Monday, July 16, 2012

Krugman and the Keynesian View of Entrepreneurship

Since Krugman has another column that he has coordinated with the Obama re-election campaign, a column that claims (once again) that the presence of a bank account in another country is proof that one is destroying  the economy at home, I won't make any comments except to say it proves once again that Paul Krugman is not an economist, but simply a political operative. Instead, I want to deal with some issues that have popped up through the comments section.

Someone cleverly sent me this link in response to my saying that Krugman never says anything about entrepreneurship. Yes, the guy is serious. He mentions the word more than four years ago, and that is "proof" that Krugman is an expert on the entrepreneur or something like that. As I went through my own search process through Google, the only other link I could find was Krugman's defense of the GM bailouts in which he claimed that "industrial clusters" really were more important than anything entrepreneurs do.

His comments on the bailouts are especially instructive because the Obama administration essentially wiped out the bondholders, gave the United Auto Workers what they wanted, and then dunned taxpayers to make it all happen. While Krugman might claim that the auto bailout was "the single most successful policy initiative of recent years," what occurred was pretty much a simple wealth transfer.

Furthermore, in his Keynesian style, Krugman assumes that capital and whole structures of production simply exist and that entrepreneurship has nothing to do with it. (Yes, he says the "individual entrepreneur," but in that he is creating the straw man, for he fails to understand the larger role of entrepreneurship in the economy.)
The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur.
Yet, it was entrepreneurship over time that created this cluster, but to admit that would mean that perhaps his collectivized view of economics might not fit reality. Furthermore, entrepreneurship is not limited to people who (in Krugman's words) start their businesses in garages. (Notice that he leaves out Steven Jobs and how Apple was started, but that would mess up his narrative.)
The point is that the quintessential business figures of the 80s weren’t creative entrepreneurs. They were big-corporation executives (Lee Iacocca) and takeover artists (Michael Milken, Ivan Boesky). The gazillionaires who started in garages came later.
By limiting entrepreneurship to people "in garages," Krugman leaves out the larger understanding of what entrepreneurship is or what entrepreneurs do. Michael Milken WAS a financial entrepreneur, as he gained funding for a number of enterprises that the banks in the cartelized system that Krugman praises to much would not touch. It was Milken who secured start-up funding for CNN, which helped revolutionized how the news is brought into our homes. The creation of MCI, which did an end run around the way long distance calling was done via the AT&T government-created monopoly, came through Milken's funding.

It was Milken that secured the start-up money for McCaw Cellular, which took an idea and laid the foundation for the vast cellular networks we have now. And there were many more enterprises, NONE of which would have received funding from the banking system that Krugman insists was perfectly fine and should have remained in place.

You see, Paul Krugman wants us to believe that modern telecommunications "just happened" or that government would have created a wonderful system on its own. Like the industry "clusters" that really are the source of wealth (and we know that the clusters just appeared on their own -- or were the result of government action along with the farsightedness of the labor unions) in Krugman's view, there really is no need for the entrepreneur, who is just a sideshow, a freak in a garage who takes advantage of what government in its infinite wisdom already has created.

In Krugman's world the telecommunications that we enjoy now would have happened anyway because, well, just because. New technologies just happen and their application to the economy just happen, too. Furthermore, even things like the pre-existent "supply chain" are not subject to entrepreneurial ideas. No, they simply exist and if a company like Wal-Mart is able to change the way that supply chains work, well, that was not entrepreneurship; it was just fate.

I would urge readers to look at what Peter Klein has written in his book The Capitalist and the Entrepreneur. Unlike Krugman, Klein actually is an economist who knows something about entrepreneurs and entrepreneurship, and who does not feed partisan political propaganda to readers. (Unlike Krugman, Klein does not coordinate his writing efforts with partisan political campaigns.)

Anyone who does take the time to read Klein will see that the scope of entrepreneurship is much, much larger than anything Krugman can imagine. But, then, Klein is not going to tell readers that government spending, borrowing, and printing is the Source of All Wealth.

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On another note, I would urge readers to look at this recent Wall Street Journal editorial that lists a number of aspects of labor law in Spain that create barriers to employment. According to the editorial, 99 percent of Spanish businesses have 49 or fewer employees. Why?
Once a Spanish business reaches 50 employees, its workers must also elect five workplace reps to bargain on wages and conditions. These delegates must each receive at least 15 paid hours off monthly for their duties, and the quotas rise as companies grow. By the time a business hires its 751st staffer, it must have at least 21 workplace reps, each getting a minimum of 40 paid hours off per month.
No doubt, Krugman would claim that such measures will increase "aggregate demand" because governments create new wealth by forcing up wages. That the Spanish employment laws prevent larger enterprises from enjoying the economies of scale from large-scale capital funding simply gets beyond the thinking of a Keynesian.

27 comments:

Dune said...

I see Spanish labor laws have made the front page again. Obviously, all of their problems are due to restrictions on business and lazy public employees.

My simple question which you never addressed previously is this: how do labor laws (which have actually improved in recent years) explain an unemployment rate which is twice that of Spain's historical average? Weren't these same restrictions on business in place 10-15 years ago?

As far as your entrepreneurship discussion...I think its laughable that you use an example from a decade when top marginal rates were twice what they were today! This is a great example for why raising rates to Clinton era levels would do little to influence incentives.

Mike M said...

Dune Said:
“This is a great example for why raising rates to Clinton era levels would do little to influence incentives.”
It’s obvious you don’t own or run a business.
This talking point repetition of citing Clinton era tax rates and showing no alleged economic harm is just another version of the type of fallacies that get trotted out again and again by Progressives. The argument goes something like this: We had higher taxes on the wealthy and the economy boomed ergo either higher taxes cause the economy to do well or at a minimum they do no harm to incentives.
Let’s think just superficially for a minute. What else was going on in the 90’s that would have compensated for the higher tax rates?
Buller, Buller, Anyone? Oh I’m sorry; I forgot Economics and humor don’t mix.
Come on Dune; think about this one for yourself. Knowledge and understanding have a much better retention when it’s not spoon fed to you.

jason h said...

The restrictive regulations will cause a constant level of “chronic” unemployment as you say. The regulations will also, amplify problems after and artificial boom, when labor and capital need to be the most agile to adapt to the new reality. Once the malinvestment reveals itself to be unsustainable firms need to move quickly to redeploy resources in new lines of production, the regulations that caused only 5% unemployment before hamstring these efforts and will cause 10% unemployment to drag on much longer than necessary.

Dune said...

jason h,

I like data. Another country called Ireland had a housing boom around the same time. It happens that Ireland is ranked 9th in economic freedom by the Heritage Foundation while Spain is ranked 36th.

Both countries are experiencing chronic high levels of unemployment and while its true that Ireland's unemployment has leveled off a bit more than Spain in the past year, this is hardly a ringing endorsement of restrictive labor laws as the sole source of Spain's misery.

Mike M said...

"..while its true that Ireland's unemployment has leveled off a bit.."

In 2011 76,000 emigrated from the country. Mostly young people that can't find work. When you reduce the denomintor in the calculation, things "look" better.

jason h said...

When you reduce the denominator in the calculation, things "look" better.

Actually, its both numerator and denominator. Still 'improves' the numbers though.

10/100 = 10%
9/99 = 9.1%
8/98 = 8.2%
7/93 = 7.5%
...
etc.

I think the takeaway is that regulations make the business cycle worse because labor is slower to move to new lines of production.

Mike M said...

Jason

You're right. At Irelend's present rate of people leaving they will be at full employment soon! Then the Progressives can use it as "evidence" that high taxes don't hurt the economy.

Dune said...

"In 2011 76,000 emigrated from the country. Mostly young people that can't find work. When you reduce the denomintor in the calculation, things "look" better."

Are you telling me emigration isn't occurring in Spain? I don't understand your argument at all...

Neither of you two addressed my central question. We have a clear natural experiment in which two countries experienced a housing boom and bust due to an influx of foreign investment.

The argument put forward by Anderson and jason is that sky high, persistent joblessness in Spain is a result of its tight labor laws. However, Ireland has a much more favorable business climate than Spain and is still experiencing the same chronic high unemployment. What is your explanation for this?

Old Mexican said...

Re: Doug,
"[H]ow do labor laws (which have actually improved in recent years) explain an unemployment rate which is twice that of Spain's historical average?

The Spanish economy is two times worse now than the historical average.

"Weren't these same restrictions on business in place 10-15 years ago?"

No, there were different restrictions, some of them being those that created the great Spanish housing bubble.

Old Mexican said...

Re: Dune,
"The argument put forward by Anderson and jason is that sky high, persistent joblessness in Spain is a result of its tight labor laws."

Persistent joblessness in Spain is explained by other factors besides the barrier to entry that Bill points to, like a big welfare state and rampant unionism.

"However, Ireland has a much more favorable business climate than Spain and is still experiencing the same chronic high unemployment."

You are a liar, sir. The unemployment rate in Spain is close to reach the 20% mark whereas it is around 13% in Ireland. Ireland still "enjoys" many regulations that hinder hiring especially among the young and inexperienced, a reason many are considering migrating. But that does not mean Ireland is just as bad as Spain.

Mike M said...

Dune said:

"Are you telling me emigration isn't occurring in Spain?"

Did I say that? No. You said you like data. I gave you data.

"We have a clear natural experiment in which two countries..."

OMG no we don't! Economics is not a science experiment. It is a biological organism made up of 7 billion people each making decisions based on a whole array of preferences, constraints and imputs, etc. If you think economics is some kind of test tube experiment in a big lab then that explains why you fail to understand some of the positions here. You simply can't pull a lever or push a button and assume a static environment. Human beings don't work that way.

Dune said...

"Economics is not a science experiment."

Oh that's right. Economics to Austrians is like some weird ideological religion, complete with myths, superstitions and idolatry. Therefore, even if facts on the question their dogma, they simply wave it away. Low inflation? Hogwash! They must be measuring it wrong. Near 0% borrowing costs for US debt? Those silly investors must be blind!

Mike M said...

Dune

Thank You. It's always much more effective when an individual demonstrates their own ignorance of a subject matter rather than have to engage in the painful process of doing it for them.

Bala said...

"Low inflation? Hogwash! They must be measuring it wrong."

What is inflation, incidentally? How do you measure

"Near 0% borrowing costs for US debt?"

How are interest rates determined today, btw? LIBOR, anyone? Just curious, you see.....

William B Swift said...

You might find an analogy I came to recently interesting. Socialism is to economics as Creationism is to biology.

Zachriel said...

William B Swift: You might find an analogy I came to recently interesting. Socialism is to economics as Creationism is to biology.

How are you defining socialism?

macroman said...

@mike m. You confused natural experiment with laboratory experiment. A lot of astronomy is natural experiments and there is nothing wrong with that.

Tel said...

Socialism is to economics as Creationism is to biology.

I get it. Central planning vs emergent self organizing. Playing off the left wing Atheists against the right wing Christians. Good work.

I've been reading Robert H Frank, The Darwin Economy lately -- it is full of the most amazing errors, but still somewhat interesting to see at least one guy trying to get his head around things.

Mike M said...

Macro

Economics is not a science. To start from the presumption it is, begins the problem.

William B Swift said...

My definition of socialism, as used in this quote (I sometimes use a stricter one where appropriate)is any political regulation of the economy, including but not limited to rent control, price controls, agricultural and other subsidies, professional and business licensing, and others. Some places are more socialist than others, but these practices are in themselves socialist.

Economics may not be a science, but it is our current best understanding of how societies function, and ignoring it is the same sort of stupid wishful thinking that is Creationism and other religious beliefs.

Zachriel said...

William B Swift: My definition of socialism, as used in this quote (I sometimes use a stricter one where appropriate)is any political regulation of the economy, including but not limited to rent control, price controls, agricultural and other subsidies, professional and business licensing, and others. Some places are more socialist than others, but these practices are in themselves socialist.

Then the analogy doesn't work. The biological Theory of Evolution is a broadly applicable scientific explanatory framework. To be analogous, socialism would have to be defined as a comparable explanatory theory.

William B Swift: Economics may not be a science, but it is our current best understanding of how societies function, and ignoring it is the same sort of stupid wishful thinking that is Creationism and other religious beliefs.

Economics is a social science. Nearly all economists recognize the need for some political regulation of the economy.

William L. Anderson said...

What do you mean by "political regulation," and who does the regulating? Are you telling us that politicians are omniscient and, therefore, know exactly what kinds of regulations to employ and how to employ them?

The economic models that are used generally assume perfect knowledge among all of the actors, which is why Oskar Lange and Paul Samuelson believed that government can create a more effective economy because political actors can coerce people into doing whatever is necessary.

However, take away the perfect knowledge hypothesis and what you have are people asserting control. Furthermore, Zachriel's dictum assumes that the politicians who regulate have no self-interest whatsoever and would not try to manipulate the system to serve them and their friends. That only occurs in Wonderland.

William B Swift said...

>Nearly all economists recognize the need for some political regulation of the economy.

That is because they are human, and are letting their political/social/tribal alliances bias, or in the case of the more socialist "economists", like Krugman, completely override their knowledge. See the biologists that support ID and MDs that practice alternative medicine for similar biases.

Anonymous said...

Economics is a social science. Nearly all economists recognize the need for some political regulation of the economy.

Of course they recognize the need some political regulation. They are the ones who want jobs regulating the economy. It's paradise for them: if they fail, they can always blame the market and demand more regulation, which means more jobs for them. If they fail miserably, they can still blame the lack of regulations. It requires no reasonable thought, just politics and a bunch of math to confuse the hell out of people.

Zachriel said...

William L. Anderson: Someone cleverly sent me this link in response to my saying that Krugman never says anything about entrepreneurship. Yes, the guy is serious. He mentions the word more than four years ago, and that is "proof" that Krugman is an expert on the entrepreneur or something like that.

No, it's merely proof that this statement:

William L. Anderson: Notice a word that never appears in any of Krugman's columns; never. It is "entrepreneurship."

is incorrect.

William L. Anderson: Furthermore, Zachriel's dictum assumes that the politicians who regulate have no self-interest whatsoever and would not try to manipulate the system to serve them and their friends.

What dictum is that exactly?

burkll13 said...

Zachriel:

http://dictionary.reference.com/browse/hyperbole

everyone knows it. you look like an ass.

Roger Drinnon said...

First off, I love Krugman-in-Wonderland. I love Dr. William Anderson's work. He is easily top tier of the Austrian School along with Dr. Robert Murphy and Dr. Tom Woods. Everyone wants Murphy to challenge Krugman, but I suspect that Anderson would be his coach for the debate. No one has gotten inside Krugman's head more than Anderson. That being said, every post by Anderson is a free economics lesson. Sometimes, though, I feel that he is casting pearls at swine as many like Dune viciously attack him. Nevertheless, I encourage Anderson to keep it up. I love all of this posts. He has taught me more about Austrian apologetics (how to interact with mainstream economists) than anyone else. What he teaches has tons of practical benefits.

For all of you who are Krugman apologists, mind you all that Krugman shows utter disdain for anyone not him, including other Keynesian economists. If you want to ally yourselves with the ego trip that is Krugman so be it, but Dr. Anderson actually has a sense of sarcastic humor. His jokes are not out of animus. He does not actively insult anyone who is not 110% in lock step with him. Likewise he uses literary devices like hyperbole to convey his points. Like with Entrepreneurship, Krugman did not get his Nobel Prize in that field of economics. He in fact knows very little of the usefulness an entrepreneur has for the economy. He views things as 'industrial clusters' (sounds like a skin disease to me not an economic term).