Cracking Krugman on Croatia

 

Princeton Professor of Economics Dr. Krugman was interviewed by Jutarnji list newspaper a couple days ago regarding the way Croatia should get itself out of an economics rut it has been it for the past couple of years.

The headline reads: “Spend, spend, spend!”

Now, I am sure that Krugman doesn’t spend all of his salary on consumer goods and therefore surely “deepening” the depression in The US, lets just briefly skim across the interview and make some short assessments of what he said.

The following unbiased short excerpts are:

“In a recent manifesto, which tries to primarily to summon economic reason in TheUS - hence the title "Manifesto for Economic Sense" - Krugman and his collaborator on the project is Richard Layard of the London School of economics,  put forward the thesis that the assertion of the majority of today's politicians and economic policymakers that the main cause of the present crisis is irresponsible borrowing countries is completely wrong. Krugman and Layard exception is Greece, which broke all reasonable limits long before the catastrophe that has happened to her.”

So according to Krugman, it is the “level” of “excess” spending that is to blame for Greece’s mess, but not for Spain’s nor Italy’s mess. Too bad he couldn’t specify what “level” of spending this is.

Next, no mention of a credit expansion in these countries, that manifested itself in the capital goods market that brought on a subsequent boom. But, before we dive into that, the following line is also intriguing:

- If you save your income so you do not buy from me, you destroy my income and my sinking jointly deepen the crisis.

Again, what magical level of personal consumption is sufficient to satisfy Krugman? Which level won’t worsen the crisis? 20%? 60? 130?

I ask the question, why do I have to save then? Lets look at the 100% option. I spend all my resources on consumer goods. I cannot purchase durable consumer goods, which qualify as capital goods, because an automobile (a durable consumer good) is purchased with a lot of resources. So, with my salary, I am priced out of this market. To buy a car I will have to lever up. I will have to go into debt. OK. Cool. So, someone will have to give me funds, WHICH ARE SAVED SO I CAN PURCHASE THIS VECHILE. Nope, can’t do that, everyone else is also spending all of their funds on consumer goods as well.

Hmm, I really hope that factories that produce consumer goods will able to keep up with all this demand. I wonder, how will factories that produce machinery which, sell them to other consumer producing factories be able to obtain funds, if all the funds that directly hit the consumer goods industries bid for factors of productions for their immediate disposal (selling clerks, janitors, new corporate automobiles, computers etc.)? They have a choice (the consumer producing industries), to bid for resources (even outbid) to satisfy the demand for their products, or save the funds and investment them in PP&E. THEY CAN’T HAVE BOTH AT THE SAME TIME.

We haven’t even discussed the effects that new money entering the economy has on the capital structure. Again, lets postpone this question for a little later. Lets assume that there is no new money in the economy. The money supply is highly inelastic.

Nobody can consume above the level he earns, unless there are individuals that refrain from immediate consumption. So, how does a factory get built? Can people chill on the beach and drink a pina colada from the pina colada factory if there is no factory? Well, I don’t think so. So, what do they have to do?

They will have to sacrifice a confortable time at the beach and drinking the colada for working on the factory. But since that they haven’t got a product (colada) to drink, their consumption level is zero. (Their consumption level is also zero if they stay on the beach, the colada doesn’t magically appear out of nowhere. I am sure that there is a demand for the colada, but without supply, good luck drinking one!). So these people will have to SAVE (refrain from consumption that doesn’t exist due to a lack of supply) whatever resource they can to sustain themselves while building the factory! This may be, for simplicity’s sake, dirt that grows on trees. They will have to use their own labor and time to accumulate dirt that grows on trees, to be able to sustain themselves while building the pina colada factory. What if they eat all their accumulated dirt that grows on trees before they finish the factory? They will have to USE THEIR TIME TO COLLECT MORE, WHICH COULD HAVE BEEN USED TO COMPLETE THE FACTORY! Again, they cannot make the cake and eat it too.

Enter credit expansion. According to ABCT, credit expansion creates the Cantillon effect and the subsequent reverse Ricardo effect that impoverishes the capital structure which is A MUST to maintain a certain level of consumption. If new money enters the economy in the capital goods industries, a boom will occur, if it enters the consumer goods industry, it will impoverish the capital structure, setting inflation, high nominal wages, and no capital structure to produce these goods.

Krugman gives no mention of what these effects have on the economy. He of course doesn’t even consider what occurs when you run out of loanable funds (present supply of resources that sustains you through the investment process). He acknowledges a need for a minimum level of inflation, of around 3%. Why not 5%? It is only marginally higher. Why not 30%? Things would really take off then.

Professor Krugman is confused of how economies function. He adheres to John Law and other monetary cranks and fiscal charlatans, such as John Maynard Keynes.

The art of spending money must not be confused with the art of creating wealth. Because, according to Krugman, people who are stupid enough to save  during the boom years, are at fault at causing the present crisis. Which means, under consumption is to blame for a depression, and not consuming more what you don’t have. That is, consuming capital to create false GDP growth.

The logical argument of Krugman’s assertions fall on the first pillar of growth. How does he get around the notion that if you wake up on a desert island, or if you are dropped of in the jungle, HOW ON EARTH, CAN YOU CONSUME SOMETHING IF THE RESOURCES HAVEN’T BEEN ACCUMULATED (SAVED)  TO SUSTAIN YOURSELVE THOUGH THE PRODUCTION PROCESS?

Professor, I encourage you to go to a location where there isn’t a trace of modern civilization (you can bring your co-author as well) and try to build up the skyscrapers as in New York, by spending your way to prosperity. 

Until then, go brake a window, since you will be helping the economy by creating demand for a window manufacturer…

Supply in a market will always find demand

 

Ina free market economy, in which the rule of private property is sacrosanct, and individuals are free to engage in any and all forms of competitive entrepreneurialism, any product that finds its way in the market will be sold in the market. Unlike the classical economists and todays neomercantilists  who suggest that cost determines price, the demand for a good will pinpoint its price through the aggregate subjective wishes of market participants in the form of an objective market price.

Due to recessionary trends across Europe, young people have decided to travel light and spend as little as possible on accommodation. This is best seen through cheap accommodations that have sprung across Zagreb, Croatia this past year.

According to business.hr:

“Opening of cheap accommodation for backpackers has become the most lucrative tourist industry in the metropolis, […]just this year opened seven hostels. Fierce competition from some 19 hostels in Zagreb will not survive even in the first six months of this year, 41 854 nights, nearly 4,000 more than the same period last year.

Instant business has become a popular tourist branch in the capital, according to latest data of Zagreb Tourist Board, according to which only the first half of the 2012th Open seven hostels, mostly in attractive locations in the city center.”

I have seen these “resorts” pop up and it is a brilliant way for youth who are on their way to the Adriatic coast to stop in Zagreb and get a feel of Zagreb during the summer as well. Since the unemployment rate of youth is morbidly high across Europe as well as escalating living costs, the market economy has adjusted in such a manner to bring about the best possible solution in such troubled times.

I believe cheaper prices will be expected in the future from these hostels, as more demand brings about greater competition and more square meters per guest with more attractive venues and business activity between the hostels and tourism outlets.

Unless the government decides to bump in and set hostel prices, as well as mandatory insurance coverage (government insurance coverage), young people should have no problem coming here and being afraid that they might be priced out due to higher prices. If anything, this sort of business activity should be encouraged, as well as quick capital mobility in case of shifting demand for hostel services in different locations.

10 Reasons Why Austrian Economics Is Better Than Mainstream Economics

 

BY: JAKUB BOŻYDAR WIŚNIEWSKI (Original Post)

1. Austrian economists make it their priority to make sure that the theorems they formulate are derived from self-evident axioms and constructed according to the proper rules of logical deduction. These considerations are at best of secondary importance to their mainstream colleagues.

2. Austrian economists make it their priority to make sure that the assumptions they base their theorems on are thoroughly realistic, i.e., corresponding to the state of the world as it is. Mainstream economists, on the other hand, admit that their hypotheses are based on deliberately false assumptions.

3. Austrian economists make it their priority to make sure that the theorems they formulate elucidate exact causal connections between economic phenomena, rather than deliberately assuming away their existence or importance by falling back on the physics-inspired notion of mutual determination.

4. The predictive track record of Austrian economists is incomparably superior to that of their mainstream counterparts (see, e.g., here and here).

5. The theorems and conclusions of Austrian economics are perfectly comprehensible to every intelligent layman, which cannot be said about the mathematical puzzles of mainstream economics.

6. In terms of their views on the method and aims of economic theorizing, Austrian economists have a much better claim than their mainstream colleagues to being the heirs and successors of the classical economists, such as Smith, Hume, Say, and Bastiat.

7. Austrian economists never tire of emphasizing the strictly value-free character of their discipline. Thus, unlike their mainstream counterparts, they never presume that the existence of any non-voluntary extra-market institution is justified, and, a fortiori, never make any “public policy recommendations” based on such presumptions. On the contrary, they confine their scholarly research to investigating the logical origins and outcomes of various economic processes and phenomena as they are, not as they would like them to be.

8. Identifying the concept of demonstrated preference as the keystone of economic analysis allows Austrian economists to avoid the twin pitfalls of behaviorism and psychologism, which their mainstream colleagues cannot navigate in any principled and methodologically robust manner.

9. Austrian economists reject academic and professional hyperspecialization in their discipline, thus stressing the holistic, integrated nature of the science of economics. In the words of F. A. Hayek, “the physicist who is only a physicist can still be a first-class physicist and a most valuable member of society. But nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nuisance if not a positive danger”.

10. Austrian economists cannot retreat into the safe haven of epistemological nihilism when the logic of their arguments turns out to be faulty. Mainstream economists, on the other hand, when the facts fail to correspond to their hypotheses, can always claim that “this time things are different”, which is a straightforward implication of the fact that any given set of sufficiently complex empirical data is compatible with a number of mutually exclusive empirical (but not logical) interpretations.