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.

Krugman's Great Illusion

Paul Krugman is in Spain this week, most likely telling the Spaniards what they want to hear: The European Central Bank can end the country's unemployment miseries painlessly by buying near-unlimited amounts of Spain's government bonds and then floating massive amounts of new euros around the world. Yes, for the umpteenth time, Krugman insists that if Europeans print money and spend it as though they are rich -- they can become rich!

Once upon a time, Krugman would have been classified as a "crank," someone who believes that wealth is cranked up on printing presses. Today, he is seen as a prophet, a "lonely voice" crying in the wilderness with the message that economic salvation is easy. Repent and be baptized in a flood of inflation, and all will be well.

He uses the analogy of Norman Angell's 1910 book, The Great Illusion, in which Angell claimed that because of the economic advances that had been made up to then, nations plundering nations via wars no longer seemed necessary:

Trade and industry, he pointed out, not the exploitation of subject peoples, were the keys to national wealth, so there was nothing to be gained from the vast costs of military conquest.

Moreover, he argued that mankind was beginning to appreciate this reality, that the “passions of patriotism” were rapidly declining. He didn’t actually say that there would be no more major wars, but he did give that impression. 

We all know what came next. 

Krugman then claims he knows the REAL lessons to be garnered in modern times. (No, it is not the lesson that wars are utterly destructive. After all, "Military Keynesianism" makes us rich, right?) It is that government hubris keeps governments from borrowing and spending as though they had the resources to do it:

The point is that the prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster. And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious.

 And what is that "obvious" lesson?

It comes as something of a shock, even for those of us who have been following the story all along, to realize that more than two years have passed since European leaders committed themselves to their current economic strategy — a strategy based on the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems of debtor nations. In all that time the strategy has produced no success stories; the best the defenders of orthodoxy can do is point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis.

Meanwhile the euro’s crisis has metastasized, spreading from Greece to the far larger economies of Spain and Italy, and Europe as a whole is clearly sliding back into recession. Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all.

One would think from that statement that European governments had massively cut back spending and allowed entrepreneurs to pursue profitable lines of production without the kind of government interference for which European governments have been famous. Think again.

No, the past four years have been characterized by governments expanding their regulatory and tax reaches, along with the massive implementations of "security" measures and other mechanisms of state power. The "austerity" programs also have brought huge tax increases and efforts by governments to stop the free flow of capital and trade. In other words, governments have used the financial crises to increase the power of governments.

To read Krugman over the past few years, one would think that the U.S. and European governments have embarked on a large-scale experiment in free markets, free trade, and measures to lesson the impact and burden of the Warfare-Welfare State, and have been the epitome of fiscal and monetary restraint. That hardly is the case.

What is needed? Once again, Dr. Krugman offers his advice to governments: pretend that you are rich and borrow and spend as though there is no tomorrow.

What would it really take to save Europe’s single currency? The answer, almost surely, would have to involve both large purchases of government bonds by the central bank, and a declared willingness by that central bank to accept a somewhat higher rate of inflation. Even with these policies, much of Europe would face the prospect of years of very high unemployment. But at least there would be a visible route to recovery.

Yes, another Krugman howler. We are supposed to believe that governments need to suck up the "courage" to borrow, print, tax, and spend on a level never seen before outside world wars. This brings the obvious question to mind: Since when did governments ever have to employ "courage" in order to do these things?

No, governments do them as a matter of course. The euro was supposed to impose a certain amount of fiscal discipline of the governments of the member states, just as the U.S. Dollar is supposed to have similar effects upon state governments. Yet, what have we seen over the last decade? I can tell you that "fiscal discipline" has not exactly been the watchword of the U.S. Government, the U.S. states, and European states.

Being that he is a good Keynesian, fiscal "discipline" is the last thing that Paul Krugman ever would want to see in government. Anyone who claims that the USA still is in depression because state governments are not spending enough money is not someone who has a handle on the reality of the current situation.

Governments -- and central banks -- do not create wealth on their own. They confiscate the wealth produced by individuals and then transfer it to others. Yes, I admit that roads and bridges can help create wealth, provided they are located in places other than the furthest reaches of "Nowhere," but the funding for those projects still must be garnered via confiscation of wealth created by others. 

(Keynesians can claim "social contract" or anything else, but taxes are a confiscation of wealth. One can argue whether or not they are "proper" confiscations, but nonetheless they are taken from people via threats. That is, unless one actually believes that the IRS never uses coercion and implied threats along with outright brutality to take money.)

I'm sure that Krugman's message will be well-received in Spain, and I am sure that he will not mention how Spain's very strict employment laws (it pretty much is impossible to fire workers, no matter how unproductive they might be) contribute mightily to that country's high-unemployment rate. Instead, he will claim that the only thing that is needed is for the other European states -- and especially Germany -- to understand that the economic version of "Hair of the Dog" is the True Pathway to Recovery.

To be sure, Krugman's scheme will not create new wealth, nor will it help economies move toward those structures of production that are sustainable. After all, Krugman is a graduate of MIT, a program made famous by Paul Samuelson and his belief that a doctrine of "Schmoo Capital" really would be appropriate for setting up working models to describe the economy.

What Krugman really is endorsing, however, is not creation of wealth or allowing entrepreneurs to move resources from lower-valued to higher-valued uses. No, what he is saying is that the Germans, the Dutch, and others in the European Union should be forced to transfer massive amounts of resources from their countries to Spain, which then will use those resources in a way that will frustrate the creation of new wealth, with the whole scheme masked by central bank borrowing and essentially the printing of money.

That this scheme actually will result in widespread prosperity is a huge illusion, but in desperate times, people especially buy into that kind of mental deception. However, it is Krugman who is delusional, for he really wants us to believe that the answer to our economic needs is for governments to spend recklessly, borrow, and print, something that governments have done as long as governments have been in existence.

Krugman wants us to believe that preparation for an imagined invasion of "space aliens" would bring back prosperity. One only can wonder if he can sell the Europeans on the same kind of scheme. Maybe there really is enough illusion to go around, after all.

The Inflation Prisoner

About 30 years ago, I read a book by Irwin Schiff (yes, THAT Irwin Schiff) called The Biggest Con in which he exposed Keynesian economics and declaring that the only "arrow in the quiver" of Keynesianism was inflation. As I read Paul Krugman's column today on Spain and its problems, I can see that if Krugman is the most public spokesman today for Keynesian thinking, then Schiff was correct. Let me begin.

In The General Theory, John Maynard Keynes argues that the standard supply-demand wage theory holds only if there is full employment of labor. However, if there is widespread unemployment, the way to get labor back to full-employment levels is to sneak in a general wage cut via inflation. Keynes writes:

...it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school. (Emphasis mine)

I believe that the concepts shown in this paragraph really are at the heart of Krugman's column today in which he says that Spain easily could get out of its present situation if it had its own currency and could engage in a devaluation which, in his view, would establish something close to full employment and boost Spanish exports. He writes:

Now what? If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors.

And internal devaluation is an ugly affair. For one thing, it’s slow: it normally take years of high unemployment to push wages down. Beyond that, falling wages mean falling incomes, while debt stays the same. So internal devaluation worsens the private sector’s debt problems.

What all this means for Spain is very poor economic prospects over the next few years. America’s recovery has been disappointing, especially in terms of jobs — but at least we’ve seen some growth, with real G.D.P. more or less back to its pre-crisis peak, and we can reasonably expect future growth to help bring our deficit under control. Spain, on the other hand, hasn’t recovered at all. And the lack of recovery translates into fears about Spain’s fiscal future.

Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency? Will it? The answer to both questions is, probably not. Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway — which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain — it’s hard to see any Spanish government taking the risk of “de-euroizing.”

The concept is strikingly similar to what Keynes wrote, although Krugman also exposes his own biases of aggregation in this column. After all, what happens when a government devaluates the currency? There is a cut in real wages, and while the goods denominated in that currency become cheaper relative to goods made elsewhere, nonetheless people at home do suffer a fall in their standard of living.

Like Keynes, Krugman argues that what he calls an "internal devaluation" is bad because real wages are cut and people can see firsthand that they are making less, and in countries like Spain that are dominated by labor unions, that spells trouble. However, an inflation-led "wage cut" tends to be less visible or less clear, even if the same thing, relatively speaking, is accomplished.

However, all of this assumes that the effects of inflation are exactly the same as a cut in wages and government spending. (Actually, Krugman believes that inflation is superior because, in his view, people spend more in the short term, which he claims gives an economy "traction," enabling it to move forward on its own.) According to Krugman, or at least what I ascertain through his columns, inflation does not distort the structures of production nor cause any internal dislocations.

This last point is important, because one can have such a view ONLY if factors of production are homogeneous. However, if there are malinvestments that come about through inflation, and these malinvestments over time become unsustainable, then there is a problem.

In a nutshell, that is a huge difference between Austrians and Keynesians. While the devaluation of which Krugman speaks might have some "good effects" at first, nonetheless, this "solution" only exacerbates the long-term problem. For example, within an economy, the wages that tend to be out-of-kilter with the rest of the economy often are centered in unionized industries, and when inflation hits, those sectors tend to be able to force employers (and the government, since these countries have powerful public sector unions) to give raises that better keep up with inflation than workers who either are not unionized or have weak or non-existent political connections.

Thus, the internal distortions are likely to grow. In countries like Spain, Greece, and Portugal, the very sectors that are bloated and are gobbling up resources are the government sectors. A bout of inflation in the long run then would further empower those very employment groups that are most responsible for the current trouble.

To a Keynesian like Krugman, none of this matters, as all sectors are homogeneous and there is no such thing as economic distortion. The only thing that matters are aggregate numbers, as economics to him is nothing more than charts, numbers, and aggregations. To "cure" an economy, give it a bout of inflation, and when the inevitable problem arise, deal with them via another bout of inflation.

When things deteriorate -- as they surely will -- then one blames the "greedy" corporations which, in the view of someone like Krugman, need to be reined in by activist government. All that is needed is to find the "Goldstein," demonize, rage on, and then inflate some more. In the end, THAT is the "Krugman solution."