💾 Archived View for library.inu.red › file › anarcho-on-paul-krugman.gmi captured on 2023-01-29 at 07:24:18. Gemini links have been rewritten to link to archived content

-=-=-=-=-=-=-

Title: On Paul Krugman
Author: Anarcho
Date: October 15, 2008
Language: en
Topics: Paul Krugman, economics, liberalism
Source: Retrieved on 28th January 2021 from https://anarchism.pageabode.com/?p=161
Notes: A few comments on Paul Krugman winning the so-called Nobel Prize for Economics. He may be left-of-centre and a Keynesian, but his economics are sadly very much neo-classical in nature.

Anarcho

On Paul Krugman

As should be well known by now, Paul Krugman won this year’s (non-)Nobel

prize in economics for his work on trade theory.

Krugman is pretty much your standard neo-classical Keynesian, but he is

left-of-centre and since the 2000 election campaign has spent much time

exposing struggle the Bush Administration and its enablers. For example,

while in the 1990s he refuted right-wing attempts to show that

inequality was not rising in America while thinking that nothing could

really be done about it, in the 2000s he has raised addressing this

issue to forefront.

Unsurprisingly, given this, the awarding of the prize has proved some

right-winger to proclaim him as a “left-wing hack” and an

“anti-capitalist”, even a “socialist”, and whinge about the political

biases of the Swedish Central Bank – obviously only (non-)Nobel prizes

to right-wingers count! This gnashing of teeth by the right has,

rightly, been a source of much amusement on the left.

Personally, I can think of worse people to give it too – and so have the

Swedes. So we have Milton Friedman and von Hayek “honoured” in the 1970s

while Joan Robinson, Nicholas Kaldor and Michal Kalecki were ignored

(but, then, they all rejected neo-classical economics and where, to

varying degrees, socialists). Kaldor, for example, destroyed von Hayek’s

business cycle theory (what he ostensibly got the prize for) twice in

the 1930s, before moving on to be the scourge of Friedman’s Monetarism.

Kalecki only managed to independently develop the key concepts of Keynes

General Theory and published first. Robinson exposed key problems with

neo-classical economics, not least the problems with marginal

productivity theory. A few years back, they gave it to Edmund Phelps

whose ideas have been used to tame the working class via his notion of

the non-accelerating inflation rate of unemployment (they should have

given it to Karl Marx, as it clearly echoed his analysis, or Kalecki who

predicted the impact of full employment in eroding capitalist power in

the workplace).

In terms of his trade theory work, it is rooted in the (flawed)

neo-classical mainstream. As Steve Keen noted in passing, “the

representative agent was a kludge invented ... to get around the problem

that, in general, the preferences of individuals could not be aggregated

... representative agent macroeconomics amounts to assuming that the

economy consists of a single individual, producing and consuming a

single commodity. However complex might be the reasoning used by such

aficionados as Paul Krugman, the realm of applicability of this theory

is that of Robinson Crusoe, living off coconuts before the arrival of

Man Friday.” (Debunking Economics, p. 212). Only radical economist

Stephen A. Marglin (in his new recent book The Dismal Science), as far

as I am aware, has presented a thought experiment on how free trade

would impact on an economy with classes and it is worth reading.

Given how free trade based on Ricardo’s theory of comparative advantage

is one of the most popular ideological positions of mainstream

economics, it may come as a surprise how few (none!) countries have

industrialised by means of it (and I’m including Hong Kong). In this,

the relatively unknown Federick List has been repeatedly proven to be

right. As such, Krugman’s work, however innovatory it is, is building

upon weak foundations.

Krugman really is pretty much a mainstream neo-classical economist. This

can be seen when he notes in his introduction to economic textbook “the

prevalence of oligopoly” and admits it “is far more common than either

perfect competition or monopoly.” However, “the analysis of oligopoly

turns out to present some puzzles for which they is no easy solution” as

“the analysis of oligopoly is far more difficult and messy than that of

perfect competition.” Why? “When we try to analyse oligopoly, the

economists usual way of thinking — asking how self-interested

individuals would behave, then analysing their interaction — does not

work as well as we might hope.” Rest assured, though, there is not need

to reconsider the “usual way” of economic analysis to allow it to

analyse something as marginal as the most common market form for, by

luck, “the industry behaves ‘almost’ as if it were perfectly

competitive.” (Paul Krugman and Robin Wells, Economics, p. 383, p. 365

and p. 383) Which is handy, to say the least.

Which brings me to why I decided to write this blog entry. A few years

ago, I read Krugman’s dismissive review of William B. Greider’s One

World, Ready or Not: The Manic Logic of Global Capitalism (The

Accidental Theorist). He uses it to “illustrate a paradox: You can’t do

serious economics unless you are willing to be playful. Economic theory

is not a collection of dictums laid down by pompous authority figures.

Mainly, it is a menagerie of thought experiments – parables, if you like

– that are intended to capture the logic of economic processes in a

simplified way.” And he presents one:

“Imagine an economy that produces only two things: hot dogs and buns.

Consumers in this economy insist that every hot dog come with a bun, and

vice versa. And labor is the only input to production ... Suppose that

our economy initially employs 120 million workers, which corresponds

more or less to full employment ... Now, suppose that improved

technology allows a worker to produce a hot dog in one day rather than

two. And suppose that the economy makes use of this increased

productivity to increase consumption ... This requires some reallocation

of labor, with only 40 million workers now producing hot dogs, 80

million producing buns.

“Then a famous journalist arrives on the scene. He takes a look at

recent history and declares that something terrible has happened: Twenty

million hot-dog jobs have been destroyed. When he looks deeper into the

matter, he discovers that the output of hot dogs has actually risen 33

percent, yet employment has declined 33 percent ... Global capitalism,

in short, is hurtling toward crisis. He writes up his alarming

conclusions in a 473-page book; full of startling facts ... and

punctuated with occasional barbed remarks about the blinkered vision of

conventional economists ...

“Meanwhile, economists are a bit bemused, because they can’t quite

understand his point. Yes, technological change has led to a shift in

the industrial structure of employment. But there has been no net job

loss ... In our hypothetical economy it is – or should be – obvious that

reducing the number of workers it takes to make a hot dog reduces the

number of jobs in the hot-dog sector but creates an equal number in the

bun sector, and vice versa.”

From this parable, this thought experiment, Krugman draws the obvious

conclusion that technological change need not be feared, that the market

will ensure that workers are redeployed to new industries. He dismisses

the objection that this “thought experiment [is] too simple to tell us

anything about the real world” by arguing that “if for ‘hot dogs’ you

substitute ‘manufactures’ and for ‘buns’ you substitute ‘services,’ my

story actually looks quite a lot like the history of the U.S. economy

over the past generation.” He proclaims that Greider’s mistake was

“systematically cut[ting] himself off from the kind of advice and

criticism that could have saved him from himself. His acknowledgements

conspicuously do not include any competent economists ... To test-drive

an idea with seemingly trivial thought experiments, with hypothetical

stories about simplified economies producing hot dogs and buns, would be

beneath his dignity. And it is precisely because he is so serious that

his ideas are so foolish.” Hence the conclusion: “It is an insight that

you can gain only by playing with hypothetical economies – by engaging

in thought experiments.”

I was not convinced at all when I first read this a few years back. I

still reject it and since Krugman is in the news, I thought now would be

a good time to actually write it down. I do not deny the importance of

thought experiments and simplified models, but if you simplify reality

too much then any conclusions to be drawn from the experiment will be

deeply flawed. Simply put, an unrealistic model will produce misleading

results.

My objections lie in the obvious fact that Krugman’s little story

ignores time, class and market power. This is not that unexpected, given

that neo-classical economics was developed to combat socialist economic

analysis and so focused on individuals rather than institutions and

social relationships. Instead of the classical theory of value, which

was utilised to show the dynamics of an economy over time (and

inadvertently showed that labour was exploited by capital),

neo-classical economics started with a fixed amount of goods and so took

a snapshot of the economy as its starting point. With production

ignored, price was determined by effective demand (something classical

economics did not deny happened in the short term). So, neo-classical

economics is based on ignoring time – at best it compares two different

snapshots while ignoring what happened in between.

This impacts into the next two ignored factors, class and market power.

Krugman’s model, as is clear, is based on workers with no mention of

bosses. The assumption is that a capitalist economy is one of

self-employment, one without capitalists! Given that there are classes,

with returns to both capital and labour, in any real capitalist economy,

this simplification becomes simply misleading. Productivity gains,

regardless of neo-classical assumptions, need not be shared equally

between classes. There is a struggle over who gets what.

This brings me to my next objection: the ignoring of market power. Mass

unemployment in an economy will mean that employed workers will be

fearful of standing up to their bosses. They will be well aware that

there are others waiting to take their jobs and, as a result, we would

expect wages to fall as well as ensuring that productivity growth

accumulates into the hands of their bosses (unsurprisingly, the evidence

is that unemployment coexists with low, not, high wages). This increase

in market power of the boss caused by unemployment would increase

inequality while making wages decrease or stagnate. Eventually, workers

in the affected sectors would find work elsewhere, but during the time

that took to happen all workers would have had their economic power

eroded, weakening unions, decoupling productivity growth from wage

growth and so on.

So, yes, over time employment would equalise over the two sectors of the

economy but the balance of class power, the levels of inequality within

the society and so would be fundamentally different. This is all ignored

by Krugman’s simplistic model.

Krugman pointed to the “past generation” in American history. The

alternative model proposed here is, basically, exactly what did happen

in America (and elsewhere) since the 1970s. Ironically, Krugman laments

precisely these developments in his new book (The Conscience of a

Liberal). There is, he now argues, “no question that US trade” with

Third World countries “widens inequality” and “reduces job opportunities

for less-skilled American workers.” (p. 135) Which is an improvement on

his previous orthodox defence of globalisation in the 1990s. He also

points to “changes in institutions, such as the strength of labor

unions” (p. 136) as another factor in widening inequality, arguing that

the unions had a “direct effect” on equality by their own wage

agreements and an indirect one, as they “raised the wages of

less-well-paid workers more” as the union contracts were “reflected in

the labour market as a whole.” (p. 149) Significantly: “If gains in

productivity had been evenly shared across the workforce, the typical

worker’s income would be about 35 percent higher now than it was in the

early seventies.” (p. 128) Instead, wealth has flooded upwards to the

top 10% (or even less).

As he said: “In the end, of course, ideas must be tested against the

facts.” I know that in neo-classical economics time, power and class are

all ignored but they exist. Once these factors are taken into account,

Krugman’s “Just-So” story can be seen for what it is. Particularly as

his own subsequent work can, in part, be used as evidence for another

thought-experiment which does not abstract from essential elements of

any real capitalist economy.

So if this award gets more people reading Krugman’s exposures of the

Bush Junta and his well documented accounts of the explosion of

inequality in America then, I would suggest, it would be for the best.

Hopefully, though, they will see past the limitations of both his

(neo-classical rooted) economics and his New Deal-style politics to

something more radical in terms of both analysis and solutions to the

social question.