Thursday, May 31, 2012

On The Existential Threat of Krugmanomics

[This article was originally published on the Ludwig von Mises Institute of Canada website.]

Bad ideas need a lot of marketing to make their sale possible. Good ideas, on the other hand, sell themselves. In economic terms bad ideas lead to ruin; while good ones are simply the discovery of a natural law of economics which leads to prosperity. Naturally, economically bad ideas require heavy dosages of misinformation, deception and misconstruing of facts in order to make their cases convincing to the public. This is so because at the root of an economically bad idea is an attempt to defraud one party at the expense of another in what is a negative sum game where in real terms both parties lose potential gains; and in relative terms the defrauder gains at the expense of the defrauded. Frauds and deceptions have been around in economic politics since time immemorial: their contents generally copied one off the other, repackaged and resold at a different time or place to a new audience of saps—like the moving carnival.

Our present day bears witness to a grafter who spews a dangerously ruinous economic idea in exchange for personal glory and media coverage. The peddler in question needs little introduction even to the economic layman. Faithfully embodying the legacy of his idol and Lord, John Maynard Keynes, our charlatan has made his way into popular magazines, news media, and feature film appearances, tirelessly disseminating the ideology of perpetual monetary inflation and total war as most desirable economic policies to be pursued whenever possible in the name of “economic growth” and “job creation.” Since the person at the centre of this discussion is a proponent of Big Government, it should come as little surprise that total war is something that he implicitly advocates, for as professor Ludwig Von Mises wrote:

The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom. [i]

We speak here of none other than Princeton economics professor Dr. Paul Krugman.
The subject of our present discussion recently took part in a TV debate[ii] versus Austrian economic disciple and sound money advocate, Rep. Ron Paul (R-TX). Needless to say the event became an instant classic if only for the fact that professor Krugman finally gathered the courage to face a representative of the school he has done his best to belittle in recent times; as well as for the fact that he has been mute to the debate challenge of one of its brightest stars for the past few years. We will focus the present article mostly on what professor Krugman said during the aforementioned television appearance[iii], since on the occasion he put most of his arguments succinctly within a few sentences.

Gonna Go Back In Time

Mr. Krugman never passes on an opportunity to disparage the gold standard. Remaining true to his form, at said debate he informed us that sound money advocates “are living in a world as was 150 years ago.”[iv] The professor however failed to qualify the “world as was 150 years ago,” as a good or bad thing. If we take Krugman literally, then the world as was 150 ago was far more akin to that as he prescribes, rather than Austrians and hard money types: the American Civil War was raging, producing unseen quantities of “stimulus,” and the United States of America was on a fiat currency. The world as Austrians would prefer is that of say, 160 years ago, of the Jacksonian era, or the world as was 130 years ago of specie resumption. However, for the rest of this article we shall take Krugman’s estimate of 150 years ago in a figurative sense.

I can recall being in the third grade (in Macedonia) and having a class discussion on poverty when one of my classmates presented the brilliant proposal that government should simply print money, distribute it to everyone, and alleviate all economic woes. My elementary school teacher—a much less economically educated woman than Krugman—quickly replied that an increase of the money supply was not the answer to our conundrum. I then put the same suggestion to my father—a person with no academic credentials in economics whatsoever. The answer I got was that printing more money would only cause something called “an inflation,” which was just a fancy word for increasing prices of everything. When I followed up as why this would be the case, it was explained to me that more paper money does not produce the goods and services which money is used to trade for. As a result, people would simply use the extra paper money to purchase the goods and services already on the market. Given the fact that these people would have more money at disposal than goods and services available on the market at initial prices, they would be encouraged to bid prices up. Considering that his proposal of “stimulus to the economy” by inflation is comparable to that proposed by my third grade mate, we can conclude that Mr. Krugman wants to take us back to the third grade. That is a bad thing because third graders are ignorant, dependent and trusting in authority. The world populated exclusively by third graders would quickly find itself wanting of many of the amenities humans have become accustomed to.

As a proponent of Statism, I have little doubt that Paul Krugman would have any real objection to transmuting the entire adult population into ignorant children, for in the wisdom of my father: an ignorant nation makes for a strong State[v]. Yet, we need to ask ourselves: How was it that my father and my elementary school teacher had the economic insight that economics Noble Laureate Paul Krugman seems to lack so desperately with regard to monetary inflation? Unlike Princeton University professor Krugman, who gets to enjoy the privileges of being a Court demagogue, my father and my elementary school teacher lived through perpetual inflation (and multiple revaluations) of the Yugoslav dinar and saw the devastating effects of such policies: a billion dinars one day often became a single dinar the next day. Not surprisingly Yugoslavia was never a poster child of economic prosperity. In fact, this Keynesian country[vi] is famous for only one thing: its end in the worst bloodshed in Europe since WWII[vii]. Unlike Lord Keynes and professor Krugman, my teacher and my father had the insight that there is no such thing as a “deficiency in aggregate demand;” rather that demand is omnipresent as a result of human nature and desire to constantly improve one’s own condition. On the other hand there constantly exist deficiencies or surpluses in specific demands of given goods and services which can only be discovered by market participants and can be satisfied provided that it makes economic sense to do so. Likewise, my father and my teacher, living under a Keynesian-command economy were aware that supply is hampered by the force majeure that is concentrated in the hands of central planners.

More advanced nations have not managed to fare any better using fiat inflationary policies either. Throughout the 20th Century Germany, France and Austria went down the path of the sort of “economic growth” as advocated by professor Krugman. The US Federal Reserve System has been flooding the market with new dollars at an unprecedented rate since the outset of the current recession. Yet, professor Krugman says, that this is not enough. Let us then examine what sort of results we are to expect if the Princeton professor’s advice is to be further followed. Self-taught economic great Henry Hazlitt provided insight into the German hyperinflation of 1921-1923 in The Inflation Crisis And How to Resolve It. According to Hazlitt, the paper mark having been at par with the gold mark at the outset of the inflation (1918) depreciated so much that “[t]he exchange rate of the paper mark, calculated in gold marks, was 1,523,809 paper marks to one gold mark on August 28, 1923.” [viii] As the German government kept “primping the pump,” and caught itself in its own trap the mark’s value kept on plummeting to “28,809,524 on September 25, 15,476,190,475 on October 30, and was ‘stabilized’ finally at one trillion to one on November 20.”[ix]

The vivid picture of inflation’s effects on production painted by Hazlitt is alarming:

The real effect of the inflation, however, was peculiarly complex. There were violent alternations of prosperity and depression, feverish activity and disorganization. Yet there were certain dominant tendencies. Inflation directed production, trade, and employment into channels different from those they had previously taken. Production was less efficient. This was partly the result of the inflation itself, and partly of the deterioration and destruction of German plant and equipment during the war. In 1922 (the year of greatest economic expansion after the war) total production seems to have reached no more than 70 to 80 percent of the level of 1913. There was a sharp decline in farm output.[x]

Professor Krugman wants to takes us back to 1923 Germany. This is bad because it was a time of “a great decline in labor efficiency,” explained Hazlitt. These were inhumane times.

Part of this was the result of malnutrition brought about by high food prices. Bresciani-Turroni tells us: “In the acutest phase of the inflation Germany offered the grotesque, and at the same time tragic, spectacle of a people which, rather than produce food, clothes, shoes, and milk for its own babies, was exhausting its energies in the manufacture of machines or the building of factories.”[xi]

To be sure, inflationism and socialism have much in common. For one, both regimes not only neglect personal property, they violently attack it and appropriate it. Furthermore, since monetary inflation distorts the price formation process, it makes economic calculation difficult. This difficulty is directly proportional to the extent of the monetary inflation. Finally, due to its intervention in the market, government distorts the market’s natural flow, thereby directing it in ways it prefers. In a sense, inflationism is a form of socialism. Professor Ludwig von Mises discussed at length the importance of economic calculation to human prosperity in his seminal and often neglected (by the mainstream) work Economic Calculation in the Socialist Commonwealth. In this paper Mises proved in theory what has been demonstrated in practice in: that economic calculation is impossible in a socialist economy due to a lack of real monetary prices; as a result socialism can only lead to a regression of a society toward the primitive state of our early ancestors. More specifically, Mises argued that the monopolized ownership in the means of production by the state makes it impossible for the participants in an economy to properly value the soundness of their decisions. He further refined this argument to say that arbitrary assignment of prices by the economic planner could not (and in fact it did not) remedy the problem, because in the free market, prices are designated as a result of the strict causal relationships of the supply and demand of the billions upon billions of factors taking part in an economy. That is to say, prices are real rather than abstract entities. Yet government intervention into the market through monetary inflation disrupts the price formation process, thus making economic calculation close to impossible.

What Krugman really wants to take us back to the Stone Age. Professor Joseph T. Salerno explained the imperative of economic calculation in the essay “Postscript: Why a Socialist Economy is ‘Impossible’”:

Mises’s pathbreaking and central insight is that monetary calculation is the indispensable mental tool for choosing the optimum among the vast array of intricately-related production plans that are available for employing the factors of production within the framework of the social division of labor. Without recourse to calculating and comparing the benefits and costs of production using the structure of monetary prices determined at each moment on the market, the human mind is only capable of surveying, evaluating, and directing production processes whose scope is drastically restricted to the compass of the primitive household economy.[xii]

This is a bad thing because, as Salerno explained,

in the absence of monetary calculation, human economy … comes to consist of super-short and repetitive household processes utilizing minimal capital and with little scope for adjustment to new wants. The result is that time itself—in the praxeological sense of a distinction between present and future—ceases to play a role in human affairs. Men and women, in their capitalless, hand-to-mouth existence, begin to passively experience time as the brute beasts do–not actively as a tool of planning and action but passively as mere duration. Humanity as a teleological force in the universe is therefore necessarily a creation of the inextricably related phenomena of calculation and capital. In a meaningful sense, then, socialism not only exterminates economy and society but the human intellect and spirit as well.[xiii]

Shell Games

Misleading statements are a key weapon to the proponent of inflation. Krugman’s most obvious shell game is in calling himself a “liberal” so as to suggest that he propagates liberty, when he indeed propagates statist coercion. We may have to excuse his propensity to deceive, since Jörg Guido Hülsmann argues that inflation causes people to lie.  

In such an environment, people develop a more than sloppy attitude toward their language. If everything is what it is called, then it is difficult to explain the difference between truth and lie. Inflation tempts people to lie about their products, and perennial inflation encourages the habit of routine lies.[xiv]

Deception is a Keynesian favorite. Indeed, in The General Theory of Employment, Interest and Money, John Maynard Keynes explicitly spelled out that the point of inflationary policies is to deceive wage earners. According to Keynes workers are more likely to accept a higher money wage which is lower in real terms, rather than a lower money wage which is higher in real terms.[xv] We shall see below that this is not the case. Nonetheless, it is one of the key reasons why governments embark on inflationary policies. A faithful Keynesian, Paul Krugman is a master of deception. For instance, in the aforementioned TV appearance he makes the claim that he is “a believer in the market economy,”[xvi] thereby giving the layman the idea that he is a proponent of capitalism. Yet, “the theory of output as a whole,” as Keynes himself wrote in the Preface to the German Edition of his General Theory,

which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.[xvii] (Emphasis added)

When Krugman proposes that hard money advocates want to take American society “to the world as it was 150 years ago,” he only appeals to emotion: people tend to have a general attitude that as a rule the future is better than the past in every way. Murray N. Rothbard writing on the basis of a study of another inflationist, Milton Friedman, came to conclusions proving Krugman’s disparaging of the gold standard wholly unwarranted. Writing on the effects of the reintroduction of the gold standard after the American Civil War and the collapse of the fiat greenback, Rothbard found proof of the most prosperous decade in American economics: the 1880s.

Once again, we had a phenomenal expansion of American industry, production, and real output per head. Real reproducible, tangible wealth per capita rose at the decadal peak in American history in the 1880s, at 3.8 percent per annum. Real net national product rose at the rate of 3.7 percent per year from 1879 to 1897, while per-capita net national product increased by 1.5 percent per year.[xviii]

This represented a great benefit to the populace at large since,

[b]oth consumer prices and nominal wages fell by about 30 percent during the last decade of greenbacks. But from 1879–1889, while prices kept falling, wages rose 23 percent. So real wages, after taking inflation—or the lack of it—into effect, soared.[xix]

In addition, the saving and lending industry also prospered:

We stress that with consumer prices about 7 percent lower in 1889 than they had been the decade before, the real rate of return by decade’s end was well into double-digit range, a bonanza for savers and lenders.[xx]

Therefore, Krugman’s fear mongering concerning the doom and gloom that is to ensue with the reintroduction of the gold standard is wholly baseless.

Let us now compare and contrast this information with the unemployment statistics during the peak of the German inflation, December 1923, and the months that followed. Paul Krugman submits that inflation stimulates trade, employment, and production. It should follow that the higher the “stimulus” provided by inflation, the better the economy ought to fare in those terms. The statistics tell a different story, however—the peak of the inflation saw the highest unemployment numbers:
Month Total
October 1923 534,360
November 1923 954,664
December 1923 1,473,688
January 1924 1,533,495
February 1924 1,439,780
March 1924 1,167,785
April 1924 694,559
May 1924 571,783
June 1924 401,958

The dramatically different outcomes the German hyperinflation of 1921-1923 and specie resumption in the US present a self evident proof of the fallacy of professor Krugman’s call to prosperity by inflation, since, according to his theory, these outcomes ought to have been reversed.

To be sure, Krugman’s favorite disinformation is that war is the ultimate stimulus to remedy for even the worst of economic ailments. He is not ashamed to flaunt it when he writes that America’s salvation from the Great Depression was delivered in the form of WWII braking out in Europe, “and the United States—though not yet at war itself—began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump.”[xxii]

Judging by his explanations of how to get out of the current recession we can conclude that Professor Krugman wants to take the world into another war. This is a very bad thing because untold millions are sure to die, be maimed, left parentless and traumatized. And it would be all for nothing, for as Robert Higgs[xxiii] has proved, the ”stimulus” to the American economy was not WWII itself, but the departure from New Deal policies in the aftermath of it! The danger is real, for not only is professor Krugman presented as a credible authority on economics by the media, the US economy is reaching the levels where desperate politicians eager to prolong their careers can easily take Krugman’s rationale as a selling point to a populace equally desperate to see an improvement of their lot.

The U.S., Canada and the EU have experienced unprecedented inflation over the past four years, yet we see no recovery. Professor Krugman’s excuse as to why his prescription has not worked is that there simply has not been enough inflation “commensurate” to the depth of the slump. I submit that have been lucky enough not to experience a situation comparable to that of Germany 1923 only due to the fact that a number of Third World countries have made been accepting our fiat money, thereby creating a situation much like during the 1920s where the monetary inflation could not be easily noticed due to increases in productivity.


When one listens or reads Paul Krugman’s opinions on the economy, one is left with only one conclusion: the only way to prosperity is through war and misery. Considering that the man calls himself a “liberal” and a “believer in the market economy,” that is to say “capitalism,” it is little wonder that laymen perceive capitalism to be an evil ideology. Yet, professor Krugman is to capitalism (and economics for that matter) what an alchemist is to chemistry. Whether he is aware of it or not, he is one of the most dangerous persons on the face of the planet right now.

[i] von Mises, Ludwig, Human Action (Auburn, 1998), p. 715
[iii] In a blog-post Mr. Krugman explained that he agreed to the debate in an effort to promote his new book End This Depression Now, a book which much like JM Keynes’ General Theory of Employment, Money and Interest is aiming at providing a quasi scientific justification for government intervention in the economy during a recession.
[iv] Video: Ron Paul vs. Paul Krugman on Bloomberg TV, April 30, 2012 (2:10)
[v] In fairness, the original maxim used to be that stupid people make for a strong state. However, I have altered the maxim, for stupidity, as a level of intelligence, is given by nature. Ignorance is produced by human action.
[vi] It is my hope to elaborate on this somewhat in the future. For now, it will have to suffice to say that the postulates of the Yugoslav economy were full employment (factory workers would literally spend their entire shift in the cafeteria), fiat money and perpetual inflation.
[vii] Contrary to Paul Krugman’s claims that wars provide economic stimulus, the former constituent states of Yugoslavia were left quite impoverished as a result of the wars of the 1990s.
[viii] Hazlitt, Henry, The Inflation Crisis and How to Resolve It (New York, 1978), p. 61
[ix] Ibid., p. 61
[x] Ibid., p. 62
[xi] Ibid., p. 63
[xii] von Mises, Ludwig, Economic Calculation in the Socialist Commonwealth, p.35
[xiii] Ibid., p. 38
[xv] Keynes, John Maynard The General Theory of Employment, Interest and Money, (Chapter 2)
[xvi] Video: Ron Paul vs. Paul Krugman on Bloomberg TV, April 30, 2012 (3:00)
[xvii] Keynes, John Maynard The General Theory of Employment, Interest and Money (Preface to the German Edition)
[xviii] Rothbard, Murray N., History of Money and Banking in the United States: The Colonial Era to World War II, (Auburn, 2002), p. 159
[xix] Ibid., p. 161
[xx] Ibid., p. 163
[xxi] Hazlitt, Henry, The Inflation Crisis and How to Resolve It (New York, 1978), p. 69
[xxii] Krugman, Paul, “Easy Useless Economics

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