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Source link: http://archive.mises.org/14443/krugman-the-depression-and-zero-sum-economics/

Krugman, the Depression, and Zero-Sum Economics

November 1, 2010 by

According to Paul Krugman today, the Really Bad People are keeping government from filling the “hole” left by the reluctance of businesses (also led by the Forces of Evil) to spend. Moreover, since all of an economy is nothing more than a set of zero-sum transfers, then it is up to government to set everything in motion.

Unfortunately, the Bad People are keeping government from doing its economic duty. I deal with those comments and more in my KIW post today.

{ 20 comments }

guard November 1, 2010 at 7:16 am

But I don’t read Krugman or care what he says.

左旋右碱 November 1, 2010 at 7:54 am

不错 呵呵

Bogart November 1, 2010 at 8:10 am

My head hurts under the weight of these economic fallacies. I find it amazing how a person who is so smart and such a gifted writer could be so devoid reason. If debt is a zero sum game then how do you fight reluctance to lend by banks with the negative sum game of government spending?The answer is as always that increasing debts or increasing government spending (Inefficiently allocated debt.) will only harm the economy and that the way out is decreased debts and more savings which is not a zero sum game.

Vanmind November 1, 2010 at 10:00 am

Yawn. When will these infomercial non-articles stop?

Anthony November 1, 2010 at 10:24 am

It’s not supposed to be an article… this is a blog post. The articles are on the Mises Daily page.

El Tonno November 1, 2010 at 1:06 pm

Quite so.

And it’s not an infomerical either. This is not Wired magazine.

iawai November 1, 2010 at 10:28 am

Economists that use the term “zero-sum game” likely have no idea what that means in terms of real probabilistic game theory: where no matter the choices made by the players, there is only a fixed real return available to all players. The real economy, or even a mirco-economy of just two people is hardly ever representable as a zero-sum game precisely because of the independence of value scales of actors.

Two people that simultaneously discover a cache of 10 loaves of bread and must decide how to split them between themselves is typical of a “zero-sum game”, but the real payoffs – the subjective valuations of each person – may have different, non-constant, aggregate outcomes. Perhaps one person is living hand-to-mouth, and hasn’t had bread in months, while the other just had a huge breakfast and can only store one or two loaves for the next few days. Without turning to praexeology and dealing only with the “economic man” – an analyst may say that there is no aggregate difference in how the loaves are determined, and will conclude that one man’s gain is the other man’s loss. But looking at actual man, we can see that both men can be happiest in one particular outcome – where the poor man gets 8 or 9 loaves and the well fed man gets only one or two loaves. Any deviation from this leaves the poor man worse off, and the rich man in no better position; the overall well being of the participants has some maximum, and is not fixed just because the sum of the outcomes is fixed.

Tangentially, the invocation by economists of a “prisoner’s dilemma” is usually misapplied and again only looks to objective value signals that can be directly added across different actors. While these probabilistic economic structures certainly have value in limited circumstances, those applications are limited to the actors within such a system, and cannot be used to make policy decisions by some third party. The very existence of a third party infuser of capital or regulator of behavior changes the theoretical construct of the “game”, and can’t know any better than the players themselves the values they ascribe to different outcomes.

If we were to take Krugman’s assertion that the economy is a “zero-sum game” seriously, there would be no room for a government to redistribute wealth – as they are also eating into the potential returns of the game merely to reach some outcome that they, or the majority, or their most powerful lobbyists deem as “best”. If there were inequalities in the “zero-sum market”, it would be in everyone’s interest to diffuse their wealth, lest they lose consumers or stoke the envious theft by those who feel cheated. Any deviation from total equal distribution would itself create more dissatisfaction in the aggregate, and would prove that there wasn’t a real “zero-sum game” to begin with – precisely because actors have subjective value scales. Therefore if there was no overall benefit from some particular distribution of goods, there would be no justification for Krugman to push for any policy or redistribution.

Internally inconsistent, and economically and mathematically illiterate Krugman is.

El Tonno November 1, 2010 at 1:16 pm

Hold on!

As far as I can remember, in Game Theory, the “zero-sum game” is the one in which the payoffs for the players always sum to zero. If one player gains X, the other player gains -X, summing to zero. If there are N players, the sum of their N payoffs sum to zero in each cell of the N-dimensional game matrix.

http://en.wikipedia.org/wiki/Game_theory#Zero-sum_and_non-zero-sum

In the first paragraph, you seem to be describing a game that optimizes the payoff for each player, i.e. where there is an equilibrium (Nash Equilibrium, probably)

iawai November 1, 2010 at 1:49 pm

You are correct, and my exposition was slightly misleading – but the real test for “zero summability” is whether choices made by the players may lead to higher or lower aggregate outcomes. In my “finding 10 loaves of bread” example, the game has a fixed number of loaves – any gain by player one of another loaf means a loss of that loaf by player two. There are no choices that will increase the number of loaves distributed to all players, there are ten loaves at the initial state of the game, and there will be ten loaves when the game is over.

The analysis in light of subjective valuations still applies, where some distribution(s) of the fixed number of loaves will satisfy the collective demands of the players better than some other distribution of the same loaves.

FYI – the Nash equilibrium doesn’t necessarily optimize the payoff for each player, but it tells each player what choice to make to optimize the payoff in light of the other player’s choices to do the same. It makes the assumptions that we know the utility value of each payoff to every participant, and that each will act “economically rational”, i.e., will make the choice to maximize their utility without error or external utility fluctuations (e.g. the psychological underpinnings of “fairness” that may make an actor reluctant to take a large payout when another would only get a comparatively small return – but this is truly all part of knowing each person’s subjective utility valuation).

El Tonno November 1, 2010 at 4:09 pm

iawai – Thank you for the clarification.

Carol November 1, 2010 at 12:32 pm

It’s hard to believe this article was published, after 3-4 years of unregulated, Wild West, fraudulent, unbridled greed. In case the author has forgotten, it was the market of derivatives that corporate traders wallowed in until their world, oooops, our world came crashing down.

It takes a lot of unmitigated gall to write that article, but I guess someone has to test the waters to see if the midway roller coaster still works. Yahoo! Let’s go for another ride.

El Tonno November 1, 2010 at 1:33 pm

Welcome comrade.

If you think it was the market of “unregulated derivatives” that done it (How come these derivatives are so powerful? Why would anyone in their right mind buy them?), you may want to start here for example:

http://mises.org/daily/4100 – Does It Make Sense to Resurrect the Glass-Steagall Act?
http://mises.org/daily/4255 – Greenspan Came Not to Save Consumers but to Bury Them
http://mises.org/daily/3382 – The Fed Did It, and Greenspan Should Admit It
http://mises.org/daily/2716 – The Shaking Tower of Debt
http://mises.org/daily/2555 – The Mortgage Market Mess

Not to say there wasn’t fraud and muggings, but these need enablers, right?

iawai November 1, 2010 at 1:56 pm

I detect jest in your tone, but which article are you commenting on, Krugman’s or Anderson’s?

In either case it was the highly regulated securities market that worked with Government Trust agencies to securitize home loans. Yes, the “corporate traders” are culpable in all of this, but it was only due to the nominal backing of Frannie and Freddie with gov’t funds that allowed them access to other people’s money with which they shielded their leveraged losses.

Christopher November 1, 2010 at 2:15 pm

Fannie and Freddy is a good start. We should also keep the following interventions in mind: the Department of Housing and Urban Development, the Community Reinvestment Act (which was reinvigorated in the 1990s), the FDIC, the Greenspan Put, the Zero Down Payment Act/American Dream Down Payment Act (Republican pieces of legislation), and the Federal Reserve. Political discourse of the early 21st century was permeated with blatant and insistent calls on both sides of the aisle to intentionally engineer a market where housing loans were far more available, and required significantly lower down payments; indeed, this was a hallmark of Bush 43′s rhetoric and policy. Only a near-total absence of knowledge–or an exercise in outright sarcasm–could inspire anyone to claim that the housing and banking markets, two of THE most heavily regulated sectors of the entire economy, were hotbeds of wildcat capitalism. Yet this lie has, to the exasperation of those who know better, become the majority opinion among politicians and pundits.

FrankG November 1, 2010 at 2:49 pm

Yes, we all now know the fallacy of writing derivatives on what were believed to be heavily government regulated assets like mortgages. No doubt, it was a massive mistake for Wallstreet to actually rely on the the regulatory work of the +200 agencies regulating the banking, securities and mortgage industries at the time. Now after Dodd-Frank, we all realize that there should have been 400-500 agencies and a consumer czar doing this important regulatory work.

Inquisitor November 2, 2010 at 7:25 am

It takes a lot of unmitigated idiocym, ignorance, arrogance and stupidity to make a comment like yours, but there you have it.

:)

Ned Netterville November 4, 2010 at 4:13 pm

Carol, I invite you to stick around this site and keep an open mind. You may find that some of your convictions are challenged on logical grounds by what you read here. Unlike the Keynesian nonsense that Krugman dispenses without being able to defend it against the challenges of Austrian economists, most of what you find published here will be logically grounded and appeal to your own common sense.

Blaming Wall Street for the current recession is what politicians do. Getting reelected is priority #1, so they dare not admit their own role in the recession lest they lose their cushy positions, but you should take their declaiming with a grain of salt.

Ned Netterville November 1, 2010 at 1:02 pm

Krugman, a putative economist, has referred to World War II as an “enormous public-works project,” looks upon war as a most effective “fiscal stimulus,” and states with a straight face that the federal government can create national prosperity by spending OPM (other people’s money), or by deficit spending, which is exactly like spending the taxpayer’s money by using the taxpayer’s credit card, which is even more expensive for the taxpayer because of the interest charges. So I guess it follows that a putative economist with the above credentials would also think that the government can abrogate a whole bunch of private-party contracts without any adverse economic and social consequences. Even a caveman knows more of economics than Krugman. (see: http://jesus-on-taxes.com/ON_PAUL_KRUGMAN.html)

Ohhh Henry November 1, 2010 at 7:20 pm

Krugman is a buffoon.

The key thing to bear in mind is that for the world as a whole, spending equals income.

Has he ever heard of central banks, and if so then does he know what they do? But whether or not you understand anything about central banks or the money supply, it is easy to grasp his main, lunatic debating point.

[Krugman's opponents claim that] debtors must pay for their sins, and from now on we all must live within our means. And that kind of moralizing is the reason we’re mired in a seemingly endless slump.

He disagrees with “the moralizers”, which means that his argument can be stated thus:

Debtors need not pay for their sins, and from now on we need not live within our means. Otherwise the economy will remain in a slump.

What a jackazz. A pack of criminally ignorant rats must be running the NYT, to publish this driveling clown’s “arguments”.

RTB November 1, 2010 at 9:56 pm

It’s also interesting how he shifts the argument from a economic one to a ‘moral’ one. His ‘opponents’ have legitimate economic reasons for their ‘opposition’, but he accuses them of ‘moralizing’, therefore shifting the argument entirely.

Not even to bring up the point that correct economics is moral and last I checked his ideas (stealing) are the immoral ones.

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