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.

Folly and "Financial Reform", Part I

In my review in the Freeman of Paul Krugman's The Return of Depression Economics and the Crisis of 2008 (a book that I am requiring for my MBA students this spring) I noted that he made some insightful observations and comments. However, I continued, he then draws all of the wrong conclusions:

...alas, in the end Krugman resorts to the arguments of the great economic cranks of history, from Silvio Gesell to John Maynard Keynes. He’s like the mechanic who expertly describes a problem with your fuel pump—then insists your car needs more gas. If the tank is full, he tells you to attach an auxiliary tank.

In other words, Krugman is still the one-trick pony featured in the Times. Whatever the problem, his solution is always the same: inflation.

Thus it is today with his column on financial reform.Krugman correctly notes that the financial sector took risks that clearly were out-of-bounds, yet they also understood that the government had their backs. All of us can agree on that point, but the next question is where we part: Now that the financial meltdown has happened, what should we do about it?

Austrian economists like me believe that we need to move entirely away from a financial sector backed up by the printing presses of the U.S. Government and the monetary manipulations of the Federal Reserve System. Such a system always is doomed to failure because the symbiotic relationship between the financial sector and government is inevitable when government agents can descend on that sector and overnight change outcomes.

(The predations of Elliot Spitzer and Rudy Giuliani come to mind. While both men were effusively praised by Krugman's NYT employer, Wall Street got the message and gave both men massive amounts of campaign contributions. Like Willie Sutton, politicians know they can raid Wall Street because "that's where the money is.")

Krugman, on the other hand, approaches financial regulation from this point: Democrats always good, Republicans always bad. Democrats want wise regulation, Republicans want wild speculation. Now, that is something I expect to hear from political hacks or from Keith Olbermann, not to mention the editorial writers and columnists at the NYT.

I don't expect a decorated economist like Krugman to give in to this simplistic hackdom, and that is what he is doing, like it or not. Furthermore, he gives a skewed history of the rise of what he and others call the "shadow banking system."

In Krugman's history, the tightly-regulated banking system was almost impervious to failure because regulators kept it from going after Big Risks. Unfortunately, those bad free-market ideologues both created a shadow system and then bamboozled the Wise Government to deregulate the banking system, ultimately leading to the present crisis. That is a history that plays well to both his audience and the current crop of politicians in power.

As I said before, I expect to hear such nonsense from the Usual Suspects, just as I expect Ann Coulter to claim that Barack Obama is not pursuing Big, Bad Muslims around the globe with enough ferocity (and, thus, adding further to our government's financial bankruptcy). However, as economists have noted for decades, the real story of regulation is much more nuanced and requires for people not to give into partisan diatribes.

What Krugman does not tell us is that by 1980, the small, wonderful banking system was in crisis in no small part because of the regulation Krugman praises. Regulators operate according to a set of incentives in which they receive no credit for "picking winners" but are in hot water if they allow actions that result in failure. Therefore, the default for regulators always will be "no."

Ever hear of MCI? Of Borders Bookstore? Of McCaw (now AT&T) Cellular? Of CNN? Of fiber-optics and a thousand other high-technology initiatives? The reason you have heard of them has been that "shadow banking system" that Krugman condemns. The heavily-regulated banking system would not touch them because these were new ventures that were outside of the usual kinds of things (like government bonds) that banks were permitted to help finance.

Like the entrepreneurs in Elizabethan England who set up shop outside London (because the Queen had granted monopolies in that city to her favored people), something noted by economists Robert Ekelund and Robert Tollison in their book Politicized Economies, the shadow financial system grew precisely because it allowed investors to pursue profitable opportunities that the regulated banking system could not.

Furthermore, the "tightly-regulated" banking system, which really was more of a regulated cartel, was losing capital. Part of the regulatory deal was that government would limit the risk the system could take, but it also would place ceilings on interest rates the banks could offer. At a time when inflation was in double-digits, but banks only could pay depositors something in the range of 6 percent, people flocked to money market accounts being offered by financial entrepreneurs that were relatively safe but also paid higher interest rates.

Like the entrepreneurs who broke down the Mercantilist regulatory system of post-Renaissance England simply by locating elsewhere, the financial entrepreneurs like Michael Milken helped to finance what would be our economic future for two decades. Of course, the established financial firms on Wall Street that were being left out of the action did not like upstarts like Milken, and so Rudy Giuliani did their dirty work, urged on by the NY Times and others.

(By the way, Milken was a liberal Democrat and hardly falls into the category of the "free-market, Republican ideologue" so demonized by Krugman and others. In other words, Milken did not fit the stock profile, but nonetheless was pushed into that false category anyway.)

The background being set, in Part II, I will look at Krugman's current statements and point out why they are wildly untrue and misleading.