Monday, March 15, 2010

Fable of the Krugman

While Paul Krugman likes to present himself as being a Keynesian, in reality, his intellectual roots run back a few centuries to the Mercantilists. If you wish to see the Krugman of 300 years ago, read Bernard Mandeville's "The Fable of the Bees," first published in 1705, to see all of the same economic (and logical) fallacies that haunt Keynesianism and Krugman's columns.

Do you want the "paradox of thrift"? You can find it there. There is "underconsumption" and the emphasis upon spending that has not changed in three centuries, at least when one reads Krugman's columns.

In his column, "Taking on China," Krugman takes his Mercantilist arguments to a new high (or low, which might be more appropriate), blaming, yes, China for the continuing economic depression in the rest of the world. It seems that China has been undervaluing its currency, the renminbi, and that forces the rest of the world into that infamous "liquidity trap." Here is Krugman in his own words:’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
To understand Krugman's logic, first you must turn economic logic upside down. By undervaluing its currency, China is following a policy of exports first, and in the process is amassing a lot of foreign reserves in the process. This, by the way, was the very kind of practice that Adam Smith and other Classical economists railed against, as they successfully argued that such artificial trade restrictions made their own people poorer.

Furthermore, China has been building a huge surplus denominated in fiat currencies from abroad, mostly the U.S. Dollar. However, Ben Bernanke and soon-to-be-his-partner-in-crime Janet Yellen are willing to turn the dollar into worthless paper that cannot compete with the infamous German Mark of 1923, not to mention the fading Euro and Lord knows what else. Maybe we can throw some Bolivian money in the mix and some Argentine Pesos from the Age of Juan Peron.

By pursuing this action, Chinese producers indeed are able to sell their goods more cheaply abroad than are Americans. This much is true. Conversely, this also means that China is willing to ship real wealth overseas and accept our worthless green pieces of paper in return. Yes, we have the situation in which the poorer Chinese are playing the role of philanthropist to the wealthy Americans and European. Hmmm, exploitation, anyone? This is a better deal than Colonialism.

Now, if one has a Keynesian, er, Mandevillian, view of the world, this is terrible. In the Keynesian view of things, spending, not consumption, is the end of economic activity. There IS a difference. Under the Keynesian view of things, consumption and production are two unrelated things. People make products and then hope-to-goodness that they can "buy back" what they have just produced.

In this view of things, producers just "make things," and then the real reason for spending is just to empty the inventories. That way, producers can make more things and then they are cleared off the shelves, and the process begins anew.

This is not an economy; this is a cat chasing its tail. The only purpose I can see here is keeping people occupied. The purpose of "consumption" here only is to "buy back" what has been made; it does not and cannot go any farther.

No wonder that Keynesians emphasize the "circular flow" of the economy, as it fits within their circular logic. Israel Kirzner once parodied this whole set of nonsense with the following dialogue: "Why do you eat breakfast? So I can go to work. Why do you go to work? So I can eat breakfast."

Lest one thinks I am exaggerating or trying to present a caricature of Keynesianism as fact, take the following quote from Krugman, in which he praises Richard Nixon's 1971 action in which he cut ties to gold, devalued the dollar (or, in real-live terms, engaged in a default), and wrote a vital chapter in what would be a disastrous economic decade:
In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies.
Now, as a hardcore partisan Democrat, Krugman cannot utter the N-word, except in derision, yet he is praising what Austrians see as a dishonest approach to the real problem of runaway government spending, fiat currencies, and a mountain of government debt. To Krugman, all of the things I have mentioned are virtues, just as Mandeville praised profligacy as being virtuous and thrift as a vice.

I would pose a different scenario. Indeed, China should end its pegging of the renminbi to the U.S. Dollar, but for different reasons. Chinese workers have toiled in factories, yet government policies are overpricing those goods at home. This is similar to what Japan did in the 1980s and we see how well that worked for the Japanese.

Yes, Wal-Mart is full of Chinese consumer goods that are artificially cheap for us, and as long as we can keep this arrangement going, who is to complain? Krugman does not like it for all of the wrong reasons. To him, when he sees Americans buying something at Wal-Mart (well, let's face it, I'm sure Krugman never lowers himself to step into a Wal-Mart and mingle with the Great Unwashed), he sees trade imbalances. I see American consumption made possible by the philanthropic Chinese government acting to the detriment of the Chinese consumer.

Granted, one must understand Keynesian and Mandevillian logic. Domestic consumption, according to this "logic," is "buying back the product," but the real goal of American production should be to let someone in another country consume what Americans have produced. If that does not make sense to you, don't worry. It means you are thinking clearly.

As for the Krugman "solution," he advises the Nixon strategy of raising tariffs (Krugman calls for a 25 percent import surcharge) and telling the Chinese that while they amassed those dollars, the heck with them if they wish to spend them at least here. Who would have thought that Mr. Democrat would be channeling the policies promoted by the Republican that Democrats Love to Hate, Richard Milhous Nixon?

Of course, this would work wonders at home. Americans, who are struggling to make ends meet, would discover that prices were shooting up and their dollars would purchase less than before. There would be international tensions and the dollar would become the worthless paper in a scenario that the Austrians have been predicting for a while.

Yes, this is the Mercantilist world of Paul Krugman. Peaceful private exchange is an act of aggression, and aggression will bring us from an imaginary "liquidity trap." Indeed, War is Peace, Slavery is Freedom, and Ignorance is Strength.


Unknown said...

Keep up the posts... they are quite good!

I tend to side w/ others that have suggested have the Gov find China guilty of patent thief and fine them 900 bln (then default on their t-bills), which is kinda what krugman is calling for in the form of "capital controls"

Unknown said...

Great article! I remember reading the opening lines of that Krugman piece and thinking, yeah he sees what China is doing with trying to create a trade surplus possibly to hurt American exports in a way that harms the Chinese people (in a way that Communists are inclined to do since they aren't bothered about destroying voluntary exchange of private property as long as they don't destroy it so much as to have nothing left to expropriate for themselves)and then he sounds off about a 'liquidity trap' (all BS)in a way that shows best the Mercantilist view of history and society: Say's Law is not true, markets do not clear, disinterested agents must manage the purchasing power of money and abrogate property rights to allow stimulus when people are reducing wealth through bearishness and underconsumption (ignoring the total contradictions of underconsumption theory within the corpus of Keynesian control of bullishness via tax, when they have interest rates inflexibly low but would rather tax than reduce their expansion of the money supply!)and therefore human society does not manage itself and should be managed by fiat money controllers and agents of fiscal stimulus. And NONE of that is the problem, no it's the solution, remember the nineteenth century and the gold standard was a terrible time of...the fastest growth in living standards throughout all history.

William L. Anderson said...

You have to understand that Keynesians do not see economics as something involving individuals. Instead, they use aggregates, trade balances, and other things mixed with economic fallacies to create an economic scenario as though people don't matter at all.

Anonymous said...

Krugman and the Keynesians suffer from an extreme conceptual misunderstanding. They actually believe that their data aggregates are real and that the real world is not real. As Krugman explains Samuelson:

Actually, there was a time when many people thought that institutional economics, which was very much focused on historical context, the complexity of human behavior, and all that, would be the wave of the future. So why didn’t that happen? Why did the model-builders, led by Samuelson, take over instead?

The answer, in a word, was the Great Depression.

Faced with the Depression, institutional economics turned out to have very little to offer, except to say that it was a complex phenomenon with deep historical roots, and surely there was no easy answer. Meanwhile, model-oriented economists turned quickly to Keynes — who was very much a builder of little models. And what they said was, “This is a failure of effective demand. You can cure it by pushing this button.” The fiscal expansion of World War II, although not intended as a Keynesian policy, proved them right.

So Samuelson-type economics didn’t win because of its power to cloud men’s minds. It won because in the greatest economic crisis in history, it had something useful to say.

In the Krugman Wonderland, the government can cure everything just by merely "pushing buttons". Gosh. Why didn't we think of that?