David Stockman is in some fundamental sense a modern day Cassandra. The man who taught me economics -- Hans Sennholz -- was as well. Cassandra's get spat in the mouth by the god of the modern science of economics, so while they have the gift of prophecy, nobody will listen. Or, could it be that even a broken clock gets the time right twice a day. In other words, if you say something over and over again, sooner or later something similar to it will actually happen. But this isn't the debate I want to spark with Stockman today (or Sennholz then). I want to read them, and their understanding of the world and contrast it with the Mises-Wicksell-Hayek explanation of industrial fluctuations, and in particular the ideas of (a) manipulation of money and credit, (b) capital consumption, and (c) the crack-up boom.
We know already that Paul Krugman finds these ideas beyond the pale. In a PBS interview he had this to day about The Great Deformation and Stockman more generally.
Paul Solman: You called David Stockman in a column of yours “a cranky old man.”
Paul Krugman: I actually meant to say it was “cranky old man economics.” I don’t think he quite makes the old man designation yet because I’m not that much younger than he is.
Paul Solman: Yes, that was one thing I had noted, but he’s cranky?
Paul Krugman: Yeah, definitely. I mean anyone who thinks that the last 80 years, ever since FDR took us off gold, have been a doomed venture, that strikes me as kind of cranky, right? There seem to have been three generations of pretty good stuff along the way, so that’s what strikes me as being a crank vision.
Paul Solman: And when Neil Irwin of the Washington Post called the book “a spittle-filled diatribe,” you approve of that description?
Paul Krugman: Well, I was glad to see Neil do that because it made me look polite. In a way, I’m glad [David Stockman] wrote it because there are a lot of people for whom that kind of crankiness or spittle outflow has a kind of visceral appeal. This is the stuff that really grabs a lot of people, so it’s good in a way to bring it out into the open in one book so that we can all say, “Hey look, let’s explain why this is wrong.”
Paul Solman: So you welcome the opportunity to oppose David Stockman at almost every turn?
Paul Krugman: Well, there are a lot of other people I need to argue with too, but I was glad to have it come out because it’s very hard to have an argument with “those who say that.” Instead of saying “those who,” I say “Stockman.”
So, not trying to debate economic prophesy, and not trying to debate Left-Right economics, but instead as I said want to delve deeper into the nuances of the implications of years of the manipulation of money and credit, the process of capital accumulation and the eroding of the accumulated surplus fund, and finally, the stages in the argument of the crack-up boom. In short, how would an Austrian economist argue against Stockman's interpretation?; and, how would an Austrian economists use the empirical 'facts' of the world that more mainstream economists rely on to make Stockman's argument for him instead of how they are normally used to refuted him? Engaging in this flipping sides type intellectual exercise, seems useful to me for thinking through not only the logic of the monetary theory of the business cycle, but the art of empirical analysis of macroeconomic phenomena.
Personally, the answer I find most satisfactory is one that takes Adam Smith seriously when he says: “The natural effort of every individual to better his own condition…is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations." I have translated this in today's terms as a horse race between Smithian gains from trade, Schumpeterian gains from innovation, and Stupidity of economic policies. As long as Smith and Schumpeter outpace Stupidity, tomorrow will be better than today and the consequences of stupidity will be hidden from the view of many. BUT, when the rate of gains to trade or gains to innovation slows -- as has been argued by Tyler Cowen -- then the costs of stupid economic policy become more evident and impinge on economic life.
Perhaps you are not persuaded by this intellectual plan of attack. My view comes from the place that the basic principles of economic policy that were articulated by classical political economists and early neoclassical economists such as Frank Knight and Henry Simons, or Mises and Hayek, were basically correct. Sound money, fiscal responsibility, competitive market and free pricing in goods and services, and open international trade. An economic system characterized by the Humean rules of property, contract and consent. So deviations from those rules in the policy space will have distortionary consequences. So the distortions and deformations of the US economy are real and evident all around us in my view, but they are also off-setting factors such as amazing technological discoveries and new trading partners, and improved paths to expand the array of trading partners. Again, Smith and Schumpeter win out over Stupidity in the horse race of economic life during the past 70 years during the era of "the economics of illusion", but there is no aprori reason why that must forever be the case, and there is also no reason to ignore the cumulative impact of all that stupidity on the economic future of our kids and grandkids.
Watch this interview with Stockman. Again, refute it from an Austrian point of view, and then defend it using the data that is commonly deployed by mainstream thinkers. In that intellectual exercise I wonder if we can find both a better understanding of the situation, and a deeper appreciation for the nuances of mainline economics and political economy.