1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/14213/my-encounter-with-paul-krugman/

My Encounter with Paul Krugman

October 12, 2010 by

Krugman dismissed the idea that Keynesianism was best suited for totalitarianism and he ignored my inquiry about the fact that the mess we are in is precisely because the US government has pursued Keynesian policies for the past eight decades. FULL ARTICLE by Murray Sabrin

{ 17 comments }

Inquisitor October 12, 2010 at 8:35 am

No doubt a crazed Tea Party activist/Glenn Beck fan “trolling” the good Herr Doktor.

Barry Loberfeld October 12, 2010 at 8:48 am

Excellent article! I heard Sabrin at FEE some years back — good speaker, too.

Wildberry October 12, 2010 at 11:57 am

In this season of political attack ads, it is not hard to notice that the general approach seems to be, put lipstick on the best pig you have. It is not that a position is defensible, accurate, or even relevant. It is only that appealing what whatever can be thought of reaches the conclusion that is necessary to win over the alternatives.

Why would you presume that Krugman is just unenlightened and a product of a faulty education? Don’t you have to admire him for sticking with a story that has more holes in it that a Taliban after a drone attack?

Krugman is an expert. His expertise is his ability to respond to inconvenient questions with rote recitations from the Keynesian models, because those very models support his favored conclusions: Big government, big spending and big interventions. That is what he is paid to do.

I don’t believe he is naïve. Why would I?

Stephen Grossman October 12, 2010 at 12:33 pm

When pseudo-scientific rationalizers of altruism advocate government-caused demand, they do not mean supply-caused demand. They mean, “Your money or your life!”

Keith October 12, 2010 at 12:59 pm

Paul Krugman may be correct in asserting that the “paradox of thrift” has played a role in our current “great recession”, but I believe that Prof. Krugman along with many others have a misunderstanding about what exactly drives the paradox of thrift. It is not simply an issue of savings.

Economic growth is driven by investment. When savings are not invested in productive assets (things that enable the production of the things people want) but instead invested in non-productive assets (physical or financial assets that may hold value over time but that do not directly contribute to production: gold, silver, Federal Reserve Notes, consumer loans, etc), the paradox of thrift is driven. The paradox is really an issue of people parking income in assets that do nothing to expand the capital base. The same behavior occurs if people consume all income.

So in some sense, Prof Krugman is right. People are saving; much of their savings are being funneled into treasuries (a non productive asset); and as a consequence, investment in productive assets has declined and with it the economy has slowed.

Because government spending is predominately consumption oriented, government borrowing lowers the effective savings rate of a nation (savings actually invested in productive assets). This slows economic growth: effectively driving the paradox of thrift.

To explore the above in a very simple simulator, go to:

http://forio.com/simulate/keubanks/macro-economics-101

It is a Solow type capital accumulation model that tracks the flow of income toward gov borrowing.

Eric October 12, 2010 at 3:05 pm

The paradox is really an issue of people parking income in assets that do nothing to expand the capital base. The same behavior occurs if people consume all income.

I disagree. When people hold their wealth in such assets as gold and silver, they are NOT consuming. In order to buy gold and silver, they must first produce something of value, which they don’t consume (ignoring illicit ways of obtaining wealth). Then they use those things produced and not consumed to trade for gold and silver.

If these produced items find their way into the production process (e.g. food that sustains workers while they produce things) then these lead to growth. If, however, they spend the gold and silver on consumption, then they are not furthering the creation of wealth.

The paradox of thrift ignores the effects of supply and demand for money and in particular ignores the consumption-investment ratio of the economy. This ratio determines whether we eat our seed corn or plant it and create more than we started with.

Keith October 12, 2010 at 3:43 pm

Eric,

I’m not trying to say that buying gold or silver is consumption. Rather that buying gold or silver to hold for an extended time can have a similar impact on the economy as buying and consuming your seed corn — at least in the near term

If all income/production is consumed, capital consumption will bleed off an economy’s productive capacity. Productive capacity is maintained by not consuming all income/production and instead allocating some toward capital replacement. If capital investment exceeds capital consumption, capital can accumulate and the productive capacity of the economy can grow.

However, if savings buy gold instead of productive assets. Buying not for exchange purposes but to hold/store value, the impact in the near term is the same as if the income were used to buy corn and consume it. It is income that is (at least temporarily) not productive. It does not support the expansion of the economy’s productive capabilities. You are removing your labors from the economy (until such future time when it is again exchanged).

The argument is that the paradox of thrift is not driven by saving per se, but what is done with savings. The paradox of thrift develops when savings are parked in physical assets that do not contribute to production. I guess you could say it is more like burying your seed corn in a time capsule, but the effects on next years crop would be the same as eating it — maybe not so for next decade’s crop.

BioTube October 12, 2010 at 8:05 pm

You’re completely ignoring the fact that, by taking money out of circulation, they’re effectively lending their purchasing power to those who don’t. The effect’s more diffuse than directly lending it in the form of money, but it’s still very real; the paradox of thrift is nothing more than an extremely elementary case of failing to consider what is not seen.

Eric October 12, 2010 at 8:07 pm

BioTube is right. Hoarding gold (or money) reduces the demand for other wealth. This frees up that wealth for either productive use or consumption.

Punderoso October 14, 2010 at 9:09 pm

In my opinion, there is no paradox of thrift. As Ayn Rand would say, if you come to a contradiction or paradox you must re-examine your assumptions.
To me, the paradox of thrift is pure collectivist political elite driven propaganda, and is a political issue disguised as an economic issue and hence the paradox. So why are people trying to resolve the paradox in economic terms?

Analgously, it is a paradox (lets call it the running man paradox) for a man to run to exhaustion across a grassy plain until his body collapses in ruin. We can discuss intelluctually what is happening to his body as he engages in this “folly”, and how some exercise is good for you but too much can hurt you. However, I can immediately resolve the paradox by pointing out that everyone seems to be missing that he is being chased by a lion. Thus, the proposed assumption the he is running for exercise gets immediately dismissed and the paradox is really not a paradox.

So what are the assumptions in the paradox of thrift. Well it seems to me that we all are assuming that there is a free market in place and it is pure market forces that drive people to save or even “hoard” money and more specifically it is usually directed against hoarding gold or silver. There is the flaw, even in the US during parts of the 1800s we did not have a free market driven by purely market forces. The tyranny of government meddling, distorting, interferring, and oppressing the markets is not one of the assumptions. Why? For the majority of civilization throughout history to present, 99.9999999999% of the time governmental forces have been meddling in the markets so how can anyone leave this assumption out, thus leaving out the politicis and trying to make this a pure economic paradox? This is equivalent to leaving out the lion in the running man paradox.

People are going to “save”, “hoard” silver or gold when the government tyranny grows to much often by forcing a fake fiat or debt based money on the people. Thus, people to protect their wealth “hoard” gold or silver to protect their savings. This typically happens during a recession that is very severe, which again the severity is caused by the poltical elite by distorting the markets, and then they need to persuade (and force) people to continue with the corrupt money which the people are rejecting (as the elites try to pretend Gresham’s Law does not exist). Other Jonathan Gullible citizens have fallen for the political elites scams and have lost their savings and have ended up in large debt. So a political argument disguised as an economic argument is the propaganda shoved out on the airwaves that people are “saving” or “hoarding” rather than spending and that is the reason why the economy is in distress (pure propaganda). And continuing with the propaganda paradox the political elite solution is then to get more corrupt fiat/debt money in the hands of the people by putting them more in debt or getting them to stop “hoarding” or “saving” their gold, and it is these “hoarders” that are destroying the collective economy.

Why isn’t the simple resolution of the paradox of thrift that when people are “saving” or “hoarding” silver or gold it is because government tyranny is on the rise and people are trying to protect their wealth from this tyranny. Further, that the cause of the recession and flight to sound money in the first place is the result of government tyranny, and that the most logical and practical method for the citizen to protect their wealth during this rise in tyranny is to “hoard” or “save” gold, silver, etc? So is it not the natural action of man to try and save and protect his wealth from government tyranny? Why would anyone be thinking about productive uses of their money when the markets are being run tyrannically by the government and there is a better chance than not that their wealth will be confiscated if they even try to find a productive investment?

Jim October 12, 2010 at 2:21 pm

I’m glad to know that Krugman has finally been confronted by a real economist. But the result is not surprising.

Angel Martin October 12, 2010 at 2:22 pm

The link to Robert Higgs’ critique to Vulgar Keynesianism does not work.

LvMIenthusiast October 12, 2010 at 6:27 pm

As a pupil of the Austrian school, it’s a shame to see Krugman continue to produce very flawed work with panaceas in just about every claim he maskes.

I say it’s a shame because not only do I believe Krugman is a prolific writer, despite his odious findings in the economic field, but here’s a man that attended Yale for his B.A. in economics and then went on to recieve his Ph.D. from MIT. Maybe it’s just one of my idiosyncrasies, since my family tends to pride itself on education, but I can’t for the life of me comprehend how such a competent man always tends to come to such inchoate conclusions. Additionally, it further irks me to see Krugman completely shun the Austrian School’s findings or completely mis-qoute the findings of the school.

I understand that he is being paid as a columnist to promote “New-Keynesian Economics” in his respective column and blog at the New York Times, but he is also 57 years old! I don’t believe for a second that he has never read or heavily considered the scholarly works of the Austrian school.

I would like to give Krugman the benefit of the doubt, that as an economist who has attained his credentials from two highly prestigious universities, that a very large portion of his work is just a charade.

To be honest, (and I know I may be at complete odds witn some of my fellow colleagues here), I don’t really buy all this talk that Dr. Krugman is not a competent economist. On a final note, I will concede that he is very much mis-guided in his findings and a very insolent man to top it off (which probably detracts from him the most in the end).

But then again, is Krugman’s column wildly different from the agitprop that is normally put forth from the New York Times? I mean out of all the daily papers out there, the NYT appears to be the worst offender on this particular front.

Ned Netterville October 12, 2010 at 10:02 pm

This is an outstanding article, Professor Sabrin.

Krugman believes WWII ended the Great Depression. He lacks the most essential attribute of an economist, which is, to paraphrase Bastiat, an ability to see affects that others overlook.

In an op-ed column entitled “Franklin Delano Obama,” published in The New York Times November 10, 2008 (http://www.nytimes.com/2008/11/10/opinion/10krugman.html), Krugman acknowledged that FDR’s New Deal failed to end the Great Depression. The reason, Krugman said: Roosevelt didn’t go far enough.

“What saved the economy, and the New Deal,” according to Krugman, “was the enormous public-works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”

Clearly, Krugman believes that WWII ended the Great Depression. He sees that severe unemployment, which persisted throughout the Depression in spite of the New Deal, was finally reduced as a direct result of WWII. Like others of his ilk, Krugman is blinded by Keynes’ full-employment nirvana. What Professor Krugman evidently fails to see is that unemployment came down because many of those unemployed workers were killed off in combat, many more were inducted into military involuntary servitude, while other were put to work making weapons of mass destruction–useful only for blowing up people and real wealth. Making things that blow up soon after being produced is a great product in the eyes of Keynesian economists, because when blown up more have to be produced to replace ‘em and blow-em-up employment can go on ad infinitum.

Krugman also fails to notice any of the many worse-than-Depression hardships imposed upon most Americans by the war, not the least of which was such a scarcity of consumer products that the government resorted to forced rationing. Many consumer goods that were available during the Depression were unobtainable during the War.

Only an economic caveman would say WWII ended the Great Depression. Only a Keynesian would call war a public “works project” or an “economic stimulus.” And only Krugman would say, as he recently did on his blog, “The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.”

Krugman advises massive government spending to end the current depression, and marks the end of the last depression with the advent of massive government spending. Could it be that massive government spending is the end unto itself?

Wildberry October 13, 2010 at 12:37 pm

Ned,

Of course! Krugman is still working because there is a demand for his product. If you follow the money, he is being paid, directly or indirectly, by those who benefit from his rationalizations.
The fact that most of his positions don’t hold water (which I leave to the true economists here to demonstrate) is not material.
When Obama says, “Most economists agree…”, he is referring to Krugman and others like him. It is not necessary that they be academically sound analysists, only that they have “credentials” and therefore their “authority” can be appealed to by those promoting massive government spending.

This spending may be shamefully ineffective for the purposes for which it is publically justified, but is quite efficient for the real purpose, which is to use the public treasury to create self-supporting conditions in what would otherwise be a “free market”. Therefore, it is an end unto itself, as you say.

Patrick Barron October 15, 2010 at 7:09 am

This is the key insight:

“Although economists tend to “get it right” at the micro level, demonstrating how prices clear markets to avoid both shortages and surpluses, they tend to go into another universe when it comes to analyzing the macro economy.”

We Austrians are not foolish enough to believe that there really is such a thing as macro-economics. All economics is micro.

Liberty Ekstrom September 15, 2011 at 3:59 am

My Encounter with Paul Krugman – high quality

Comments on this entry are closed.

Previous post:

Next post: