Friday, December 28, 2012

Krugman: Capital Stalls Economic Growth and Creates Inequality

One of the differences between mainstream Keynesian (and neoclassical) economists and the Austrians is the view that both sides have of capital. On the Keynesian-socialist side, capital is useful mostly in the spending that is done in capital creation, and future capital improvements and repairs are useful only if these things require more spending.

Before going further, I need to emphasize that Austrians do not endorse all capital expansion, as we do see expansion based upon aggressive efforts by the government via the Fed pushing down interest rates or the government offering all sorts of subsidies and tax benefits (see "green energy") as promoting malinvestment. Since Keynesians such as Krugman do not recognize malinvestment as an economic issue (except for rare times when they think it might aid their arguments, and even then they will not use malinvestment as an economic term), they can endorse things like the massive subsidies for "green energy," since those sectors allegedly "create jobs."

If one ignores the Law of Opportunity Cost, then "green energy" is a great investment. Except, as the Wall Street Journal recently pointed out in an editorial, the Algore Sector of the economy is a disaster, an investor's version of the black hole. If Paul Krugman is interested in the relationship between capital formation and inequality, he need look no further that what has happened to the economic sector that President Barack Obama promised would lead us out of the economic downturn. Time and again we see the government transferring wealth to those who already are wealthy via this unjustified program of capital malinvestment.

(Al Gore, by the way, has managed to become fabulously wealthy living off these taxpayer subsidies while the investors who have helped provide the up-front money that he pockets have taken a financial bath. That is a story for another time and another posting, but I do find it instructive that Krugman never has gone after Gore the way that he has gone after people who actually might be productive.)

So it is today that Krugman takes on the capital bogey, first repeating (with some skepticism) yet another version of David Ricardo's pessimistic "steady state" plateau to be reached at an unnamed time. Ricardo's insistence of decreasing marginal returns to capital is there, as well as the view that at some point, capital formation will run into the proverbial brick wall. To his credit, Krugman disagrees, although not for the right reasons.

For Krugman, growth occurs only if government spending increases. One should not forget his preposterous claim that the recovery was faltering because state government spending was not rising at rates comparable to previous economic recoveries. (It never occurs to Krugman that because states must balance their budgets, they are heavily dependent upon real economic growth from private firms, so if anything, the financial problems in states and municipalities should be the "canary in the coal mine" warning that maybe Obama's policies are not promoting growth.)

Krugman then lets loose with this gem:
So machines may soon be ready to perform many tasks that currently require large amounts of human labor. This will mean rapid productivity growth and, therefore, high overall economic growth.

But — and this is the crucial question — who will benefit from that growth? Unfortunately, it’s all too easy to make the case that most Americans will be left behind, because smart machines will end up devaluing the contribution of workers, including highly skilled workers whose skills suddenly become redundant. The point is that there’s good reason to believe that the conventional wisdom embodied in long-run budget projections — projections that shape almost every aspect of current policy discussion — is all wrong.
Yeah, it is capital creating mass unemployment across the economy just as capital is responsible for the high cost of medical care. True, if it is malinvested capital, then in the long term, the malinvestments direct investment away from truly productive uses, and after the inevitable bust occurs, we see unemployment rising.

On the subject of "inequality," Krugman is insinuating that unless government steps in to limit investment returns to capital, then those returns will enrich some, but at the expense of others. Thus, Krugman reasons, capital that actually might be profitable in a market setting actually helps to create poverty. This is an amazing conclusion, but then we live in amazing time.

Krugman does not address the fact that maybe, just maybe, people purchase goods because they believe use of those goods will make themselves better off. In other words, he recognizes only the returns to investors as having anything to do with economics, while the actual uses of these goods and their economic effects either are ignored or are devalued.

During the 1930s, the New Dealers that Krugman so often praises claimed that the economy was in depression in part because ours was a "mature economy." I remember reading a 1980 Daniel Patrick Moynihan newsletter in which he made essentially the same claim. If that really were true, then I would challenge readers to go back to those eras and see who has a higher standard of living, Americans then or Americans now.

One one last point, Krugman continually claims that our present policies are starving Washington of wealth and that Washington really is on an "austerity" plan. If that is true, then why is the economy of the D.C. area booming at a time when the economy elsewhere is stagnant? Seven of the top 10 wealthiest counties either are contiguous to D.C. or are contiguous to counties that touch the D.C. borders, and the pattern continues. But if D.C. is booming, then why is the rest of the country doing poorly?

20 comments:

Anonymous said...

Think of the sad fate of all those buggy whip artisans and housepainters with brushes. I fear for humanity.

Anonymous said...

Thank you for this article. I have always thought that Krugman was full of it. But like so many misguided people he is touted as a real thinker in the MSM. I am assuming that people like being led by the blind.
It is very typical that the Keynesians don't offer any real explanation of economics because if they did they woudl A) lose funding and B) they would start a revolution in this country. So they don't offer any real solutions and say "we don't really understand why the economy works the way it does."
Which leads me to my last thought, my brother in law is an engineer and he become an Austrian economics believer because of it. He is extremely logical and he took an economics course in college and didn't get the answers he wanted so he sought out a new theory (which wasn't really new). He discovered Smith and Hayek and real answers. It's just sad that he had to discover it on his own and wasn't just taught it in school.
I really like your blog and please keep up the good work.
-John Elliott

Pulverized Concepts said...

In 1505 Duke George of Saxony probably wouldn't have been able to predict the steam engine, internal combustion engines, electricity, or even Lady Gaga. He had no reason to believe that eventually Leipzig would become the hub of an international air transport company after being held hostage by totalitarian barbarians from the east. He probably had no idea that the descendants of his subjects would daily march into factories for the reward of fiat money. Nobody knew that. Yet today poseurs like those in the CBO, and Paul Krugman, make predictions based on a continuation of the present and the recent past. These predictions are easier to make when their own money isn't involved.

Malinvestment, the commitment of capital to projects with an ultimately negative return, not only bankrupts the present but also is a burden to the future. It's arrogance in high heels and fishnet stockings to assume that future humans will be unable to find solutions to their own problems and that we must provide these folks with the blueprint for their own lives.

Anonymous said...

I can only attribute Krugman's attitudes to insanity.

I can't think of any other way to put it. No sugar coating it with disagreements about political and economic philosophy. It's sheer madness. Even in the dark days of of the USSR or Mao China even the most dictatorial and control loving of the leadership recognized that innovation and modernization was desirable.

In modern America the commandment is "Tho shall not create. Tho shall not build." Somehow destruction and waste will propel us to wealth and greatness.

I haven't read too much of Keynes, but from what I've seen he never directed any true hate to those that create. I never saw him curse the farmer for harvesting crops or the machinist for making parts.

We see plenty of that now. The farmer makes you hungry. The architect leaves you homeless. I'd call it a cult of anti-industrialization. The way back is the way forward.

I'll never understand why such stupidity isn't laughed off the stage.

Struggling Tenant said...

The idea that more productive or innovative capital goods reduces employment is a fallacy that Henry Hazlitt refuted in 1946 in Economics in One Lesson. Specifically, in Chapter 7, "The Curse of Machinery". He refers to how pin making machines enabled workers to go from making 240 pins a day to 4800 pins a day. This should bring employment in the pin making industry to near zero if machines really create unemployment. Perhaps the technophobes were right, and we should have stopped new capital formation around the time of Adam Smith.

This is like Economics 101. Anyone want to send Krugman a copy of Hazlitt's one lesson?

Anonymous said...

Professor, you would do well to read chapter 16 of Keynes famous book- its entirely about capital development and long-term growth.

Your suggestion that in Keynes economics is only useful due to spending is a silly strawman.

Dinero said...

Woah its P Krugman on the Luddite theme again (preveious 9 Dec)

contrary to his pessimism increased productivity decreases the costs of the workers purchases to there advantage.

There is however an industrial economy issue, as jobs are a mechanism of income to the individual while at the same time the main point of progress is to reduce the need for toil.

- Mr Anderson

what definition of capital do you use cash - savings, cedit , or tools to use for production

Anonymous said...

"the main point of progress is to reduce the need for toil."

According to whom is this the "main point of progress"?

Do you mean all endeavor, or manual endeavor? If the former, are you seriously saying that the main point of progress is to eliminate productive work? And, if so, wouldn't that make your statement the equivalent of "the main point of progress is to reduce the need for progress"?

Dinero said...



well to rephrase-

There is however an industrial economy issue, as jobs are a mechanism of income to the individual while at the same time the main point of progress is to reduce the need for toil and the destruction of those very same jobs.

Anonymous said...

read chapter 16

By all means, immerse yourself in Chapter 16 [http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch16.htm] of the General Theory. You'll learn why savings depress economic development and are inferior to consumption.

Including this gem that underlies all the "stimulus" spending in the decades after: "'To dig holes in the ground,' paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services."

Interest and return on capital, according to Keynes, beyond some modest amount, is theft; if only the rentier class, the money-lenders and capitalists can be eliminated or, at least, reined-in, full employment and a static society can be maintained.

Keynes stands "conventional" economics on its head--or so his apologists imagine--with a mind-numbing succession of run-on rhetoric. The longer the sentences, the fatter the piled up compound clauses, the greater the insights. Such a stylist! No wonder hardly anyone actually reads the General Theory, but depends on the exegeses of Samuelson etc.

Keynes set out to provide a rationale for total but indirect state control of the economy. Labour writer and politician John Strachey gets to the heart of the matter:

"the positive part of Keynes’ work was a demand that capitalism should now be regulated and controlled by a central authority….. The principal instruments of its policy should be variations of the rate of interest, budgetary deficits and surpluses, public works and a redistribution of personal incomes in the equalitarian direction.[sic] This positive side of Keynes’ work requires an authority to do the regulating and that authority can be, in contemporary conditions, nothing else but the government of a nation-state. http://www.keynesatharvard.org/book/KeynesatHarvard-ch05.html

In the final analysis, Keynes was a socialist and a monetary crank for whom economics was a means to an end. Krugman carries on that great tradition. (Being a handmaiden of the State also pays pretty well.)

William L. Anderson said...

Well, 12:44, you definitely rock! Thanks for the comments.

Bala said...

I have a lot to thank 12:44 for. I just took the link he gave and what did I find in the first few lines of that link but this gem!!!!

"AN act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand."

WOW! So saving is not a deferral of consumption. Unbelievable! Right there, I have enough reason to conclude that the entire chapter is utter, unadulterated nonsense. Now I see all the more why whatever-Keynesianism is nothing but drivel.

Anonymous said...

Latest Greg Mankiw New York Times column. I thought this would be interesting to share.

http://www.nytimes.com/2012/12/30/business/on-middle-class-tax-rates-too-much-wishful-thinking.html?smid=pl-share&_r=0

Bala said...

Thanks, Anonymous 5:48. That was an interesting read indeed.

Really, Tom Friedman? said...

Oookay, so explain this:

Compensation of Employees: Wages & Salary Accruals (WASCUR)/Gross Domestic Product, 1 Decimal (GDP)

Worthy innovators finding new uses for all that accumulated capital no doubt?

Anonymous said...

Insanity?! No! Greed is more like it, as he knows he's a tool for the power holders but wants all the fame and fortune that goes with being the economic mouth-piece for them.

Dinero said...

Notewothy that here PK assosiates those previose periods of lower economic activity as the appropriate result of volantary human action at the time rather than treating them all as Keynsian malfunctions

Bob Robertson said...

I've read this "technological unemployment" fallacy everywhere, from Jack Chalker science fiction to Paul Krugman to the Zeitgeist idiots, and yet none of them will say what the "optimal" tech level is. They're so certain that if machines are super productive that no one will have jobs (so no one will have any income and so no one will be able to buy the production), yet try to pin them down and all there is is "It will happen! It's all Capitalism's fault!"

Scott D said...

@Bob Robertson

Oh, God. The Zeitgeist idiots. I like to check on those guys every now and then when I need a good laugh.

Fearsome Pirate said...

I'm not sure it's even right to call Krugman a "Keynesian" any more. Greg Mankiw's an actual Keynesian, i.e., one who actually publishes scholarly articles, and you won't find him saying anything quite so idiotic as "machines cause poverty." In fact, with that kind of nonsense, Krugman's gone over the line from Keynesian to Marxist.