January 11, 2012
I’m worried. Is Krugman losing touch with reality?
The Keynesian Krugman has long been spouting total garbage, but this, as pointed out by Steve Landsburg, "is all looney-tunes" (see this).
The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.
This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.) [Source]
It is true that at one time Krugman made some useful contributions to economics and possibly "deserved" a Nobel prize.
For an economist, however, to now write like this points to loss of key mental capacities.
Would someone who knows Krugman approach him to find out what's going on. It may be kinder for Steve Landsburg (and others) to to stop debating with Krugman and assist him in his dotage, instead.
[For those who didn't catch the point, see Landsburg's post, but also the points I make below:
– "feedback loops" is a pure myth. All that happens in an economy is that production is consumed at a market clearing price. It is irrelevant whether consumers are employees.
– it is productivity that determines production (and hence wages), not some mysterious "feedback" or "multiplier". The producer does not sell to his employees at a discount (if he does, it is implicitly included as part of the wage bill). The producer and consumer are theoretically and pratically DISTINCT.
– a "macroeconomy" DOES NOT EXIST. There is no society. Only individuals. The macroeconomy is nothing but the sum of all businesses, no more, no less. There is no "whole is bigger than the parts" Genie who is magically created by aggregating businesses and consumers into a "macroeconomy".
– The actions of a business to cut its labour in half lead to greater productivity (and hence greater wealth for society). The other half who have lost their job then get jobs elsewhere at market clearing prices.
There is NO unemployment (hence depression) merely because a business cuts labour costs. The same thing, multiplied thousand fold, has the same result: DOUBLING OF WEALTH, NOT DEPRESSION.
A classic case is the US itself. Except for periods when it was seriously mismanaged by socialists and Keynesians, unemployment has remained at less than 6 per cent even as businesses have produced tens of times more with the same labour. Krugman is truly off his rockers on this one. Not even Keynes would babble so.
– there is NO PARADOX OF THRIFT. This Keynesian hypothesis is fiction designed to lead policymakers to do stupid things like a "stimulus", instead of ensuring that everyone is held to account for their decisions, and regulation is kept to the minimal level that is compatible with fraud prevention.
– there is NO LIQUIDITY TRAP, another Keynesian myth. There is simply bad governance.