I want to wish all of you who contribute comments to this blog a most Merry Christmas and Happy New Year, and that includes EVERYONE. Part of the fun of a blog is to have people disagree and have others disagree with them.
So, thanks to everyone who contributes, whether or be in agreement or disagreement. And the very best to all of you.
Tuesday, December 25, 2012
Monday, December 24, 2012
The Prophecy Game
If Americans today did what Israelites were commanded to do back in Bible times -- stone false prophets to death -- there would be a lot of dead economists, and that would include Paul Krugman. Krugman has been wrong in the past (claiming that if Japan borrowed and spent enough money during the 1990s, that it would come out of its economic funk, with Japan doing the former but the latter not occuring), but he also knows that a good defense is a good offense.
Thus, he centers on an editorial that is more than three years old to claim that EVERYONE who might disagree with his wisdom is a false prophet. No, he doesn't want them stoned to death, just removed from any meaningful social contact with anyone. His theme is simple: anyone who predicted that the massive expansion of the Fed's balance sheets and attempts to monetize U.S. debt and deficits would lead to an increase in interest rates is an idiot:
So, what is it? Are interest rates an effect of a bad economy, or do they ward off a bad economy? There is a problem of causality, as Krugman wants it both ways. We shall see in the coming year what actually happens. If Krugman is correct, the government's vast intervention into the economy is finally going to bear real fruit, as most sectors will rebound nicely and President Obama will have that real recovery that he deserves.
On the other hand, Krugman has been wrong before, not that he ever admits it. The Krugman paradigm is this: when the economy is depressed, government should suppress interest rates, create lots of new money, try to initiate inflation, and then borrow and spend lots of money. This will bring about a real recovery.
Since the financial crisis became painfully obvious in 2008 (and, really, more than a year before that), government has done all of these things, including bailing out banks, financial houses, and much of the domestic auto industry. The Fed's balance sheet has grown exponentially, and it seems that if nothing else, Bernanke is hellbent on making sure that no big bank goes out of business.
On the other hand, the real economy is not doing so well. If we see the kind of recovery Krugman predicts in the next four years, then Krugman will be able to claim victory, although he has a habit of claiming victory even when he is wrong. The problem is that, like most Progressives, he believes that leftist government is so magical that it can do away with the Law of Opportunity Cost by printing money.
I don't believe that economics is an "empirical" science. Instead, economic theory must submit to the laws of nature, not the laws made up by a British sexual pervert. That means a priori, and anything else is metaphysics, as far as I am concerned. So, we shall see in the end who is the false prophet.
Thus, he centers on an editorial that is more than three years old to claim that EVERYONE who might disagree with his wisdom is a false prophet. No, he doesn't want them stoned to death, just removed from any meaningful social contact with anyone. His theme is simple: anyone who predicted that the massive expansion of the Fed's balance sheets and attempts to monetize U.S. debt and deficits would lead to an increase in interest rates is an idiot:
...we cannot and will not persuade these people to reconsider their views in the light of the evidence. All we can do is stop paying attention. It’s going to be difficult, because many members of the deficit cult seem highly respectable. But they’ve been hugely, absurdly wrong for years on end, and it’s time to stop taking them seriously.Krugman points out that as long "as the economy is depressed," interest rates will remain low. Unfortunately, he wants to claim that this is a market phenomenon instead of something that is being done by Ben Bernanke, an effect of the bad economy. Yet, what should help revive the economy? You guessed it: low interest rates.
So, what is it? Are interest rates an effect of a bad economy, or do they ward off a bad economy? There is a problem of causality, as Krugman wants it both ways. We shall see in the coming year what actually happens. If Krugman is correct, the government's vast intervention into the economy is finally going to bear real fruit, as most sectors will rebound nicely and President Obama will have that real recovery that he deserves.
On the other hand, Krugman has been wrong before, not that he ever admits it. The Krugman paradigm is this: when the economy is depressed, government should suppress interest rates, create lots of new money, try to initiate inflation, and then borrow and spend lots of money. This will bring about a real recovery.
Since the financial crisis became painfully obvious in 2008 (and, really, more than a year before that), government has done all of these things, including bailing out banks, financial houses, and much of the domestic auto industry. The Fed's balance sheet has grown exponentially, and it seems that if nothing else, Bernanke is hellbent on making sure that no big bank goes out of business.
On the other hand, the real economy is not doing so well. If we see the kind of recovery Krugman predicts in the next four years, then Krugman will be able to claim victory, although he has a habit of claiming victory even when he is wrong. The problem is that, like most Progressives, he believes that leftist government is so magical that it can do away with the Law of Opportunity Cost by printing money.
I don't believe that economics is an "empirical" science. Instead, economic theory must submit to the laws of nature, not the laws made up by a British sexual pervert. That means a priori, and anything else is metaphysics, as far as I am concerned. So, we shall see in the end who is the false prophet.
Friday, December 21, 2012
On Second Thought...
I do have a brief commentary about Krugman's latest political column masquerading as Serious Economic Analysis. Like all Progressives, Paul Krugman believes that the State can create an economy by coercion. If it is ordered into being, then it is so.
Furthermore, political victories by the Democratic Party always make the economy better. That is why the economy has done so well in the past four years. (Don't forget that Democrats had absolute majorities in both houses for two years with Obama being permitted to do anything he wanted, but unemployment went up, not down.)
Of course, this notion that government can order anything into being via coercion has tragic results. In writing about the Sandy Hook massacre, Jeff Tucker writes:
Should prices be "sticky," then government can inflate, which cuts the real prices and creates prosperity, since everyone knows that printing money is the key to making us richer.
The problem is that politics generally is the enemy of prosperity. Politicians see no problem in destroying businesses and throwing sand in the gears of entrepreneurship, since the media then will be the megaphone for trumpeting the message of the politicians: See? Businesses always fail! That is why you need us to help you!
Well, Krugman, Obama definitely has won the political PR battle (given the love affair the media has with him), and he has the numbers. We shall see how this turns out. Although I do not believe that the "fiscal cliff" can throw us into recession, nonetheless it will impede the recovery, but that is OK, since in the end, the politicians will win.
Furthermore, political victories by the Democratic Party always make the economy better. That is why the economy has done so well in the past four years. (Don't forget that Democrats had absolute majorities in both houses for two years with Obama being permitted to do anything he wanted, but unemployment went up, not down.)
Of course, this notion that government can order anything into being via coercion has tragic results. In writing about the Sandy Hook massacre, Jeff Tucker writes:
In the days that followed the killing, my browser kept taking me back to a Wikipedia link about the Gun-Free School Zones Act of 1990. The law, still intact after many challenges and rewrites, reads: “It shall be unlawful for any individual knowingly to possess a firearm that has moved in or that otherwise affects interstate or foreign commerce at a place that the individual knows, or has reasonable cause to believe, is a school zone.”To put this in an economic context, Krugman actually seems to believe that if Democrats have enough political power and Barack Obama orders the economy to improve, then it will improve. Raising taxes will have no effect except to allow for more spending, and everyone knows that government spending is the key to economic recovery, as there can be no downside to expanding the government checkbook.
Guns of all sorts are banned anywhere near schools. If the government’s laws had worked, this killer would have realized that his plan was unachievable. After all, the world’s most powerful government had banned the whole idea of guns at school.
Should prices be "sticky," then government can inflate, which cuts the real prices and creates prosperity, since everyone knows that printing money is the key to making us richer.
The problem is that politics generally is the enemy of prosperity. Politicians see no problem in destroying businesses and throwing sand in the gears of entrepreneurship, since the media then will be the megaphone for trumpeting the message of the politicians: See? Businesses always fail! That is why you need us to help you!
Well, Krugman, Obama definitely has won the political PR battle (given the love affair the media has with him), and he has the numbers. We shall see how this turns out. Although I do not believe that the "fiscal cliff" can throw us into recession, nonetheless it will impede the recovery, but that is OK, since in the end, the politicians will win.
Krugman: Playing Fantasy Economics
I originally started out critiquing Paul Krugman's latest political screed, but decided, instead to defer to Bob Murphy and others. After all, unlike Krugman, Murphy is an economist.
If Krugman has a column Monday, then I will have commentary. If not, Merry Christmas, everyone!
If Krugman has a column Monday, then I will have commentary. If not, Merry Christmas, everyone!
Monday, December 17, 2012
Deficit Economics
Thirty years ago, I published an article in The Freeman entitled, "Deficits are Not the Only Problem," and in it I challenged the notion that federal budget deficits in and of themselves are the major economic problem in our society. The deficits, I argued were symptoms of the larger problem of out-of-control government expansion and the spending that accompanies that expansion.
On the surface, it seems that Paul Krugman agrees with me that the federal deficit by itself is not THE economic problem. Furthermore, I will go further and agree with him that much of the current deficit is due to the depressed state of the U.S. economy, and that a stronger economy would, in fact, provide more tax revenues from current tax rates than is now the situation.
Like always, however, I disagree vehemently with Krugman on (1) the role of federal deficits in "providing" or at least enabling economic recovery, and (2) the efficacy of government spending itself. Krugman believes that we need large deficits so that the government spending generated by them can help jump-start the economy; I believe that the very spending he believes provides overall economic benefits actually hampers economic recovery.
Krugman says that out of the current trillion-dollar deficit, about $600 billion of it is due to the depressed economy, and that the remaining $400 billion is "sustainable." (Funny, he wasn't making that claim when George W. Bush was running large deficits. Then Krugman claimed that the cut in the top income tax rate from 39.6 percent to 35 percent was causing huge economic problems and was dragging us into economic hell. Yes, a relatively small cut in tax rates was destroying the economy, which would have been a first in economic history.)
He writes:
He continues:
Yes, we are supposed to believe that things are just fine, and if President Obama is permitted to stick it to some taxpayers (with the middle class to be stuck at a future date) and spend a few billion here and there, that the economy will recover because of it. Furthermore, if the so-called Fiscal Cliff (yet another idiotic slogan from Washington that the media recites in its usual Pavlovian style) kicks into action, then the economy will tumble down the hill like Sisyphus's boulder.
Notice that this contradicts what Krugman claimed a couple of years ago when the tax cuts were supposed to expire and the government extended them. Back then, Krugman said that if it were up to him, he would allow all of the rates to go back to their pre-2003 levels and use the newfound revenues for more current spending projects. For that matter, he claimed in 2010 that even if all rates were raised, the negative effect would be minimal to the economy.
Today, he sings a different tune. If the Republicans don't give Obama everything he wants, then the Republicans will solely be responsible for plunging the economy into something akin to the Dark Ages. Why he claims that Obama's prescription for recovery -- tax, borrow, print, and spend -- will be effective it beyond my comprehension.
When George W. Bush was president, Krugman claimed over and over that the economy was moribund because Bush got Congress to cut the top rate from 39.6 percent to 35 percent, and that the marginal tax rates for everyone else were cut as well. A while back, he was claiming that these tax cuts were "unaffordable" to the tune of four trillion dollars. With Obama in the White Hosue, he has claimed that it doesn't matter how much the government borrows, since interest rates are at "historic lows" and we "owe it all to ourselves," anyway.
In other words, Krugman gives us mixed signals that on the surface seem to be confusing. There is an easy translation, however: Democrats (and especially Obama) always good, Republicans always bad. If Republican administrations borrow and spend, they are dragging us into Hades; if Democrat administrations borrow and spend, they are bringing economic recovery.
So, in his attempt to be the world's most politically-partisan economist, Paul Krugman calls for the very things that in the long run are economically destructive, but claims that if a Democrat implements those things, then the result will be prosperity. I'm not sure how all of this will take place, but I must say that following Krugman does prove to be an interesting ride.
On the surface, it seems that Paul Krugman agrees with me that the federal deficit by itself is not THE economic problem. Furthermore, I will go further and agree with him that much of the current deficit is due to the depressed state of the U.S. economy, and that a stronger economy would, in fact, provide more tax revenues from current tax rates than is now the situation.
Like always, however, I disagree vehemently with Krugman on (1) the role of federal deficits in "providing" or at least enabling economic recovery, and (2) the efficacy of government spending itself. Krugman believes that we need large deficits so that the government spending generated by them can help jump-start the economy; I believe that the very spending he believes provides overall economic benefits actually hampers economic recovery.
Krugman says that out of the current trillion-dollar deficit, about $600 billion of it is due to the depressed economy, and that the remaining $400 billion is "sustainable." (Funny, he wasn't making that claim when George W. Bush was running large deficits. Then Krugman claimed that the cut in the top income tax rate from 39.6 percent to 35 percent was causing huge economic problems and was dragging us into economic hell. Yes, a relatively small cut in tax rates was destroying the economy, which would have been a first in economic history.)
He writes:
First of all, the weakness of the economy has led directly to lower revenues; when G.D.P. falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.
Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.
Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.
He continues:
And the prospects for economic recovery are looking pretty good right now — or would be looking good if it weren’t for the political risks posed by Republican hostage-taking. Housing is reviving, consumer debt is down, employment has improved steadily among prime-age workers. Unfortunately, this recovery may well be derailed by the fiscal cliff and/or a confrontation over the debt ceiling; but this has nothing to do with the alleged unsustainability of the deficit.
Yes, we are supposed to believe that things are just fine, and if President Obama is permitted to stick it to some taxpayers (with the middle class to be stuck at a future date) and spend a few billion here and there, that the economy will recover because of it. Furthermore, if the so-called Fiscal Cliff (yet another idiotic slogan from Washington that the media recites in its usual Pavlovian style) kicks into action, then the economy will tumble down the hill like Sisyphus's boulder.
Notice that this contradicts what Krugman claimed a couple of years ago when the tax cuts were supposed to expire and the government extended them. Back then, Krugman said that if it were up to him, he would allow all of the rates to go back to their pre-2003 levels and use the newfound revenues for more current spending projects. For that matter, he claimed in 2010 that even if all rates were raised, the negative effect would be minimal to the economy.
Today, he sings a different tune. If the Republicans don't give Obama everything he wants, then the Republicans will solely be responsible for plunging the economy into something akin to the Dark Ages. Why he claims that Obama's prescription for recovery -- tax, borrow, print, and spend -- will be effective it beyond my comprehension.
When George W. Bush was president, Krugman claimed over and over that the economy was moribund because Bush got Congress to cut the top rate from 39.6 percent to 35 percent, and that the marginal tax rates for everyone else were cut as well. A while back, he was claiming that these tax cuts were "unaffordable" to the tune of four trillion dollars. With Obama in the White Hosue, he has claimed that it doesn't matter how much the government borrows, since interest rates are at "historic lows" and we "owe it all to ourselves," anyway.
In other words, Krugman gives us mixed signals that on the surface seem to be confusing. There is an easy translation, however: Democrats (and especially Obama) always good, Republicans always bad. If Republican administrations borrow and spend, they are dragging us into Hades; if Democrat administrations borrow and spend, they are bringing economic recovery.
So, in his attempt to be the world's most politically-partisan economist, Paul Krugman calls for the very things that in the long run are economically destructive, but claims that if a Democrat implements those things, then the result will be prosperity. I'm not sure how all of this will take place, but I must say that following Krugman does prove to be an interesting ride.
Friday, December 14, 2012
There is Plenty of Delusion to Go Around
Paul Krugman writes that the Republican Party is delusional, and who could disagree with him? The USA spends more on "defense" than the rest of the world put together, yet Republicans still are claiming that it is not enough. Moreover, few Republicans left in office are willing to admit that the current rates of spending by the federal government are not sustainable without massive money printing that will turn the dollar into worthless paper.
Unfortunately, the Republicans are not the only party that is defined by delusion, and the number one academic shill for the Democrats -- Krugman himself -- has penned a column that truly is breathtaking its own web of fantasies. But first his attack on the Republicans. Krugman writes:
I have no reason to doubt his claim, although one also has to understand that President Obama and the Democrats have no intention of cutting any spending of their own, so we really do have an example of the worst kind of hypocrisy in which each side's accusations against the other are nothing more than mirrors held up to themselves. In fact, Krugman seems to revel in the huge expansion of the welfare state that has occurred with the Obama presidency.
One would think this to be a problem, given the state of the economy, but Krugman has an answer: We don't need to worry about paying for all of this because we can borrow-and-print our way to prosperity. He writes:
Yep. We can just borrow and spend, and if the markets per chance won't readily accept U.S. paper in the future, then the Federal Reserve System can borrow U.S. bonds in the primary market, provided that Krugman's "clever lawyers" can find a way around the Federal Reserve Act that forbids such practices. The financial well is bottomless.
This is delusion, and it is even more delusional than anything we are hearing from Republicans, if that is possible. Yes, Krugman knows that maybe some day in the future, we might have to rein in the spending, but for now, we can pretend we are rich, and if we pretend long enough, we will become rich.
This is nothing more than the MMT nonsense that we have been hearing from James Galbraith and others, that we can take advantage of the fact that the dollar is a reserve currency, so we can print to our heart's content and beyond. It is a free pot of gold.
I don't have to say what nonsense this is. One cannot inflate the dollar forever, and the damage that is being done to the economy right now is such that we will not be able to climb out of this hole at all.
Whether the Republicans are having an "existential crisis," I don't know. However, I do know that if the U.S. Government continues to follow Krugman's advice, an existential crisis will be the least of our worries. Krugman may believe that he is so clever and so brilliant that he can find ways to circumvent the laws of economics, but those laws have a way of asserting themselves in the end.
Unfortunately, the Republicans are not the only party that is defined by delusion, and the number one academic shill for the Democrats -- Krugman himself -- has penned a column that truly is breathtaking its own web of fantasies. But first his attack on the Republicans. Krugman writes:
By all accounts, Republicans have, so far, offered almost no specifics. They claim that they’re willing to raise $800 billion in revenue by closing loopholes, but they refuse to specify which loopholes they would close; they are demanding large cuts in spending, but the specific cuts they have been willing to lay out wouldn’t come close to delivering the savings they demand..
I have no reason to doubt his claim, although one also has to understand that President Obama and the Democrats have no intention of cutting any spending of their own, so we really do have an example of the worst kind of hypocrisy in which each side's accusations against the other are nothing more than mirrors held up to themselves. In fact, Krugman seems to revel in the huge expansion of the welfare state that has occurred with the Obama presidency.
One would think this to be a problem, given the state of the economy, but Krugman has an answer: We don't need to worry about paying for all of this because we can borrow-and-print our way to prosperity. He writes:
We are not having a debt crisis.
It’s important to make this point, because I keep seeing articles about the “fiscal cliff” that do, in fact, describe it — often in the headline — as a debt crisis. But it isn’t. The U.S. government is having no trouble borrowing to cover its deficit. In fact, its borrowing costs are near historic lows.
Yep. We can just borrow and spend, and if the markets per chance won't readily accept U.S. paper in the future, then the Federal Reserve System can borrow U.S. bonds in the primary market, provided that Krugman's "clever lawyers" can find a way around the Federal Reserve Act that forbids such practices. The financial well is bottomless.
This is delusion, and it is even more delusional than anything we are hearing from Republicans, if that is possible. Yes, Krugman knows that maybe some day in the future, we might have to rein in the spending, but for now, we can pretend we are rich, and if we pretend long enough, we will become rich.
This is nothing more than the MMT nonsense that we have been hearing from James Galbraith and others, that we can take advantage of the fact that the dollar is a reserve currency, so we can print to our heart's content and beyond. It is a free pot of gold.
I don't have to say what nonsense this is. One cannot inflate the dollar forever, and the damage that is being done to the economy right now is such that we will not be able to climb out of this hole at all.
Whether the Republicans are having an "existential crisis," I don't know. However, I do know that if the U.S. Government continues to follow Krugman's advice, an existential crisis will be the least of our worries. Krugman may believe that he is so clever and so brilliant that he can find ways to circumvent the laws of economics, but those laws have a way of asserting themselves in the end.
Tuesday, December 11, 2012
Back to the Socialist Calculation Debates
This week, Paul Krugman has been arguing that in some circumstances, the mysterious path of at least some capital investment can lead to lower wages, unemployment, and general misery. Furthermore, if the economy is not in "perfect competition," then a lot of the advantages of capital development are lost.
Likewise, he is arguing, at least some capital development can lead to monopoly in which capital is receiving large rents at the expense of workers and everyone else. There are a few things to remember as one goes through these two Krugman posts that he is not pointing out, yet do have significance.
These are interesting arguments, and they bring us back to the Socialist Calculation Debates that took place in the 1930s and 40s between socialists like Oskar Lange and Ludwig von Mises and Friedrich A. Hayek.
The first is that there is no such thing as an "aggregate production function." I remember several years ago attending a Paul Craig Roberts lecture in which he was arguing that if capital could move beyond national borders, then factors would revert to "absolute advantage," and one country would produce everything and make everyone else poorer. The disappearance of comparative advantage, of course, would mean that the Law of Opportunity Cost would also disappear, since comparative advantage is built upon the idea that there always is opportunity cost in producing anything.
He "proved" his point by using aggregate production functions, i.e. "Britain has this production function" and "China has THIS production function," and so on. That is nonsense. An attempt to aggregate something like numerous productions functions within an economy into One Big Function truly has no meaning; it is a fictitious concept like "aggregate demand" or "aggregate supply." In reality, one cannot reproduce any of these things. (Yeah, I know. This last statement will send the Keynesians into a frenzy.)
The second thing is Krugman's idea of "perfect competition" being some sort of Holy Condition. Remember that the assumptions necessary for "perfect competition" include perfect homogeneity of goods produced within an industry and small-scale capital, not to mention all firms being tiny and having no effect upon the overall supply of goods within a particular market.
Even the idea of homogeneity being the necessary ingredient for "competition" is laughable on its face. This kind of perfect homogeneity is not a basis for competition at all, but rather a basis for no competition, for if every good is exactly the same, an important mechanism for choice disappears and an economy then simply becomes little more than an exercise in randomness.
More important, socialists have argued that heterogeneity of goods then leads to inefficiency and "spatial monopolies" (to quote Joan Robinson). However, the concept of "efficiency" that Robinson and others were promoting (and I suppose Krugman believes it, too) is mathematical, not economic. The entire platform upon which these ideas are built is that everything discussed follows functions that are smooth, continuous, and twice-differentiable. While I have no problem with creating mathematical functions to use in parallel models to explain some aspects of an economy, the idea that an economy MUST follow exactly the constructs of mathematical models or it is creating great harm and must be smashed by the state is ludicrous.
It is obvious, then, that the entrepreneur in this whole Brave New Economy is a parasite, someone who disturbs the Holy Production Function, and creates heterogeneity, which then takes the economy down the Path of Perdition. There is a problem here that Krugman and others cannot answer: Why were the socialist economies of the U.S.S.R. and its satellites much more primitive than the economies of the "monopolistic" capitalists when the Soviet Union collapsed in 1991?
After all, the aggregate planning mechanism of the socialist world followed what Robinson, Lange, and others claimed would create "efficiency." Lange argued that if planners had access to (1) production functions and (2) prices of goods (which could be found on financial pages in western newspapers), then planning an economy was as easy as solving a whole slew of simultaneous equations.
In fact, the Soviets were very good at solving these equations. As my math econ professor in grad school put it, the Soviets created a number of advancements in using matrices to solve these equations. However, he added, "It didn't do the economies any good."
Krugman, in trying to explain why corporate profits might be high at a time of high unemployment, simply reverts to the arguments used by Lange and Robinson and others: the U.S. economy is not in "perfect competition," monopolies abound everywhere, and the capitalists have managed to create aggregate production functions that don't benefit the workers, only the capitalists.
Salvation, in this view, lies in the omniscience of the monopolistic state. Yes, that huge monopoly known as government also contains the Very Secrets of how to create the perfectly-competitive economy that always operates at the point of efficiency. Bureaucrats and elite academic economists can collaborate to impose efficiency because they know exactly where the points of efficiency exist and they have the wisdom and foresight to move us to that point of Nirvana.
Krugman always is lambasting "faith-based" economics. I would contend that the economics of Paul Krugman requires the kind of religious faith that is not found in even the most fundamentalistic aspects of any religion. In the end, we get Faith-Based Keynesianism.
(To further demonstrate the whole idiocy of the Soviet economy, here is the link to a video on some of the automotive masterpieces produced by the Soviets back in the days when Paradise ruled.)
Likewise, he is arguing, at least some capital development can lead to monopoly in which capital is receiving large rents at the expense of workers and everyone else. There are a few things to remember as one goes through these two Krugman posts that he is not pointing out, yet do have significance.
These are interesting arguments, and they bring us back to the Socialist Calculation Debates that took place in the 1930s and 40s between socialists like Oskar Lange and Ludwig von Mises and Friedrich A. Hayek.
The first is that there is no such thing as an "aggregate production function." I remember several years ago attending a Paul Craig Roberts lecture in which he was arguing that if capital could move beyond national borders, then factors would revert to "absolute advantage," and one country would produce everything and make everyone else poorer. The disappearance of comparative advantage, of course, would mean that the Law of Opportunity Cost would also disappear, since comparative advantage is built upon the idea that there always is opportunity cost in producing anything.
He "proved" his point by using aggregate production functions, i.e. "Britain has this production function" and "China has THIS production function," and so on. That is nonsense. An attempt to aggregate something like numerous productions functions within an economy into One Big Function truly has no meaning; it is a fictitious concept like "aggregate demand" or "aggregate supply." In reality, one cannot reproduce any of these things. (Yeah, I know. This last statement will send the Keynesians into a frenzy.)
The second thing is Krugman's idea of "perfect competition" being some sort of Holy Condition. Remember that the assumptions necessary for "perfect competition" include perfect homogeneity of goods produced within an industry and small-scale capital, not to mention all firms being tiny and having no effect upon the overall supply of goods within a particular market.
Even the idea of homogeneity being the necessary ingredient for "competition" is laughable on its face. This kind of perfect homogeneity is not a basis for competition at all, but rather a basis for no competition, for if every good is exactly the same, an important mechanism for choice disappears and an economy then simply becomes little more than an exercise in randomness.
More important, socialists have argued that heterogeneity of goods then leads to inefficiency and "spatial monopolies" (to quote Joan Robinson). However, the concept of "efficiency" that Robinson and others were promoting (and I suppose Krugman believes it, too) is mathematical, not economic. The entire platform upon which these ideas are built is that everything discussed follows functions that are smooth, continuous, and twice-differentiable. While I have no problem with creating mathematical functions to use in parallel models to explain some aspects of an economy, the idea that an economy MUST follow exactly the constructs of mathematical models or it is creating great harm and must be smashed by the state is ludicrous.
It is obvious, then, that the entrepreneur in this whole Brave New Economy is a parasite, someone who disturbs the Holy Production Function, and creates heterogeneity, which then takes the economy down the Path of Perdition. There is a problem here that Krugman and others cannot answer: Why were the socialist economies of the U.S.S.R. and its satellites much more primitive than the economies of the "monopolistic" capitalists when the Soviet Union collapsed in 1991?
After all, the aggregate planning mechanism of the socialist world followed what Robinson, Lange, and others claimed would create "efficiency." Lange argued that if planners had access to (1) production functions and (2) prices of goods (which could be found on financial pages in western newspapers), then planning an economy was as easy as solving a whole slew of simultaneous equations.
In fact, the Soviets were very good at solving these equations. As my math econ professor in grad school put it, the Soviets created a number of advancements in using matrices to solve these equations. However, he added, "It didn't do the economies any good."
Krugman, in trying to explain why corporate profits might be high at a time of high unemployment, simply reverts to the arguments used by Lange and Robinson and others: the U.S. economy is not in "perfect competition," monopolies abound everywhere, and the capitalists have managed to create aggregate production functions that don't benefit the workers, only the capitalists.
Salvation, in this view, lies in the omniscience of the monopolistic state. Yes, that huge monopoly known as government also contains the Very Secrets of how to create the perfectly-competitive economy that always operates at the point of efficiency. Bureaucrats and elite academic economists can collaborate to impose efficiency because they know exactly where the points of efficiency exist and they have the wisdom and foresight to move us to that point of Nirvana.
Krugman always is lambasting "faith-based" economics. I would contend that the economics of Paul Krugman requires the kind of religious faith that is not found in even the most fundamentalistic aspects of any religion. In the end, we get Faith-Based Keynesianism.
(To further demonstrate the whole idiocy of the Soviet economy, here is the link to a video on some of the automotive masterpieces produced by the Soviets back in the days when Paradise ruled.)
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