http://www.slate.com/articles/business/the_dismal_science/1998/12/the_hangover_theory.html
We've seen it before, but even when I first read it I knew that it at least seemed facile or glib. Krugman's criticism was, as Murphy explained and as even I suspected, easily countered by saying that an investment boom and a consumption boom are simulataneously possible, just as the destruction of one industry and the rise of another need not imply a depression in one and a boom in the other.
So, is there some hidden genius to his criticism that I'm not seeing?
But I will lay it out as best I can. Murphy wrote an article refuting Krugman's hangover theory article. Krugman grasped, what you apparently don't, that the gist of Murphy's rebuttal is that the boom degrades the country's prodcutive capacity.
Dude. You are assuming these things about me rather than reading anything I am saying. You think Krugman's original Slate article ignored the fact that modern ABCT implies that the nation's productive capacity is diminished due to malinvestments made during the boom phase? Great. I agree. I was making this point back in 2010. See my 3 yr old critique of Krugman's Slate article (posted before Krugman's response to Murphy btw): http://mises.org/Community/forums/p/14157/300656.aspx#300656
That ISN'T what I am talking about. It doesn't mean Krugman's criticism from his Slate article don't blow Rothbard's Theory of the Business Cycle out of the water.
If you think that Murphy's explanation of degradation of the country's prodictive capacity depends on Garrison's exposition, and is incompatinble with Rothbard's please show us exactly why that is so.
That was what I did in my very first post of this thread. Re-read it, I guess? If you need a side-by-side comparison of Garrison and Rothbard, I already did that in this post 2 years ago: http://mises.org/community/forums/p/22237/393306.aspx#393306
The essential point is that Garrison believes productive capacity is reduced because the simultaneous increase in investment and consumption lead the middle stages of production to become undermaintained. While Rothbard believes....well...it actually isn't clear what causes the recession in Rothbard's model. Which is Krugman's entire criticism.
Thos quotes do not answer my simple question. What is the cause of the recession according to Rothbard? Is it lack of AD? Is it degradation of the country's productive capacity?
That is the criticism!!!! I am saying that Rothbard's theory actually DOESN'T explain why recessions happen at all. Unlike Garrison, his explaination doesn't rest on the productive capacity of the economy being reduced. He only talks about capital investments in higher order of production going bad and turning out to be wasteful as consumption increases and resources must shift toward lower orders of production. Why would that cause a recession? He says "frictional unemployment" could result as workers have to shift from sector to another, but like Krugman asks, why does it only become costly to shift resources during the bust?
Let's make the differences between Garrison and Rothbard more stark. I dare you to find a sentence anywhere in AGD or MES where Rothbard says that productive capacity has decreased because the simultaneous increase in consumption and investment in higher order stages of production lead to a under maintence of capital in the middle stages of the production structure. THAT is CRITICAL to Garrison's theory, BUT YOU CAN'T find it Rothbard because he doesn't believe consumption and investment increase simultaneously (as I showed in my first post).
Sadly, I think we are once again hitting that wall that for some reason precludes our understanding each other.
I think what is causing our misunderstanding is that I am responding to the actual things you say, while you are mostly arguing with yourself. That is why you have to say things like "Student seems to think the problem that causes all recessions is AD" (i never said that) or "Krugman retracted his comments" (he never said that).
Ambition is a dream with a V8 engine - Elvis Presley
his explaination doesn't rest on the productive capacity of the economy being reduced. He only talks about capital investments in higher order of production going bad and turning out to be wasteful.
Did you even read what you wrote there? "He only talks about...production going bad and turning out to be wasteful."
Guess what that is? What happens when production "goes bad" and is "wasteful"? Do I have to spell it out for you? That is exactly "productive capacity of the economy being reduced".
I hope I don't have to go into little parables of a pizza shop throwing away it's stock of tomato sauce and cheese to explain what is going on.
In any case, Part Two of my humble article on Krugmans hangover piece is hot off the presses: https://smilingdavesblog.wordpress.com/2013/03/22/flaws-in-krugmans-hangover-theory-in-simple-language-part-two/
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
You may want to re-read the sentence. It isn't that the "production goes bad" it is that the INVESTMENTS in high orders of production go bad--investments as in NEW capital purchased to INCREASE productive capacity at higher stages of production. So if every single investment made in higher stages went bad (meaning they do not result in actually increading the productive capacity) that would be bad news for investors and it would mean capacity in the higher stages of production had not INCREASED. However, this says nothing about the capital that existed BEFORE the artifical boom. As far as we know (from Rothbard's story), this capital has been maintained and is in the same condition it was before the boom. He provides NO REASON to think otherwise. So if that is the case, production will not increase (relative to pre-boom levels), but it doesn't have to decrease either (because our capital structure from before the boom has not been degraded). In other words, NO RECESSION.
The critical contribution of Roger Garrison, is to point out that INVESTMENT AND CONSUMPTION INCREASE AT THE SAME TIME DURING THE BOOM (it is good his model predicts this because it is what we observe in the real world). And, as a result, this redirects resources toward both the HIGHER AND LOWER stages of production--essentially CROWDING OUT maintenance of capital in the middle stages of production. THIS IS WHY WE CAN'T PRODUCE AS MUCH AS WE COULD BEFORE THE BOOM!
Rothbard's theory not only DOES NOT MENTION any of this, he CONTRADICTS IT. He explicitly says that INVESTMENT AND CONSUMPTION DO NOT INCREASE AT THE SAME TIME. Therefore, his explaination CANNOT rest on the same mechanisms that Garrison's does.
This may be the 5th time I've explained this. I've provided quotes from Rothbard and I provided quotes from Garrison (in my old post from 2011 I linked you to). If you seriously can't see the difference, I'm not sure I can help you any further.
Not to be rude, but I am not convinced you understand what is going on.
It isn't that the "production goes bad" it is that the INVESTMENTS in high orders of production go bad--investments as in NEW capital purchased to INCREASE productive capacity at higher stages of production. So if every single investment made in higher stages went bad (meaning they do not result in actually increading the productive capacity) that would be bad news for investors and it would mean capacity in the higher stages of production had not INCREASED. However, this says nothing about the capital that existed BEFORE the artifical boom. As far as we know (from Rothbard's story), this capital has been maintained and is in the same condition it was before the boom. He provides NO REASON to think otherwise. So if that is the case, production will not increase (relative to pre-boom levels), but it doesn't have to decrease either (because our capital structure from before the boom has not been degraded). In other words, NO RECESSION.
You are assuming [though you may not realize it] a world with no scarcity. In other words, you are assuming [though you may not realize it] that newly printed money also creates more physical resources, which is absurd. Let me explain.
Rothbard is describing a situation where consumption has not decreased. Meaning there is no NEW capital. New capital does not fall down from the sky. It does not pop into existence when new money is printed. So where does it come from? From underconsumption. When an economy consumes less, what they do not consume is the NEW capital available for INVESTMENTS. So when consumption is the same, where, oh where, is the NEW capital coming from? Only one answer: From pirating existing capital. That's why production will eventually decrease.
Peter Boettke, who you quote your other thread as support for you, doesn't say what you do. He doesn't say, as you do, that "I am saying that Rothbard's theory actually DOESN'T explain why recessions happen at all." Not even close. All he says is that Roth. is different from Garrison in one detail [that is not written in stone that it has to happen in every recession]. In fact he describes Rothbard's version exactly as I do.
Full quote from Peter B., taken from your own post [emphasis mine, to show exactly where he agrees with me about Rothbard]:
Peter Boettke: Roger Garrison has tried to explain the possibility of comovement [between investment and consumption] due to the artificial nature of the boom which appears to violate the scarcity constraint...in the standard textbook presentation of the Mises-Hayek story we do not see comovement, but the distortion of the structure of production, which is then corrected during the bust phase. http://www.coordinationproblem.org/2011/01/call-all-economists-lets-answer-a-serious-question.html
BTW I think the guys over in the other thread did a good job refuting you. You obviously disagree.
Smiling Dave,
haha I wonder how much glee you felt when you saw me post that PB quote in the ABCT reading thread. "This time I *really* got him. So I am going to dig back up this thread I havent responded to in weeks!!!!!"
Now, I already know how debates with you go, so this will be my only response.
#1. Your "gotcha" quote falls flat. I never quoted PB as supporting my claim that Rothbard's theory doesn't explain recessions (PB has never directly commented on it that I've seen). However, PB does support my assessment that Garrison predicts comovement of investment and consumption, Rothbard does not. Earlier you said that this was a minor difference that doesn't matter. PB couldn't disagree more. In fact, the entire point of that post is to call all Austrian economists to seriously try and explain the EMPIRIAL REALITY that investment and consumption move together (a FACT that Rothbard simply does not explain). PB apparently sees Garrison as only a first step. For anyone interested, here is the PB post. http://www.coordinationproblem.org/2011/01/call-all-economists-lets-answer-a-serious-question.html
#2. "So when consumption is the same, where, oh where, is the NEW capital coming from? Only one answer: From pirating existing capital. That's why production will eventually decrease."
I don't remember seeing this argument articulated in this way in any of Rothbard's stuff. But it has been a while since I really dug into this stuff (I wrote my famous post on the subject back in 2011), so I could be wrong. If you have any supporting quotes, feel free to post on your humble blog. In any case, if this is what Rothbard was trying to say, it still doesn't make sense. It basically assumes you can easily liquidate existing capital during the boom phase ("pirating" existing capial from lower order stages to move to higher order stages), but that it somehow becomes difficult to liquidate existing capital during the bust phase (why can't we just as easily "pirate" from higher orders and move to lower orders). This is similar to a complaint Krugman already logged back in 1998. And it is complaint Garrison's theory is not subject to.
Okay, that's it. It has been good talking with you.
#1. OK, glad we agree on a few things. Most important, that nobody but you thinks that "Rothbard's theory actually DOESN'T explain why recessions happen at all." Peter Boettke doesn't think so. Roger Garrison doesn't think so.
Whether the difference between Rothbard and Garrison is "major" or "minor" is a question of semantics. What I meant by calling it minor is that Rothbard's explanation of ABCT is not rendered into incoherent rambling because of this difference, as you would have it. Is the difference worth investigating to a professional economist, which is why Boettke might call it important? Maybe. Is the difference a reason to dump Rothbard's very readable books in the trash bin? I don't think so. You may disagree.
#2. I'm glad you got something new from my humble post, a new articulation of ABCT. Actually, it's not new at all, but what everybody has been saying all along.
I already gave supporting quotes, as did you yourself. What do you think "malinvestment" and "distortion" mean?
As for your question about it being easy or hard to pirate from one direction to the other, and it being related to Krugman's question, we have already talked about this. One thread [was it this one?] brought in Krugman's Great Leap Backward idea, "degradation of the country’s underlying productive capacity". Maybe, now that you sort of know what I'm talking about, piracy and so forth, you will now grasp what I wrote there as well.
The search engine here is a little shaky, so I refer you to my humble blog that discusses it at length.
http://smilingdavesblog.wordpress.com/2013/03/21/flaws-in-krugmans-hangover-theory-in-simple-language-part-one/
https://smilingdavesblog.wordpress.com/2013/03/22/flaws-in-krugmans-hangover-theory-in-simple-language-part-two/
Oh, what the hey. I'll spell it out. We are not talking about easily liquidating existing capital during the boom phase. We are talking about resources, including time, labor, raw materials, taken away from making what people want and wasted on making what people don't want. Some of what happens is reversible; a lot of it isn't. The steel and whatever that went into making the self exploding Chevy Volt can be partially recycled, yes. But you won't get all your money back doing it. The jobs flipping burgers that ceased to exist because people were hired making Volts can come back, to some extent, but that takes time. It's called frictional unemployment. The time and hard work that could have been used making us all richer is gone forever. The factories that were turned into highly specialized units for making Volts can be demolished and the land and building and scrap used for something else, but that costs money to do, and of course we won't get all our wasted capital back.
You see this kind of thing on a small scale all the time. Websites like overstock.com exist because of it. You'll note that overstock.com has to sell at low prices, usually below costs of production [otherwise why hand them over to overstock.com in the first place]. It's what Krugman calls degradation of the country's underlying productive capacity. It's not easily un-degradated.
The boom is when the piracy happens. The bust is when people pick up the pieces, slowly and partially.
Enjoy your researches into these fascinating topics.