Krugman dismisses the Austrians too soon.
His error is to rely on Von Hayek's and Schumpeter's versions instead of
that of the neo Schumpeterians (of which I am one).
What he has done is equivalent to ignoring Friedman and Keynes on money and
criticising monetary economics on the basis of what Say said.
There is solid statistical work on inventions, innovations and energy by
Mensch and Marchetti to show that these long cycles exist and are
associated with regular (55 year approximately) cycles in innovations (new
products that create new industries) and substitutions between primary
energy forms in the new world economies which accompany them. See Gerhard
Mensch Stalemate in Technology, Ballinger 1979 and Cesar Marchetti Society
as a Learning System: Discovery, Invention, and Innovation Cycles
Revisited, Technological Forecasting and Social Change, volume 18, (1980).
Moreover the dips between cycles are associated with other phenomena which
go a long way to explaining why large numbers of people start preferring
cash (saving) at that point. The economist Harold Innis and the
sociologist Samuel Clark (both of U of T) before the War pointed to an
association with the emergence of radical Protestant sects at these times
and the University of Chicago historian William McLouglin, more recently,
to the coincidence of alternate ones (the ones which in history have come
to be called Commercial or Industrial Revolutions) with what religious
historians refer to as Awakenings, which involve fundamental rethinking of
cultural and religous values on a societal scale. When people are afraid
and uncertain and depressed, as they are at these times, they hoard money
or money equivalents.
If Dr. Krugman prefers statistics to qualitative history to measure
societal distress then he should take a look at sucicide and homicide
statistics which track the cycle perfectly, They peak at each mid-point of
the wave of technological innovations (1929 and 1982 for the last two
cycles).
In other words, Krugman, like the vast majority of economists, ignores
"non-economic" phenomena which would explain a lot of the thing he finds
unexplainable. It is also notable that the statistical methodology which
Marchetti used to analyze invention, innovation and energy data came from
biology and was used first to examine technologies by engineers employed in
technological forecasting for the Pentagon in the 1950s. It was also used
by marketers to examine product cycles. What we have here is the peculiar
blindness to evidence which does not come from one's own narrow area of
expertise and usually presages a paradigm change in a discipline.
He also ignores demographics. Detroit had been able to ramp up automobile
production far faster than society has ramped up the population to buy
them. Once you have two cars in every garage, as you had by the 1970s, the
market grows much more slowly. because then you are not selling a car to
someone who has never owned one so much as you are selling one to someone
whose automobile has worn out. If I have no car and a pocket full of
dollars I am a customer now. If I have a car and a pocket full of dollars
I am someone else's customer (for stereos and personal computers). I won't
be in the market for a new car for five to fifteen years. Replacement
demand is far slower than new demand. Over production/capacity therefore
does matter, Dr. Krugman.
Krugman's economics suffers from over generalization and an inability to
appreciate Schumpeter's most important contribution - the fact that the
nature of the economy changes at these times - whole industries die and
whole industries are born. Put another way, it is not just a case of
aggregate demand changing (the over generalization); the structure of
demand changes too. Over generalization appears also in his remark that
underutilized capital would be fully utilized if demand were adequate (the
demand for money reduced). The structural change in demand means that
stranded assets are left all over the place (as the electricity generating
industry has discovered). You cannot make silicon chips with steel plants.
Ergo the value of unwanted steel plants goes to zero and they are left to
rust away behind locked gates. The savings they embody, if they are not
fully depreciated, also disappear. When people feel less wealthy because
their savings in the form of shares in steel companies disappear, there is
a real wealth effect; people spend less (prefer cash). Has Krugman never
read Patinkin ? Go visit Pittsburg and Youngstown if you want evidence.
Moreover the industries which die and the ones which are born, do so in
different places geographically. The silicon chip plants were built in
California and Texas not in Michigan or Pennsylvania. Labour is not
perfectly mobile, and those who don't make the move to California find
their incomes fall so their consumption also falls. Moreover, labour is
also not homogenous (another one of those wonderful neo-classical
assumptions). People educated to a level to work in a steel plant and with
the skills of a steel plant worker and with the work to rule attitudes of
organized labour in a mature industry are unwanted by the new industries
anyway. Their children and grandchildren may have the education and
attitudes needed and move, but not the mature worker. Even if he could
finance it - remember most of his savings are in his house which the
collapse of local industry has caused to fall (indeed it may be unsaleable
at any price, like the steel mill in which he once worked - another real
wealth effect Mr. Krugman).
The people who grow the new industries and are employed by them enjoy
economic rents due to their innovation and enterprise. There is a
redistribution of income. Take a look at the way income distribution has
skewed over the past ten years Dr. Krugman. Unfortunately,the people whose
incomes are depressed far out number those who incomes are growing - you
can flatten an industry which has matured overnight, but you can't grow a
new one at the same pace. People with high incomes cannot consume them all,
much as they try (just go to Seattle and look at the monster houses Bill's
Microsoft millionaires are building), so much of their income goes into
financial assets (stocks and bonds = near money) - look at the money piling
into the financial markets.
Why do the new economies arise some place else ? A variety of reasons
historically. Usually it has to do with revolutions in transportation
technology which transform location economics - Edmonton and Calgary and
Irkutsk could not have grown without the transcontinental railway, to take
extreme examples. It has also been influenced by the availability of a
suitable primary energy - that is why the English cotton industry which
drove the first industrial revolution was first located on remote streams
and rivers and then on the coal fields. In the case of silicon plants the
reason was social/human, according to Spanish sociologist Cassils in his
recently published study of new high tech or science cities. The man who
founded the Stanford Research Institute around which the industry
subsequently bloomed (his students included pioneers like Hewlett and
Packard) had initially tried to interest Boston area universities and
prominent citizens in his ideas (Boston was where the electronic high tech
industries developed in the Second World War were located, firms like
Raytheon). He was given the cold shoulder. He didn't fit their paradigm
:-) (Anymore than Krugman's theorizing fits the facts :-) ) So he
broadened his field of search and Stanford, then a very minor college, said
yes. It also helped that his widowed mother had earlier settled nearby. So
much for prices and demand and supply curves.
So the frictional problems which the Austrian school pointed to and which
Krugman dismisses are very real. And so is the real wealth effect of
stranded assets. And so are the spiritual and social psychological crises
which cause people to become pietistic (consume less) and demand more money
for security's sake.
Mike H
