In 1998 Paul Krugman wrote an attack on the Austrian theory of the business cycle (ATBC), saying that it was about as credible as the “phlogiston theory of fire.”   Not surprisingly, he managed not only to mislabel the ATBC (calling it a “Hangover Theory”) but also proved incapable even of describing the theory that had been so well laid out by Ludwig von Mises, F.A. Hayek, and Murray N. Rothbard.

I mention this ten-year-old sarcastic foray into economics because Krugman has struck again, this time in a New York Times Magazine article, “How Did Economists Get It So Wrong?”  It turns out, according to the 2008 Nobel Prize winner, that economists falsely claim that capitalism is “perfect”:

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

That was not the only problem with economists, as Krugman sees it.  Not only did they have a wrong-headed faith about free markets, but they also had forgotten the Great Lessons of Keynesianism:

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps. [Emphasis added.]

He adds:

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism.

One should read Henry Hazlitt’s classic The Failure of the “New Economics” to see something other than the fawning prose that Krugman writes about Keynes. There is so much nonsense in these two paragraphs that it would take a large volume to refute it all.  I will concentrate on just a few things.

First, it is amusing to see Krugman write that Keynes was concerned about economic “fundamentals,” given that Keynesian theory treats all capital and, indeed, all assets as being homogeneous.  There are no economic fundamentals in the Keynesian system; indeed, Keynes (and Krugman) call for inflation, which is general in scope, as a way to end unemployment in specific economic sectors.

Second, like Keynes, Krugman has declared that printing money will solve nearly any economic problem (although he has not used the specific Keynes quote on inflation, that it “turns stones into bread”).  As Hazlitt noted in his classic, Economics in One Lesson, inflation always leads to economic disaster.

Third, as the ATBC so aptly points out, it is inflation that creates the boom-and-bust cycles.  If inflation is the cause of the problem, then even more inflation cannot be the solution.

Krugman is correct when he says Keynes made “bold assertions,” but one searches The General Theory in vain for something profound.  As Hazlitt noted, there is nothing in the book that is both true and original: What is true is not original, and what is original is not true.

Krugman is right that economists “got it wrong.”  However, it was not a religious belief in free markets that caused the trouble, but rather government intervention, something Krugman never seems to mention in any of his columns.