Keynesianism Still Doesn’t Make Sense (Audio)

Well-known Austrian economist and author Bob Murphy recently joined Tom Woods in a strong critique of popular, mainstream economics. Murphy tore apart everything from a recent Paul Krugman blog post to the Keynesian explanation for the 2008 financial crash. The interview is long and in-depth, but a great listen if you want a detailed rebuttal of modern Keynesian economics.

Highlights from the interview:

“The point is, Krugman is correct that, in general, the Keynesian theory says if there’s a supply shock, meaning like technology has changed or if there’s an earthquake and a bunch of workers get killed, the standard Keynesian textbook does not say, ‘Oh! The government should just spend a bunch more money and the economy won’t suffer from that. So Krugman’s right, and he was saying this guy’s little fable of a four-person barter economy is a supply shock, and therefore, he’s an idiot for thinking that somehow hurts Keynesianism. But then Krugman, thinking he’s going to hit this guy with an uppercut, goes and says, ‘Oh, and by the way, we could also explain this situation… as a monetary demand shock, in which case the Keynesian’s prescriptions would apply and it would fix things.’ The problem is it was a barter economy, so Krugman can’t have it both ways, is it a supply shock or a demand shock…?

“The issue is that Krugman thinks the Keynesians have a monopoly on any sort of explanation of the business cycle that involves changes in aggregate spending because he’s combating real business cycle theorists… I wrote an article… and so Krugman responded to that and he did pay me a compliment by saying ‘This is the best exposition of this viewpoint that I’ve seen.’ But he came back and he said, ‘What’s the actual empirical evidence that that’s actually what was going on in the 2008 crisis?’ In his response to me, Krugman actually said, if the Austrians are right, how can we have all of this data and evidence showing that central banks can affect the timing of recessions. This is hilarious because this is the Austrian story…

“It’s the standard Austrian story here. They’re saying, if you don’t like the depression, the thing to do is to stop having the prior artificial expansion. That’s ultimately the way you fix it… I guess we should just flood the economy with more money and that will fix it. That’s the crude Keynesian analysis of the situation and solution, whereas the Austrians are saying, well why is it that the economy fell off a cliff like that…? They see what it was, the real forces that were set into motion…

“Even if everybody were perfectly rational and could see the future, you can’t completely offset a central bank that has a monopoly on the money supply dumping more money in and picking certain groups to get it first. There’s nothing you can do to offset that. It’s not merely an issue of bad expectations. Certainly it hurts things, it makes it harder for entrepreneurs to predict the future when you’ve got a central bank making all kinds of decisions on the fly.”

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