Wednesday, April 07, 2010

Finally, a Snappy Comeback

I have finally figured out a snappy comeback to one of Krugman's anti-Austrian fallacies. This makes me happy, because my previous efforts against him took practically a thesis to explain.

But I finally figured out the snappy answer when he asked the question again in a blog post today:

The Austrian view is that unemployment in a slump results from the difficulty of “adaptation of the structure of production” — workers are unemployed as resources are painfully transferred out of an overblown investment-goods sector back into production of consumption goods.

But this immediately raises the question, why isn’t there similar unemployment during the boom, as workers* are transferred
into investment goods production?

This is a variation on a question he asked previously:

And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

The simple answer:

During the boom, resources are transferred into investment goods production from savings, not from production goods investment. During the bust, there were no more savings, so the transfer had to come from decreased investment.

*It makes more sense if you assume that Krugman meant "resources" here.

That is all.

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