basically pseudoscientific. No wonder a practitioner of that approach should feel so threatened.
Elsewhere, Steve Baker MP has given a superb speech in the House of Commons about our pseudo-capitalist economic system:
Unfortunately, most economists talk about money flowing into the economy as if it were water poured into a tank that found its own level immediately, but what if it is like treacle or honey? What if it builds up in piles when poured into the economy and takes a while to spread out? What if that money was loaned into existence in response to individual choices led by the excessively low interest rates pushed by the central bank?
What if it was loaned into existence in particular sectors, such as the housing sector, where prices have more than doubled over the same period, and what if it was the financial sector that received the benefit of that new money first? Would that not explain why financiers and bankers are so much wealthier than everyone else, and why economic activity and wealth has been reorientated towards the south-east?
…[Humanity] tried the statist direction in the past and it led to misery and murder. I stand for free markets and free co-operation, but I say this to the House: if this is capitalism, I am not a capitalist.
Again – read the whole thing. I don’t know if people like Rizzo and Baker will get through to their colleagues, but it’s certainly worth a try. In trying to effect a paradigm shift in their respective professions, they have as difficult a task as Copernicus railing against his contemporaries' certainty that the Earth was the centre of the universe. It's a tough, lonely fight. But, daunting as it is, they shouldn't lose hope yet. Every so often, the Copernicuses of this world have their day.