The Twenty-Four Year Hangover

“Where all is but dream, reasoning and arguments are of no use, truth and knowledge nothing.” – John Locke

Daniel Lahoud is an economist, PhD in history, researcher and professor of Finance and History of Economic Thought at Universidad Catolica Andrés Bello (Caracas) and Universidad Central de Venezuela (Caracas). Visit his blog here.

Twenty-four years have passed since Paul Krugman wrote “The Hangover Theory,” ample time for him to have read Friedrich Hayek’s “Prices and Production” or even J. M. Keynes’ “Treatise on Money.” The former provides an understanding of the Austrian School’s Cycle Theory while the latter, a discovery rather than denial of the 1930s diatribe in relation to Keynes’ ineffable Treatise. Suppose there is one thing to be learned in the History of Economic Thought. In that case, it is this: you must first familiarize yourself with an author before presenting a thesis based on imagination. Aligning Hayek and Schumpeter is a terrible starting point.

Mises initiated the Austrian Theory of the Economic Cycle research. Hayek expanded it during his lectures at the London School of Economics in 1930, and in addition, Schumpeter also elaborated on the cycle. But Schumpeter’s position misses that of Mises and Hayek’s; in “Theory of Economic Development,” his only book with an Austrian influence, his explanation of the cycle is associated with the idea of innovation. For Schumpeter, the cycle becomes expansive with the rupture of equilibrium resulting from innovation, and the recession begins with the massification of innovation and the restitution of equilibrium. It has nothing to do with the Austrian Theory of the Economic Cycle.

Astonishingly, Krugman flippantly asserts that the Austrian Cycle Theory speaks of either a shift of workers from investment to consumption during a crisis or the recession is the consequence of expansion. Nowhere is this found in the Austrian tradition. Krugman criticizes without knowing the arguments and his disingenuous assertions represent terrible tactics for a meaningful debate. Mr. Krugman would do himself and his admirers a great service by reading:

In them, Krugman would learn that his summary of the cycle theory is oversimplified and incorrect and that Keynes misunderstood Hayek’s criticisms of Keynes’ “A Treatise on Money.” Through the use of a dense epistolary bibliography, Keynes did manage to improve and raise his arguments again, saying to Hayek, “I no longer think like that, I am writing a book in which I show the way in which I understand the problem” (1935). Had Krugman enquired, he may have abandoned his view: 

“[a] theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.” 

The Keynesian (not Keynes) system is similar to the Ptolemaic system in its belief that it sits squarely in the centre of the universe. Fortunately, the Austrians effectively point out that the Keynesian approach better likens a small satellite circling a planet, believing cycles are products of the businessman’s mood swings. But how would they explain the absence of deflation when businessmen simultaneously raise their demand for money at the onset of a recession? They would likely tell me to revisit the monetary theory.


Join our list!
Subscribe To Newsletter

Receive notifications about newly posted content.

Invalid email address

1 thought on “The Twenty-Four Year Hangover

  1. In this era where all information is out there, it is astonishing that someone would share serious claims without researching a bit. Krugman can fool one or two, but not everyone!

Leave a Reply

Your email address will not be published. Required fields are marked *