Intellectual Honesty and Great Britain

Bob Murphy has a post on Free Advice that deals with the intellectually dishonest way that Paul Krugman portrays Herbert Hoover and the Andrew Mellon quote, "Liquidate the farmers, etc." Krugman clearly tries to claim that Hoover followed what Mellon said to do when, in fact, Hoover was dead set against it.

(David Henderson further exposes Krugman's dishonesty in posts here and here. Because of the intellectual environment in which he operates, Krugman does not have to worry about telling whoppers, as they fit the narratives that the people who surround him hold. Why bother with the truth when the narrative is more popular?)

Krugman no doubt would argue that because the results of the Hoover presidency saw a lot of business and farmer liquidation, that Hoover somehow must have been a closet Mellonite. After all, had Hoover actually intervened in the economy, then it would not have fallen so far, right?

Actually, this post is not about Hoover. Instead, it is about Krugman's recent blog post on Margaret Thatcher and Great Britain. Krugman asks whether or not Thatcher's policies actually had any positive effect on the British economy and concludes in a backhanded way (of course) that they did not.

Krugman's "proof" is shown on two graphs, the first showing Great Britain's GDP relative to France from 1950 to the present and the second a comparison of unemployment between the two countries from 1978 to now.

Contrary to what Krugman claims, the British economy relative to France did in fact see a GDP jump in the early 1980s following a steep recession. And while Krugman admits that when Thatcher took power in Britain in 1979, the country had "huge economic problems," but does not go on to explain what was the situation: 20 percent inflation, a huge and bloated government sector, and numerous nationalized industries better known for strikes and shoddy products. Andrew Sullivan writes:

To put it bluntly: The Britain I grew up in was insane. The government owned almost all major manufacturing, from coal to steel to automobiles. Owned. It employed almost every doctor and owned almost every hospital. Almost every university and elementary and high school was government-run. And in the 1970s, you could not help but realize as a young Brit, that you were living in a decaying museum – some horrifying mixture of Eastern European grimness surrounded by the sculptured bric-a-brac of statues and buildings and edifices that spoke of an empire on which the sun had once never set. Now, in contrast, we lived on the dark side of the moon and it was made up of damp, slowly degrading concrete.

Krugman political logic demands that once a politician takes office, the economy must immediately improve, with the rate of unemployment falling. Oh, I forgot, that didn't happen with Barack Obama's presidency, but Krugman has been willing to give a myriad of excuses for his beloved president. (And don't forget that Goldstein always has lurked in the background trying to destroy the economy and undermining Obama's efforts to subsidize more "green" industries, reflate the housing bubble, and print money out the wazoo.)

Indeed, we do see an upturn in the British economy during the early-to-mid 1980s with British unemployment falling. (The interesting thing about the unemployment graph is that during the 1980s, France was governed by a socialist government, yet unemployment also rose in that country during the early 1980s. I guess Francois Mitterand must not have believed enough in government.)

Krugman also fails to point out something that is painfully obvious in the first graph, and that is the rapid decline of the postwar British economy. Now, that should surprise any Krugman fans, given the British governments (and especially the Labor governments that Krugman so favors) were seizing industries, nationalizing medical care, and printing lots of money. The government still rationed food into the mid-1950s despite the fact that the other economies in Europe already were well on the way to recovery even though many countries had received much more physical damage from warfare. (In 1976, Great Britain received a bailout from the IMF and "60 Minutes" asked in one episode, "Will there always be an England?")

Furthermore, as invariably happens under socialism, capital deteriorated, the society became even more stratified, and many enterprising Brits left the country in hopes of doing better elsewhere. The numbers are clear, and one can see steady progress upward after Thatcher took office (with the exception of the 1990 recession, which also hit the USA).

Yet, Krugman wants us to believe that most likely Britain would have been better off with the old order in place, or at least wants us to think that nothing improved in the country until the Blair government took power in the mid-1990s. (And, don't forget that Blair did not follow his labor predecessors in nationalizing everything and reimposing socialism. His policies were not much different than those of the Tories, something that Krugman would ignore, of course.)

Like all strong politicians, Margaret Thatcher had a mixed record. Yet, she steered Great Britain away from an economic course that was strangling its once-magnificent economy. Great Britain is not the world power it was more than a century ago, but neither is it spinning off into irrelevancy as it was in 1979. That Krugman cannot recognize that fact should not surprise any reader.

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.)

Krugman: Nothing to See Here, Folks! The Economy is Doing Great!

Yes, yes, Paul Krugman's latest column is a stirring defense of the Welfare State, which in Wonderland is permanently sustainable because interest rates are low. And why are interest rates low? I think his former department chair, Ben Bernanke, might have something to do with that, but low rates certainly are not due to any increase in savings or positive long-term outlooks by investors.

Krugman writes:

...we are not facing any kind of fiscal crisis. Indeed, U.S. borrowing costs are at historic lows, with investors actually willing to pay the government for the privilege of owning inflation-protected bonds. So reducing the budget deficit just isn’t the top priority for America at the moment; creating jobs is. For now, the administration’s political capital should be devoted to passing something like last year’s American Jobs Act and providing effective mortgage debt relief. 

 Actually, an economy normally creates employment opportunities by creating new wealth, not printing money, but in Wonderland, the printing press is the real source of wealth and the more the Obama administration through Bernanke prints (and that essentially is what the guy is doing), the wealthier we are!

How do economies grow? Before the creation of Wonderland, they grew when entrepreneurs found ways to combine resources and factors of production in way that would enable them to move these factors and resources from lower-valued to higher-valued uses, as ultimately decided by people who purchased consumption goods. Over time, entrepreneurs found newer and better ways to apply these resources in a way in which we were able to produce more with less.

Even economists at one time believed that. Today, we have Nobel Prize-winning economists claim that economies grow via government spending, through vast subsidies given to industries run by people who are politically-connected to whomever is in power, and by keeping entrepreneurs from producing more wealth.

In Wonderland, "costs" simply are official price-denominated outlays that can be raised or lowered simply via government edict. As the Federal Reserve System quietly props up more banks and governments, we are told that Bernanke actually is creating a miracle world in which the Law of Opportunity Cost is repealed.

The real economy is doing very poorly, but Krugman and his friends in Washington, which has found itself in the position of becoming wealthier during this depression -- at the expense of the rest of the country -- are doing quite well, thank you. Federal workers are taking in more than ever, while the regulatory state grows and grows, while the police powers of the State of Wonderland increase.

Once upon a time, Washington would have been exposed for the parasitic economy it has become, but now that we are in the Age of Wonderland led by Really Smart People, Washington's new riches are seen as progress. Socialism comes to a grinding halt when, in Margaret Thatchers words, the socialists run out of other people's money to spend, but I guess we are not quite there yet.

You see, Krugman actually seems to believe that the "Social Safety Net" actually is a net creator, not a net consumer of wealth. It is economics turned upside down, but for the time being, the folks who believe we create new wealth by taxation, printing money, borrowing at record rates, restricting entrepreneurs, and promoting inflation have the microphone and they are not giving it up.

Robert Wenzel and the March Toward Socialism

Paul Krugman does not like to say that government control of the economy is socialism, and maybe he is correct. After all, the Nazi government controlled prices, picked "winners and losers," and directed production.

Producers got to own the property (in name, at least) and those favored producers got to be profitable, but at the expense of those people and companies that were not politically connected or simply were scorned by Hitler and his gang. We called that "Fascism." Another term might be "Crony Capitalism."

Today, we have a regime that tries to pick winners, rewards friends, and direct production to those lines favored by Washington. Call it what you will, but Robert Wenzel in this post calls it socialism. And I think he is correct.

Krugman's "Dark Ages" Demands

Paul Krugman does not simply advocate inflation; no, he worships at its very shrine. Inflation is our savior; inflation will give the economy "traction."

Furthermore, anyone who might have an argument against his illogic is doing nothing short of advocating a return to "the Dark Ages" of economics. I say, nonsense.

One of the mantras of modern Progressives is that contemporary thought always is superior to any thinking that occurred in the past (especially if that thought is espoused by Progressives). Thus, the way to "win an argument" is simply to quote whatever was written or said a while ago and to assume it has to be wrong. (The exception, of course, is anything written by J.M. Keynes, who is treated as The Great Prophet.)

So it is in the Krugman blog post I have linked in which he quotes a passage from Joseph Schumpeter's work and then assumes that because Schumpeter wrote it in the past, that it amounts to advice from "the Dark Ages." Why? Well, because Krugman says so.

However, Schumpeter in that passage is addressing the point that inflation distorts the structure of production, creating malinvestments and bringing about maladjustments which cannot be sustained over time. So, using inflation to fight any depression simply prolongs the pain, and any short-term "gains" are wiped out longer term.

Obviously, since Krugman's mantra is "we need inflation," such words from Schumpeter are heresy. Furthermore, because Schumpeter wrote them many years ago, they automatically are wrong.

But I also have another problem. Krugman has been insisting that the reason the economy is in a funk is because the Obama administration pushed through an $800 billion "stimulus" instead of a $1.2 trillion spending package. Yes, for lack of $400 billion to be spent on political pet projects, the entire economy is sinking.

Krugman also insists that inflation will give the economy "traction," as though an economy is a perpetual motion machine that just needs a push from monetary authorities to move on its own. Where does he get that? Furthermore, the only way for his plan to work is for all assets to be homogeneous and for factors of production to automatically be able to adjust when done so administratively.

Does he know nothing about what happened with such economic planning in the former U.S.S.R.? There were economic planners who were as intelligent as Paul Krugman and who had doctoral degrees from Moscow State University, where the economics curriculum was every bit as rigorous as that of MIT.

Yet, the economy was a miserable failure, as planners could not negotiate simple goods through simple processes. Why? The economy lacked real prices that reflected the relative scarcity of factors of production. Instead, they believed that administered prices and production functions would take care of things, which never happened.

So, Paul Krugman demands the same for us. Have inflation distort prices, assume that factors of production are homogeneous, ratchet up government spending, and it will give us prosperity. Hey! It worked well for the U.S.S.R.

Talk about the Dark Ages.

Paul Krugman Is Not a Serious Economist

So, from calling for a return to the super-high tax rates of yesteryear to demanding that governments borrow and print money into oblivion, Paul Krugman believes that socialism really is the road to prosperity. In his post today, "Martin Wolf Is Not A Serious Person," he quotes Wolf and then declares that Wolf is correct.

Just what did Wolf say that was so brilliant? Here it is:

I have now lost faith in the view that giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy.

Actually, the Wolf quote is at the end of a long rant in which he excoriates the Organization for Economic Co-operation and Development because its members are rightly concerned about the spate of borrowing and ultra-loose monetary policies. Wolf, instead, believes that governments are not being profligate enough. He writes:

...fiscal tightening would only work if it coincided with a robust private recovery. Otherwise, it would drive the economy into deeper recession. Yes, that is a Keynesian argument. But this is a Keynesian situation.

Neither Wolfe nor Krugman explain why there is no "robust" recovery, however. The Keynesian explanation is that a market economy cannot generate by itself the necessary "spending" to move out of the doldrums. Only government can do that.

However, neither Wolfe nor Krugman can explain why that is so when, in fact, every recession before the Great Depression ended without a massive explosion of government spending, including the deep but short-lived recession of 1921. Why is this situation any different?

The problem is that neither person wishes to deal with the fact that the economy is full of malinvestments that governments still are trying to keep propped up, just as Japan tried to do the same during the "Lost Decade." To Keynesians like Wolfe and Krugman, all economic assets are homogeneous, and there is no difference between the activities of the state or private business, economically speaking, except that whatever the state does is morally and economically superior!

Krugman continues to claim that he is not a socialist, but if he wants the state to be doing everything, including confiscating huge amounts of income from individuals, then I don't see where his view differs from standard socialism.

Krugman's Chilean Fantasy

Paul Krugman never ceases to amaze me with how he dishonestly rewrites history. Indeed, he does not so much give us history as he does Democrat-Socialist talking points, which he shouts out while holding his ears shut.

In this blog post, Krugman claims that relative free markets established after the Marxist Allende government fell in 1973 had nothing to do with Chile's prosperity today or the fact that the recent earthquake that hit the country -- one of the most powerful earthquakes ever recorded -- had a relatively small death toll, especially compared to the carnage in Haiti. As usual, the post has a number of howlers. Take the following, for example:

Actually, as you can see from the chart above, what happened was this: Chile had a huge economic crisis in the early 70s, which was, yes, partly due to Allende and the accompanying turmoil. Then the country experienced a recovery driven in large part by massive capital inflows, which mostly consisted of making up the lost ground. Then there was a huge crisis again in the early 1980s — part of the broader Latin debt crisis, but Chile was hit much worse than other major players. It wasn’t until the late 1980s, by which time the hard-line free-market policies had been considerably softened, that Chile finally moved definitively ahead of where it had been in the early 70s.

So: free-market policies are applied, and presto! prosperity follows — fifteen years later.

Ah! Where does one begin? First, Krugman glosses over the fact that Allende was trying to establish a full communist state. His government seized businesses, both foreign and domestic, printed money out the wazoo (creating 1,000 percent inflation), erected huge tariffs and trade barriers, and decimated civil liberties. Yeah, I guess that would cause some economic problems.

Next, just why might have Chile experienced some capital inflows following the overthrow of Allende? Maybe it was because the new government promised not to seize capital invested in Chile by foreign firms, and maybe because the government lowered many of its trade barriers.

Chile was hardly the only country to experience a serious recession in the early 1980s. As I recall, a country named the United States of America suffered its biggest downturn since the Great Depression, and, like Chile, had a robust recovery. There is no doubt that Chile has a much more free economy than do most Latin American countries, and also has a higher standard of living. (I'm sure Krugman has another explanation for Chile's prosperity. Maybe it finally is experiencing the "good effects" of all that money Allende printed nearly 40 years ago.)

As for the country's survival rate following the earthquake, Krugman writes:

As a number of people have pointed out, there’s this little matter of building codes. Friedman wasn’t exactly fond of such codes — see this interview in which he calls such codes a form of government spending, because they “impose costs that you might not privately want to engage in”.

First, building codes by themselves are meaningless. One must have the wherewithall to build structures that actually meet codes. Second, Chile has a strong record of private property rights.

Haiti, on the other hand does not. I recently read that about 80 percent of Haitians live on land of which no one holds clear title. That means that people basically are squatters, and squatters do not build strong buildings. (I am sure that Haiti also has building codes, but even the presidential palace was heavily damaged and the Haiti earthquake was not nearly as strong as what recently hit Chile.)

Being a good socialist, however, Krugman is going to claim that Chile's survival rate following the earthquake is due entirely to state power. And there is one more issue to address: the false notion that economic booms immediately follow economic liberalization.

That often is not the case, as what we saw in the early 1980s. Economies that are heavily regulated or have a lot of state ownership engage in malinvestments that cannot stand after an economy is liberalized. Indeed, given the massive malinvestments and the utter chaos that accompanied the Allende government, I would expect Chile's recovery to take a long time after liberalization, and that is what happened.

However, Keynesians believe that all economies are homogeneous, and that all a government needs to do is add money. Interestingly, that is exactly what Allende did, and even Krugman's little graph does not show that the communist government brought prosperity.

Guess Krugman needs to go back to the drawing board.

Krugman and the Tyranny of Markets

The Great Nobel Laureate is upset that someone is worried about the response of the markets (this means Wall Street, of course). Now, I happen to agree with some of what Krugman says, but for very different reasons. As usual, even when Krugman starts to get it right, he ultimately veers into Wonderland.

Krugman is reacting to Tim Geithner's argument that the Senate needs to reconfirm Ben Bernanke in order to calm the markets, and declares that the government should not base its actions on possible reaction of others:

Nobody really knows how the markets will react; the right thing, always, is to pursue policies that look right on the substance.

At one level he is right; markets generally will react short-term to anything that upsets the current political calculus. However, the idea of "substance" in Krugman's Wonderland is for the government to be printing more money and for the state essentially to nationalize the markets. This is not substance, folks. It is something akin to what Hugo Chavez is doing in Venezuela, and we all know how well that is working.

Like so many Keynesian economists, Krugman looks at markets with the wisdom of John Maynard Keynes himself, who declared markets to be run by "animal spirits." To Keynes, there was no rhyme or reason to markets and furthermore, the sale of secondary assets in any kind of market had no economic value, anyway. Therefore, the markets don't tell the government what to do; the government tells the markets how to act.

So, if there is to be tyranny, he wants it to come from Washington. No doubt, Paul Krugman has the Great Wisdom necessary to run all of our economic affairs, just as the central planners of the old Soviet empire were able to do. (One of Krugman's mentors, the late Paul Samuelson, was full of praise for Soviet Socialism, all the way until the empire collapsed.)