Deflation also hurts holders of fixed assets. In fact, the only people it helps are holders of capital. Guess who's most in favor of Austrian (or, more broadly, neoclassical) approaches to depressions?
Edit: Krugman's latest
, discussing that the cutoff of unemployment benefits at the start of the year did not, as predicted by conservatives, increase employment through the "desperation factor".
More people seeing work does not make more jobs magically appear for them to do.
Edit 2: More from that paper I linked earlier:
Practically, all one need to do is not to interfere with the fundamental
market forces of supply and demand but let them their job. In the face of a
lower overall volume of spending (which, incidentally, was brought about by
the preceding credit expansion aided and encouraged by central banks, i.e. by
the policy of interventionism), the self-interest of buyers and sellers of goods
and services is the most reliable mechanism to adjust prices and wages to the
new reality of a lower aggregate monetary demand in the economic system.
This is Austrian thought in a nutshell: the idea that removing intervention will cause the marketplace to magically establish a state of perfect equilibrium. It's also blatantly false to empirically observed facts.
The claim about interventionism causing the previous crisis is only partially true. Yes, there was intervention in markets, but it was pro-cyclical, not counter-cyclical: easy money policies in an environment where savings were already too high compared to investment opportunity. The disequilibrium that preceded the 2008 crash was started by the relaxing of regulatory controls on the financial industry and the slow dismantling of progressive taxation that allowed capital to accrue to households with a lower marginal propensity to consume and abetted by stimulatory fiscal policy during a boom, all of which is exactly the opposite of what Keynes said you should do.
However biased that paper may be, it does a very good job of explaining Keynesian principles. The error it makes is the basic Austrian one of not having its conclusion follow from any evidence presented. In other words, it specifies no actual mechanism whereby the desired correction will take place.
edited 15th Apr '14 11:22:10 AM by Fighteer