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Monday, October 20, 2008

Glaivester: Krugman Doesn't Get It

Glaivester: Krugman Doesn't Get It

all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent.

Uh - no. Not according to the Austrian Theory, at least. In fact, this sounds suspiciously like the Keynesian "acceleration principle," a subset of "underconsumption" theory. According to this theory, production of some durable good or service rises due to a sudden increase in demand, and then falls as that demand is satisfied. For example, there is a sudden demand for a 50% increase in compact fluorescent lightbulbs (CFLs). Then, because all of the extra bulbs will not burn out for 5 years, demand suddenly drops back to where it was before the increase, resulting in a glut of CFLs, and pushing the CFL-producing company to the edge of bankrupcy. (This is a flawed theory, largely because it assumes that the CFL makers (for example) cannot adapt their production and prices to anticipate future needs).

In any case, the flaw in this statement is the concept of "too much capacity," which is a fancy way of saying that too many goods were produced to meet the demand. While this can happen in certain industries, it seems unlikely to hapen in several economic sectors at once, and moreover, if there is actual overall "overproduction," demand will almost certainly grow to meet it.


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