Krugman wins not for his Keynesian-style macroeconomics
The Nobel Prize committee seems to have gone out of its way exclusively to cite Paul Krugman's "analysis of trade patterns and location of economic activity," contributions which students have appreciated and also criticized (Mark Brandly wrote this short piece in 1996). Only at the tail end of the press release does the committee mention the other Krugman we know so well: "In wider circles, he is better known as a lively blogger and spirited columnist in the New York Times." Is this the first time that blogging has been mentioned in the Nobel release?
Of course, the prize confers a broader invitation to take all his other ideas seriously, among which his criticism of Austrian trade cycle theory, a criticism to which Tyler Cowen points with admiration.
Here is Shawn Ritenour's excellent review of some of Krugman's work in this area. He argues that Krugman is not a neo-Keynesian or a proto-Keynesian or any other variety; he is just a plain old-fashioned paleo-Keynesian. Here also are Roger Garrison and John Cochran responding to Krugman.
You can comment on the forum, where a thread is developing.
Comments (27)
Well at least Krugman favours free trade right? (Correct me if I'm wrong). On all other economic issues, god help us if politicians start following his advice.
Published: October 13, 2008 6:53 AM
I just read the article by Mark Brandley above, where he points out all economists don't even agree on free trade. If economists can't even agree on the basic issue of free trade, in what respect is it a science with predictive value? Government economists get their budget forecasts horrendously wrong and would be fired were they in the private sector. Nobel prize winners frequently disagree with one another on fundamental points (e.g. Friedman vs. Hayek vs. Krugman). The Nobel prize is a dangerous thing, because the public is given the impression that economics is a precise discipline; in reality, the arrogance of technical economists (e.g. in the Soviet Union) has led to the death of millions.
Published: October 13, 2008 7:19 AM
@ Sukrit: Someone correct me if I'm wrong, but as far as I know Krugman is a proponent of the "fair trade" cult. Which in common sense terms (or Austrian economic terms if you will), is something entirely different than free trade.
In general, I'm wondering whether the Nobel Peace Prize of last year of this Nobel Prize in Economics is more political or not. Good thing I do not take the Nobel committee serious as far as it is concerned to economics.
Published: October 13, 2008 7:23 AM
http://en.wikipedia.org/wiki/Parable_of_the_broken_window#Terrorism
Krugman doesn't understand the Broken Window Fallacy...
Published: October 13, 2008 8:13 AM
Oh my God!
Please read Krugman's article on abct.
Regardless of the number of fallacies and factual errors.... it is downright scary!
Read his proposed solutions to busts and tremble...
Published: October 13, 2008 8:15 AM
Krugman battles his own straw man in his article. He clearly does not understand Hayek, Mises or Austrian econ, but that doesn't stop him from declaring his ignorance to everyone who will listen.
Published: October 13, 2008 8:17 AM
The best bit is when he blames Hayek and Schumpeter for the length of the Great Depression, apparently their ideas were followed too much during the "Great Contraction".....
I guess I was stupid to think that Hoover and Roosevelt were socialists/keynesians... They were bitter liquidationist/austrian/tough love dogmatists!
Published: October 13, 2008 8:21 AM
http://en.wikipedia.org/wiki/Parable_of_the_broken_window#Terrorism
Krugman doesn't understand the Broken Window Fallacy...
Published: October 13, 2008 8:26 AM
My objection to Krugman is not so much that I disagree with him (which of course I do).
The problem is that he is so obviously a shallow and superficial thinker.
I don't mind disagreeing with someone for whom I can muster a basic respect. Krugman is a gnat.
Surely the committee could have done better, even without sacrificing its obvious political agenda.
Published: October 13, 2008 8:27 AM
I guess we can conclude Tyler Cowen is an idiot too.
Published: October 13, 2008 8:41 AM
I enjoyed this link to his piece criticizing Hayek in this article, It is a good reminder of what perception of "uncompromising" free-maket is the most disturbing.
Intellectuals don't like the moralizing aspect (Intelligence "puts" you above "justice"). True. Austrians are annoying, they don't respect academics as such, they even respect the opinion of the population. True... They contradict some very widely accepted compromises, and make speak of themselves in this scandalous original fashion thus. True (Ron Paul).
On the other hand, this simplistic explanation, of recession, leaving out the main Austrian critic to money devaluation, really makes you wonder about the alleged left-wing "intellectuality" (who is suppose to read this I wonder...? ):
"As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa)"
...A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time."
Is this theory really mainstream... I wonder?
Published: October 13, 2008 9:10 AM
Wow, I'm loving the comments over at MR on this.
>>The odd thing about the Austrian theory is that it is self-contradictory. On the one hand, it says that "the market knows all"; on the other it says that "the market knows nothing." It says that we should trust all to the market, and that the market always gets it wrong, either on the high or the low side.
I'm guessing this is disagreement with the idea that central banking necessarily causes the boom bust cycle on the grounds that (strawman) Austrian-model entrepreneurs never make mistakes. Or something. Like Bryan Caplan's critique, about how entrepreneurs would figure the Fed out and then there would be no more business cycles.
-Gendou
Published: October 13, 2008 9:30 AM
The primary characteristic of superficial and shallow thinkers as Krugman is not that he is knowingly attacking strawmen but that those strawmen appear from their own fallacious and incoherent doctrines/disciplines which are undeservedly called science.
The whole fallacy is that distinct doctrines within the economics science exist at all. One may specialize in a certain theoretical of empirical field, but that doesn't make them distinct disciplines. If one combines all standpoints Krugman has in the different 'disciplines' he practices, I'm sure one cannot derive a coherent line of thought from it.
This is why he can all of a sudden wonder why the Austrians are so self-contradictory, because he cannot imagine that the definition and concept of a market in the Austrian sense is always the same and not instrumental/relative to what implicit and explicit assumptions one wants to prove/ or alternatively not instrumental/relative to what the accidental data in the data set says.
Scientists (they do deserve the label I think) like Alchian and Friedman at least were clear on what status their definitions of certain economic phenomena had (from a philosophy of science view this is less true): instrumentality relative to hypothesis generating value. People like Krugman just seem to swim but not drown in their own rhetoric constructs: one cannot (at least I can't) clearly derive any definitions of economic phenomena at all. An example of this kind of postmodern positivism can be found in the article Entrepreneurship: productive, unproductive and destrictive by W.J. Baumol (1990 - http://www-econ.stanford.edu/academics/Greif_228_2007/Baumol%201990%20JPE%20Entrepreneurship.pdf ): in this article can cannot find the definition of entrepreneurship AT ALL. It just seems to mean businesses or entities endulging in economic activity, but one cannot be sure. Consequently, the article can mean anything, and therefor it means nothing.
Krugman seems to be in the same league, he's so clearly vague on almost everything, he always right and invulnerable for critique.
Published: October 13, 2008 10:24 AM
I think that the thing to remember is not that Krugman or others are not trying to create a particular science of economics. They only emphasize the points that support their other agendas. This is why their debates seem disjointed and inconsistent; they're not trying to be consistent.
When I'm in a debate with someone on economics it gets to a point when they think they can predict what my opinion is on the next point. Then when I express an opinion other than they expect they're generally surprised. I've had this comment many times, "At least you're consistent."
The left has figured out they can win individual points and ignore the whole. This is how they can say that we're going to raise corporate taxes and not raise taxes on the middle class. Look at their argument when it's pointed out that corporations generally pass on the increase. They say, 'history shows a different story.' or whatever. They make the debate about proving that they pass it on and don't allow it to be shown that their being inconsistent.
It's sickening, but what we're allowing 'debate' to become.
Published: October 13, 2008 10:40 AM
Yes, Mr. Krugman is a Paleo-Keynesian plain and simple. He belongs to the august group that believes that the manipulation of prices, including the rate of interest, only produces wonderful results. To these individuals, market-determined prices have little or no significance or importance, and there is no such thing as economic law. Politicians as advised by well-paid academic "economists" can manipulate any price, or any economic parameter for that matter, and the results will always be beneficial. We have the knowledge, just give us the power!
These so-called economists and the power-hungry politicians are fools and their arguments should be ignored except for the fact that the theories and policies are so pernicious.
Using one specific example, how can the Keynesian system be taken seriously when its "founder" believed that the scarcity of capital could be eliminated by driving the rate of interest down to zero through "enlightened" monetary policy? And to a significant extent, this view of capital and interest is a foundation block of Keynesian theory. This is not reasoned or learned analysis, but foolishness of the greatest order.
Published: October 13, 2008 10:59 AM
I guess it's time to feel ashamed of one's nationality!
Published: October 13, 2008 11:23 AM
">>The odd thing about the Austrian theory is that it is self-contradictory. On the one hand, it says that "the market knows all"; on the other it says that "the market knows nothing." It says that we should trust all to the market, and that the market always gets it wrong, either on the high or the low side. "
On the other hand, whoever wrote this knows precisely nothing about the Austrian theory. How does the "market know all" when faced with a massive price control over interest rates? Are these individuals so stupid not to see this or are they hacks trying to discredit Austrianism on the weakest points they can make? Really, it's embarassing to have such idiots for critics.
Published: October 13, 2008 11:33 AM
In a follow up to my earlier posting, I would like to quote Professor Ritenour from his above-linked review in the QJAE of Krugman's "Post-Modern Economics: The Return of Depression Economics:"
"Krugman closes with a revealing statement, 'the only important structural obstacles to world prosperity are obsolete doctrines that clutter the minds of men.'”
In this quote it is apparent that Krugman holds some of the more fantastic and irrational beliefs of Keynes.
Published: October 13, 2008 1:28 PM
Krugman: “Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?”
In that one statement Krugman advertises his complete ignorance of centuries of monetary and capital theory. Unemployment happens because companies go bankrupt, or lay off people in order to avoid going bankrupt. Companies go bankrupt because of the shortage of capital goods (not money) created by monetary expansion. The money not spent on investment goods does not get spent on consumer goods; it disappears. The money supply falls because of companies defaulting on loans and/or repaying loans. Then banks can’t or won’t re-loan money because their financial condition is bad or because businesses won’t borrow because of lack of confidence. Where does the money go? No where. It ceases to exist. Krugman doesn’t realize that money can simply disappear, but it does. When the money supply shrinks, prices fall. Lower prices cause lower accounting profits and in some cases bankruptcies because companies have less income with which to repay loans.
Krugman: “The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods.”
That’s simply not true. No one who has read either economist would make such a stupid statement.
Krugman: “And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.”
This is a factual error. Rarely does every industry contract. Specific industries are always hit harder. In fact, the whole ABCT got started when people recognized that the producer goods industries got hit the hardest in the depression and expanded the most in good times. Anyone who listens to CNBC a few hours knows that investment advisors avoid producer goods industries when they think a downturn is coming and advise buying consumer goods stocks.
Krugman: “A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.”
Krugman’s whole business cycle theory is summed up in “for whatever reason.” Or in the more technical mainstream terminology, “bad things happen.” Why do people want to hold more cash? Either their cash reserves were depleted by losses or money is worth more. Money becomes worth more when prices fall at the end of a depression. And people have lost money in the depression so they want to rebuild cash balances. Krugman confuses cause and effect. People holding more money as cash is the result of the depression, not the cause.
Krugman: “Junk the bad investments and write off the bad loans.”
That is the very “liquidationist” view that Krugman trashes at the beginning of his article.
Krugman: “nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present.”
He clearly hasn’t read anything that Hayek or Mises wrote. Bad investments in the past mean that businesses go broke. When they go broke, they get rid of workers. Workers who don’t have jobs make up the unemployed.
Krugman: “Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism.”
Now Krugman claims psychic powers. The truth is that Krugman doesn’t know Austrian economics.
Krugman: “The truth is that the Japanese have been remarkably willing to make hard choices, such as raising taxes sharply in 1997. Indeed, they are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out.”
So what does he advocate the Japanese do? Lower interest rates to expand credit? How can he be completely unaware that the Japanese tried that throughout the 1990’s when he wrote this in 1998?
Krugman: “The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession;”
Austrians make a distinction between the primary recession and its aftershocks. The aftershocks can sometimes be worse than the man earthquake. The Great D came about because of the terrible aftershocks and bad policy. No Austrian has ever advocated tax increases during a depression or as a cure for one. The politicians who passed the tax increases during the Great D did not see them as a cure or a help, but feared the effects of government deficits. This is just another example of Krugman’s dishonesty, for the straw man fallacy is just a technical way of calling a person dishonest and Krugman mainly spars with straw men that exist only in his fevered imagination.
Published: October 13, 2008 1:49 PM
I've often thought that, in the interest or promoting his ideas as superior, pointing out the fact that Hayek got a Nobel prize in economics was treading on shaky ground, because of the unabashed statism of several of the other economists who were also Nobel prize recipients.
But this clinches it: Paul Krugman has been awarded a Nobel prize in economics. And what perfect timing! Interventionist policies have brought the U.S., and the world, to their knees financially. Who better to be lauded than a champion of leftism! Oh, the sweet irony.
I know the Swedes have had their challenges with socialism, but how far left can they go before they've completely stripped a Nobel prize award of all its legitimacy? What's next, a posthumous Nobel for Marx? Playing "a big role in shaping the discourse in economics" is the central criterion for the Prize, after all.
How much you would you bet that Hayek would list his Nobel on eBay now if were alive? The Nobel in economics is now, officially, a bad joke.
Published: October 13, 2008 2:02 PM
"Krugman doesn't understand the Broken Window Fallacy..."
No, he doesn't. Some years ago, he wrote that the September 11 2001 terrorist attacks might be a boon to the economy, since the need for repairs would create new jobs.
It's Keynes' wars, earthquakes and pyramid building all over again.
Published: October 13, 2008 4:38 PM
"No, he doesn't. Some years ago, he wrote that the September 11 2001 terrorist attacks might be a boon to the economy, since the need for repairs would create new jobs."
One of my professors, who is an ardent follower of Krugman, once posted the article you refer to over on his blog. I deconstructed the argument (I recall using the broken window fallacy and opportunity costs), and received a tantrum of a response. It was my first experience in just how uncivil professors can be when their dogmatic beliefs are questioned.
Published: October 14, 2008 9:39 AM
Ryan:
That's similar to the manner in which politicians and other promoters of government spending on their particular favorite programs not only have a laundry-list of the benefits they expect to be provided but, in addition, refer to this or that many "jobs being created" as though it were an entire division of additional benefits arising from their ingenuity. For some reason, few seem to realize that, whatever the particular (and debatable) benefits such programs
are to provide, the jobs created are a real (and frequently the principal) cost of those very programs.
Now, the politicians and other program proposers are not entirely ignorant (of the foregoing). Rather, they are keenly aware that the creation of jobs is a means of enhancing the size of a voting constituency (which may be additionally charmed by the fact that others--particularly political opponents--are more apt to be net payers for the program).
Published: October 14, 2008 2:41 PM
It is clear that this is another part of the ongoing swindle, scripted to keep the masses from understanding the inflationary crime that has been perpetrated against them for almost a century.
Hell, that's probably why the one-world socialists allowed Keynes to be published in the first place. It's all manufactured "prizes" and "celebrity economics" acting as smoke & mirrors.
Published: October 15, 2008 10:44 AM
Paul Krugman is a paid shill, bought and paid for. In other circles he would be known as a bag man.
His economics writings are at the freshman macro economics level of illogical silliness. You always put a dunce in a highly visible position like that. Newseek and Time are tabloids without the titillation just the conventional wisdom, a thin watery gruel of etatist pablum. No one really reads Krugman.
"Best damn yes men money can buy."
~ Paul Newman as Lousiana Gov. Earl Long in Blaze
Published: October 15, 2008 5:05 PM
The only worthwhile critique of Ludwig von Mises, that I know off, is contained in the book, "The Paper Aristocracy." It differs with von Mises, in that it advocates a Silver Standard, rather than a Gold Standard. Silver is much more available than Gold, and is much less susceptible to attempts to Corner the Gold Market. Britain rose to Greatness on the Silver Standard, and when it went off the Silver Standard, went off the Greatness Standard. The US needs to Nationalize the Fascist Federal Reserve System; remember that before entering politics, and later putting forth the word Fascism, Benito Mussolini edited a periodical devoted to the Philosophy of Harvard Professor of Philosophy and Psychology, William James. After entering politics, Benito became the head of the Italian Socialist Party, then after WWI, founded the Italian Fascist Party, based on William James Philosophy, and the American Scene in General. Benito Mussolini's son, is a Musician of American Jazz, and is, like his father, very attuned to the American Scene. What is Fascism; it is a Form of Socialism that is designed to benefit the Very Rich. The Greatest Socialist President in US History, is So-Called Democratic President, Woodrow Wilson, really a Fascist, before Mussolini Introduced the Name: Wilson won with the backing of John D. Rockefeller Sr., and in turn repaid John D. Rockefeller Sr. by passing the Federal Reserve System Act, which gave the New York Branch of the Federal Reserve Bank, the right/duty to set interest rates; the New York Branch was initially set to consist of three banks, the Gigantic Rockefeller Fortune controlled Chase Manhattan Bank plus two tiny banks, one in upstate New York, the other in New Jersey. The John D. Rockefeller Sr. controlled Titanic Chase Manhattan has always been capable of getting, what ever it wants from the Two Tiny New York Branch Bank, other members, so as to amount to effective Chase Only Control; according to Richard Ney, author of the "Wall Street Jungle." Since The Rockefeller control of the New York Branch Bank of the Federal Reserve System, is an inherited position, this is effectively a Title of Nobility, which the US Constitution of 1792 has always sated was Unconstitutional and therefore Illegal.
Published: October 16, 2008 4:27 AM
The only worthwhile critique of Ludwig von Mises, that I know off, is contained in the book, "The Paper Aristocracy." It differs with von Mises, in that it advocates a Silver Standard, rather than a Gold Standard. Silver is much more available than Gold, and is much less susceptible to attempts to Corner the Gold Market. Britain rose to Greatness on the Silver Standard, and when it went off the Silver Standard, went off the Greatness Standard. The US needs to Nationalize the Fascist Federal Reserve System; remember that before entering politics, and later putting forth the word Fascism, Benito Mussolini edited a periodical devoted to the Philosophy of Harvard Professor of Philosophy and Psychology, William James. After entering politics, Benito became the head of the Italian Socialist Party, then after WWI, founded the Italian Fascist Party, based on William James Philosophy, and the American Scene in General. Benito Mussolini's son, is a Musician of American Jazz, and is, like his father, very attuned to the American Scene. What is Fascism; it is a Form of Socialism that is designed to benefit the Very Rich. The Greatest Socialist President in US History, is So-Called Democratic President, Woodrow Wilson, really a Fascist, before Mussolini Introduced the Name: Wilson won with the backing of John D. Rockefeller Sr., and in turn repaid John D. Rockefeller Sr. by passing the Federal Reserve System Act, which gave the New York Branch of the Federal Reserve Bank, the right/duty to set interest rates; the New York Branch was initially set to consist of three banks, the Gigantic Rockefeller Fortune controlled Chase Manhattan Bank plus two tiny banks, one in upstate New York, the other in New Jersey. The John D. Rockefeller Sr. controlled Titanic Chase Manhattan has always been capable of getting, what ever it wants from the Two Tiny New York Branch Bank, other members, so as to amount to effective Chase Only Control; according to Richard Ney, author of the "Wall Street Jungle." Since The Rockefeller control of the New York Branch Bank of the Federal Reserve System, is an inherited position, this is effectively a Title of Nobility, which the US Constitution of 1792 has always sated was Unconstitutional and therefore Illegal.
Published: October 16, 2008 4:27 AM