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Eating Cheetos and Watching "The Real Housewives of Galt's Gulch" Is Not the Optimal Way to Deal with "Overinvestment"

Ryan Avent:

Business cycles: Quote of the day: KARL SMITH:

[T]his is what a functioning market does when you have spent beyond your means or you’re not as rich as you thought you were. You produce things that get to be consumed by other people. You don’t shutter factories and send your workers home to eat Cheetos and watch the Real Housewives.

So why might workers sit at home wasting away their time? It could be that the economy has spent beyond its means (as through having run sustained current account deficits) and must adjust, but the adjustment is impaired (as through fixed exchange rates and wage rigidities). Or it could be that no adjustment is needed, but that the central bank has allowed a drop in expectations to translate into reduced nominal spending. But you certainly don't make good on old obligations by sending millions of productive workers home to do nothing.

Very true. And that, I think, is why Friedrich von Hayek is only a very minor and very unproductive figure in the work of macroeconomics. He--and Schumpeter, von Mises, and the rest of them--spent a lot of time figuring out why it might be that when you learned that you had overinvested and overborrowed, the natural and necessary thing to do was to shutter (rather than repurpose) factories and send your workers home to eat Cheetos and watch "The Real Housewives of Galt's Gulch".

Paul Krugman:

Things That Never Happened In The History Of Macroeconomics: Via Mark Thoma, David Warsh finally says what someone needed to say: Friedrich Hayek is not an important figure in the history of macroeconomics. These days, you constantly see articles that make it seem as if there was a great debate in the 1930s between Keynes and Hayek, and that this debate has continued through the generations. As Warsh says, nothing like this happened. Hayek essentially made a fool of himself early in the Great Depression, and his ideas vanished from the professional discussion.

So why is his name invoked so much now? Because The Road to Serfdom struck a political chord with the American right, which adopted Hayek as a sort of mascot — and retroactively inflated his role as an economic thinker…