From The Daily Capitalist
April 1, 2020
I’ve been pretty rough on economist Paul Krugman so imagine my surprise when he called me on Monday to chew me out for criticizing him for his support of massive government intervention to cure the economy. Now, let me say that I have never met the man, never have exchanged correspondence with him, and have been happy to snipe at him from a safe distance. I am also shocked that he would even read The Daily Capitalist, so it’s kind of an honor that he would stoop to talk with me.
You may recall that I took him to task in my March 16 commentary, Professor Krugman and Professor Keynes. I asked him 10 questions about Keynesian solutions to the economic crisis. I never expected him to answer these questions; it was just a rhetorical device.
I have to admit it was the most interesting one hour conversation that I have ever had. While I said in the article that he was brilliant, I didn’t realize that he was one of those “off the chart” geniuses that people talk about but rarely encounter. Now, I’ve read Keynes’s General Theory and thought I was pretty firmly grounded in his ideas and his major flaws. What I criticize the opponents of free markets for is that they have never read Mises or Hayek.
My mistake. It turns out that he has read all the major Austrian treatises, including Menger, Boehm-Bawerk, Mises, and Hayek. We spent a long time discussing Mises’s theories of epistemology and a priori theoretical analysis versus the school of historicism and econometrics. He admitted that he thought that Mises’s Human Action was an important book, but was a dead end as far as important economic theory. I thought Human Action was one of the greatest books ever written, economics or otherwise.
Let’s just say that we had a spirited conversation. As I said he is a very bright guy and to be honest I learned a thing or two from him. Basically, he argues that mathematics is the foundation of all economic science, and that through mathematics we can gain real knowledge of human behavior. The point he argues is that we can’t know everything just from logical analysis: you’ve got to examine the real world data and from that you can extrapolate real truths and derive real data from mathematical analysis and projections of the data.
I had actually never thought of it that way until Krugman explained it rather rationally. I immediately countered saying that isn’t that Hayekian “scientism” where unless you start with a proper theory, how do you know which data to choose for your real world analysis. He actually laughed at me and said, “That’s the biggest flaw of Austrian theory. Think about it—how can you know anything just from logical analysis? It’s really stupid when you think about what they are saying.”
And that’s when it hit me. He’s right. You actually can derive the ultimate truth of social problems by applying math to empirical research. It doesn’t matter so much if you don't have all the correct data because mathematics can adjust for that. As he pointed out there is a mathematical formula for everything in the world and human behavior is no different than the behavior of physical matter. You can imagine that this revelation struck me like a thunderbolt and since then I have been re-examining many of my basic precepts about economic theory.
I am now going back and applying these concepts to my previous posts to see if I can make sense of it. I have been clearly wrong in many cases—my apologies to all of you for that. But, I think that, once I get it right, I’ll be better able to write more intelligently about economics. In fact, thinking about it, it really makes everything a lot simpler, thus easier for me to understand the world, and that will be of benefit to you.
I think Keynesian theory is mostly correct, at least as seen through the eyes of the Neo-Keynesians like Krugman and Robert Reich (another thinker whom I have wrongfully maligned on these pages). I now think that the Obama stimulus plan has a pretty fair shot at working. Krugman thinks we are doing too little and should be spending twice as much, but I don’t know until I do some more analysis with the classic Keynesian formula of:
Pretty cool stuff, I have to admit.
This was my April Fool's joke last year. A bit of an Austrian "in" joke. I received hate mail from one very prominent Austrian economist who didn't think it was funny. What do you think? Was it a hit or miss?