There are many differences between Austrian economics and the neoclassical mainstream, but one of the most critical involves the difficult field of ‘capital & interest theory.’ (Here are three links of increasing difficulty to show the Austrian perspective on these issues: one, two, and three.) This area has been dubbed the ‘black hole of economics’ because it can devour researchers, but in the present post I can use a recent Paul Krugman blog entry to graphically illustrate the Austrian viewpoint. Specifically, Krugman’s diagram doesn’t even get the dimensions right!
Before diving in, I should acknowledge that this particular dispute has nothing to do with Keynesian policy recommendations. Rather, the problem in Krugman’s diagram is something that is taught in standard economics programs, whether Keynesian, Public Choice, or Chicago School.
This post was published at Ludwig von Mises Institute on November 3, 2017.