I'm sure I'm more ignorant than Krugman, especially about economics and economists. And I know nothing about the "capital reswitching phenomena".
However, I think the evidence suggests, in times of crises, capitalism tends toward underconsumption. Or as Krugman wrote: "A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time."
The reason appears obvious: during a slowdown, marginally employed people (those facing the next round of layoffs) will start increasing their cash reserves fearing their own layoff. This is somewhat of a self-fulfilling response. As people consume less, more people lose their jobs ... and another group of marginally employed increases their cash reserves.
Its how we respond to this cycle that separates the Austrians from the Keynesians. The Austrians seem to believe that the cycle needs to run its course: "For recovery is sound only if it does come of itself." (Schumpeter) Although Keynesians believe, as Krugman wrote: "Junk the bad investments and write off the bad loans", they also believe in activist policies to support demand (such as safety nets, like unemployment insurance) so people don't feel the need to increase their cash reserves. And the Keynesians support even more activist policies during periods of severe unemployment.
During good times, there is general agreement. As an example, I think both groups would be highly critical of Bush's fiscal policies. However the Keynesians would be more supportive of the actions of the Fed under Greenspan. I'm sure there are many other differences ...
Even if the Austrians were correct, their solutions to crises are politically unworkable. "Liquidate everything" (Andrew Mellon) just causes a populist revolt - and the result would likely be something far worse than Keynesian capitalism.
More Krugman:
delong.typepad.com
Keynes was no socialist - he came to save capitalism, not to bury it. And there’s a sense in which The General Theory was... a conservative book.... Keynes wrote during a time of mass unemployment, of waste and suffering on an incredible scale. A reasonable man might well have concluded that capitalism had failed, and that only... the nationalization of the means of production - could restore economic sanity.... Keynes argued that these failures had surprisingly narrow, technical causes... because Keynes saw the causes of mass unemployment as narrow and technical, he argued that the problem’s solution could also be narrow and technical: the system needed a new alternator, but there was no need to replace the whole car. In particular, “no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.”... Keynes argued that much less intrusive government policies could ensure adequate effective demand, allowing the market economy to go on as before. |
