James Galbraith vs. Paul Krugman

A dialogue:

From: James K. Galbraith
To: Paul Krugman
Posted: Tuesday, November 5, 1996, at 4:30 p.m. PT

Jacques Derrida
Ain't no wrida
Then again, ain't no reada
Eida.

MIT, at the pinnacle of professional prominence, has an ideological flavor ... and also a stronger team orientation than most places. The problem is not conditions at the pinnacle but the inferior results when lesser places try to replicate the coverage without the people. And when good people in niches cannot find steady employment because second- and third-rate departments lack the courage to hire them.

Evidently Krugman ain't no reada, eida.

Krugman's main point is that he represents the "nerds" of economics, whereas I and the distinguished writer Robert Kuttner are "literati," who would like the profession to be less mathematical than it is. Leaving Kuttner to speak for himself, this view also totally misrepresents not only my position but also Paul Krugman's own professional one.

This may come as a surprise to outsiders, but Krugman is not a mathematical theorist (and I have heard him admit this, to a knowing audience). Krugman's mathematics are not deep, and he has no interest in complicated manipulations of data. He owes his fame, instead, to an exceptional grace and lucidity of formal presentation. With these gifts, Paul has expanded the range of neoclassical economics in several notable directions, especially international trade theory. Krugman's professional work is mathematically literate, of course. The point is that it is also literate, and, for many economists, that is its appeal.

My own work is mathematical when it needs to be. In recent years it has become very much so, in papers that are just beginning to appear (one came out this year) and working documents that I or co-authors have presented recently at Harvard, Berkeley, and to the physics department (of all places) at Texas. I have nothing against math, and when my topic (inequality, in this case) is mathematical, then so am I.

So if the issues between Krugman and myself are neither hermeneutic nor mathematic, what are they? The actual issues are philosophical and theoretical.

Paul's worldview rests on the belief that useful implications for important questions of public policy can be derived, essentially from first principles, with the help of a well-structured logic. Well-structured deduction from metaphysical first principles is the Krugman forte.

I don't accept that much of use can be learned about policy in this way. When the world deviates from the principles, as it usually does, the simple lessons go astray. This is not a complaint against math. It is a complaint against indiscriminate application of the deductive method, sometimes called the Ricardian vice, to problems of human action. Mine is an old gripe against much of what professional economists do; not against science but against scientism, against the pretense of science. To combat it, I spend my research time wrestling with real-world data, and I spend much of my writing time warring against the policy ideas of aggressive, ahistorical deductivists.

Within economic theory, our differences can be stated even more simply, for those who know the jargon. Paul is a moderately liberal neoclassical economist, formed at MIT. I am an unreconstructed and very thoroughgoing Cambridge Keynesian. Paul's main mentors are, I would judge, Paul Samuelson and Robert Solow. Mine were probably Nicholas Kaldor and Joan Robinson, not to mention the influence of my own father. This accounts for many differences between Krugman and myself, on issues ranging from the role of the market to the role of the state, differences that are rooted in deep disagreements over economic ideas.

In the final analysis, Krugman's argument is that there is a simple distinction between the "serious" economists--who agree with him--and the "critics," who are, by definition, not serious. It is true, of course, that economic-policy discussions are magnets for cranks. But from this it does not follow, and is not in fact true, that all "serious" economists hold to some single position. It is even more absurd to suppose that one gains access to this wisdom by passing an exam in algebra. In this respect, Krugman's argument is so shallow, so actually illogical (a fallacy of induction, in this case), that it is evidently aimed at rubes. I hope not many will be taken in.

(Many of my articles, including the original target of Krugman's critique, "What Is to Be Done [About Economics?]" are accessible online. Also available, a paper entitled: "Linear Decomposition of Time-Series" [for anyone interested in checking out my linear algebra ...].)

From: Paul Krugman
To: James K. Galbraith
Posted: Tuesday, November 5, 1996, at 4:30 p.m. PT

I am grateful to James Galbraith for two things: the relative civility of his letter, and the link to his article on doing economics. That way we need not throw quotations at each other--readers can go look at his piece and see if I have gotten the spirit of it right.

When you try to talk about the importance of a mathematical sensibility in doing economics, there are two misunderstandings that you must immediately confront. The first is that the math must be fancy--that I must be talking about pages and pages full of squiggles. The second is the charge that if you think that algebra is important, you must believe that everything about the world can be deduced from equations, and be uninterested in checking your equations against reality.

What I actually have in mind is something much more prosaic. Economics is at least partly about quantities and their relationships; so you can't make sense of it unless you are willing to do some arithmetic and even some algebra to make sure that the stories you tell hang together--and that they are consistent with the evidence. This doesn't sound like much, but experience shows that there are many influential intellectuals who are prepared to make sweeping pronouncements on economics without doing the arithmetic. And by the way, throwing around lots of statistics is not the point: It's a question of thinking hard about how the statistics fit together.

Maybe the only way to explain what I am talking about is to give an example. It involves Michael Lind of The New Yorker, against whom I have no particular grudge--in fact, part of the point is that he is, undoubtedly, a very smart guy. That is what makes this particular example so revealing: It shows what happens when someone who is very bright but does not understand the role of arithmetic in economic analysis tries to make pronouncements on the subject.

Two years ago, Lind wrote the following in Harper's:

Many advocates of free trade claim that higher productivity growth in the United States will offset any downward pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs--an abundance of the sort created by the globalization of the labor pool for U.S.-based corporations.

Now what should Lind have done before publishing this passage? He should have had an internal monologue--something like this: "Hmm, do these numbers make sense? Well, historically, compensation of workers has been around 70 percent of national income. So let's say that initially, output per worker is 100, and the wage is 70. Now if productivity is up 30 percent, that means that output is 130, while if wages are down 13 percent, that brings the wage down to around 61, which is less than half of 130--wow, that means that the share of labor in national income must have fallen more than 20 percentage points. Let me check that out in the Statistical Abstract. ..." Of course, if he had, he would have found out that the share of compensation in national income, far from declining 20 percentage points, was about the same (73 percent) in 1992 as it was in 1977, offering a clear warning bell that something was wrong not only with his numbers--for example, he turns out to have confused productivity in manufacturing with productivity in the economy as a whole--but with his story. (This was not a throwaway passage marginal to his main argument; the claim that globalization has shifted the distribution of income drastically in favor of capital was central to his article.)

How could Lind have failed to go through this little monologue? Well, I have had several conversations with impressive, highly articulate men, who believe themselves sophisticated about economic matters, but who simply do not understand that if productivity is up and wages are down, this must mean that labor's share in income has fallen. These conversations are not pleasant: They want to discuss deep global issues, and end up being given a lesson in elementary arithmetic. But that is precisely the point: All too many people think that they can do economics by learning some impressive phrases and reciting some gee-whiz statistics, and do not realize that you need to think algebraically about how the story fits together.

Presumably, Galbraith will say that this example has nothing to do with him and his friends. But consider the concept of "deindustrialization," which has been a centerpiece of much economic writing over the past 15 years--in fact, it could be considered Bob Kuttner's signature contribution to the field. The story is that wages in the United States have stagnated or declined largely because trade deficits have eliminated high-paying jobs in manufacturing. There is nothing wrong with this story, in theory--in fact, it is a perfectly good example of what is known as the "domestic distortions" argument for harm from international trade, which is covered in many undergraduate textbooks on the subject, mine included. But if you do even a rough back-of-the-envelope calculation--a little more complicated than the one Michael Lind should have done, but still very simple--and check it against the data, you immediately realize that the displacement of high-wage manufacturing jobs by imports cannot have pushed average wages down by more than a fraction of a percentage point. The point is that the deindustrializers have a good story, but lack the instinctive urge they should have had to see if that story actually adds up.

I have no doubt that Galbraith can do linear algebra, probably better than I can. That is not the point, because we are not talking about fancy math. In fact, there is a familiar tendency of some basically anti-mathematical intellectuals to reserve a small pedestal for people who do very complicated math that seems to refute orthodoxy--like the correspondent who told Steven Pinker, the author of The Language Instinct, that "[w]e don't need natural selection, because now we have chaos theory," or the one who assured me that global savings don't have to equal global investment, because the world is nonlinear. (I call this tendency the "Santa Fe syndrome.") I suspect that this perverse affection for confusing math owes less to any expectation that it will clarify matters than to a sense that it absolves us from the need to understand simpler models.

Finally, notice how utterly false is the charge that people like me believe that the world can be predicted and understood entirely by a priori reasoning. On the contrary, both Lind and Kuttner have, whether they know it or not, been making arguments that are straight out of standard undergraduate textbooks on international trade--Chapters 4 and 10, respectively, of mine. I don't start from the position that what they are saying cannot be true in the light of orthodox theory--it could be, but I have looked at the evidence, and it isn't. But that is a quantitative, arithmetic assessment--which is why they didn't notice that problem for themselves.

From: James K. Galbraith
To: Paul Krugman
Posted: Wednesday, November 6, 1996, at 4:30 p.m. PT

Clearly, Paul Krugman's response narrows our differences. I do not criticize him for the simplicity and elegance of his math; my linear algebra is not fancy either. We agree that journalists should be careful with numbers. And while I'm quite certain that my own work also contains mistakes, it is gratifying that so far, Paul hasn't found them. His reply also does not repeat the canards about "deconstruction," "anti-academic writers," "lit-crit style," and "intellectuals who can't stand algebra" of his original attack.

Paul's own past work is probably not available online, so readers may have to go to the library to check whether there isn't, after all, just a hint of that Ricardian vice on his record. Readers should also stay tuned on the great questions of trade and wages that are the subject of the rest of Paul's letter. The real issue here, still very much unresolved between academics, is not the division of income between wages and profits. It is the effect of trade on inequality within the wage structure. It is whether trade has displaced relatively low-wage manufacturing jobs, not high-wage jobs. My present view is that the actual effects of trade on wage inequality are stronger than Paul appears to believe, that they worked mainly through the exchange rate, and that they are, nevertheless, not as strong as the influence of high rates of domestic unemployment. For more details, however, readers will just have to wait--I'm still checking the numbers.

From: Paul Krugman
To: James K. Galbraith
Posted: Wednesday, November 6, 1996, at 4:30 p.m. PT

This debate is getting more civil by the minute--can it be that we will actually end up agreeing?

I think my first reply to James Galbraith effectively answered much of what James Devine had to say. (Hi, Jim.) I have never argued, or believed, that economic theory proves that markets always get it right; the truth is that economic theory allows lots of possibilities, and is always up for revision anyway. But your story must hang together; and you must be willing to do some arithmetic to see that it does. Moreover, the kind of arithmetic involved does not come easily to people who are unfamiliar with economics. Everybody here seems to be invoking the ghost of John Maynard Keynes; perhaps I should simply note that he wrote at one point that "[e]conomics is a difficult and technical subject, but nobody will believe it."

Let's talk for a minute about the substantive issues, then go back to the nature of economic discourse. I agree with Galbraith that the serious intellectual issue regarding trade and wages is how much of the widening inequality among workers can be explained by growing trade; everyone agrees that trade has played some role, and the question of how much is, well, "difficult and technical." Some of the studies that seemed to show that trade played a very large role have turned out, on closer inspection, to be deeply flawed; but I am quite willing to agree that trade has widened the gap between college- and high-school-educated workers by 2 percent or 3 percent. (See my article in Brookings Papers on Economic Activity last year.)

But when Galbraith says that this is the "real issue," I wonder what he means. If he means that statements like the one by Michael Lind that I quoted are silly, or that we need not take seriously the claim that wages have fallen because of the displacement of high-wage jobs by imports (as opposed to the displacement of low-wage jobs that has contributed to growing inequality), then, obviously, I agree. But, did the readers of Michael Lind's Harper's article know that what he was saying was nonsense? Did the editor of Harper's know that it was nonsense? (I have had some fascinating conversations with other editors who either have never heard of the idea that economics should be based on models, or are hostile to that idea.) Above all, did Lind himself know that it was nonsense, and that you are supposed to think these things through?

Or to take the more pointed case: It has been obvious since the early 1980s to anyone willing to do simple algebra that the deindustrialization hypothesis about wage stagnation could not be more than a tiny part of the story. So, in some sense, we could say that deindustrialization was not the "real issue." But did the authors and readers of the 1988 Cuomo Commission report, which placed deindustrialization at the center of America's economic difficulties, know that? I can assure you that as of 1992, Gov. and then President-elect Clinton did not: As a well-read, highly intelligent man who followed what people he regarded as serious economics writers had to say, he thought he knew that the loss of manufacturing jobs to imports ranked at the top of American economic problems.

In my unpleasant debate with Bob Kuttner in the pages of the American Prospect, Kuttner at one point asserted that "[a]s Krugman surely knows, the real controversies in economics and economic policy are not about the arithmetic: they are about the assumptions." I only wish that I did know that. But the debates over deindustrialization, or over national economic "competitiveness," or, for that matter, over supply-side economics, are not about assumptions: They are about arithmetic, and one side in each debate is wrong because it has simply failed to make sure that its stories add up. If these aren't real controversies, that is news to the participants and to the intellectual public.

There are actually many economists willing to push the boundaries of the field, to try out the consequences of alternative assumptions. It is hard to think of an economist whose research has been more innovative than Joseph Stiglitz, now chairman of the Council of Economic Advisers; and, as my critics endlessly point out--as if it somehow invalidates what I say now--I have a pretty good reputation as an innovator myself. Why, then, do people like Stiglitz or myself so often seem to be in the position of defending economic orthodoxy? Because when you enter the real world of policy debates, you find out that the great majority of those who attack standard economic prescriptions may imagine that they have transcended textbook economics, but, in fact, have simply failed to understand it.

From: James K. Galbraith
To: Paul Krugman
Posted: Thursday, November 7, 1996, at 4:30 p.m. PT

Mea culpa! I did commit the academician's sin, of implying that the "real" and the "serious intellectual" issue were one and the same.

In the beginning I entered this fray to defend myself, not a class action involving Lind, Kuttner, and Stephen Jay Gould. But Paul now seems to have dropped his complaint against me. The question now arises: Do I want to keep this going by filing a counterclaim?

Well, why not? We have agreed that good economics requires careful theory, data, and arithmetic. Paul has conceded that there are important issues on which "serious" economists disagree. I raised the trade-and-wage-inequality question precisely to make this point. A noneconomist reader might easily have missed it, reading Paul's criticisms of Michael Lind.

Here's the new issue. Are such "serious" disagreements the exception, or are they the rule? It seems pretty clear to me that professional economists are deeply divided over many of the important economic-policy issues we face today. Some examples:

The merits of cutting the budget deficit. Do serious economists all agree that cutting the budget deficit will raise savings and investment, and increase the rate of productivity growth? They do not. The late, great Bill Vickrey, who died just three days after receiving this year's Nobel Memorial Prize in Economic Sciences, was only one of many who think our present preoccupation with deficit reduction is dangerously counterproductive. I'm another.

The "natural rate of unemployment." Do serious economists agree that there exists a "natural rate of unemployment?" No. Do those who do believe in this concept agree on what the natural rate is? No. Do those who have estimated the natural rate agree on how quickly inflation will accelerate if unemployment goes below the natural rate? Again, no. (The next issue of the Journal of Economic Perspectives will carry a symposium airing this argument.)

The alleged overstatement of measured inflation. A commission headed by Professor Michael Boskin has just reported that the Consumer Price Index seriously overstates the rate of inflation. These findings lend support to proposals to cut back on cost-of-living adjustments for Social Security and other programs. But, was Boskin correct? Tracing implications in just the way that Paul Krugman recommends, Dean Baker of the Economic Policy Institute finds that if so, then back in 1960, maybe half the population must have lived below the poverty line (!). Michael Lind is not the only one who might benefit from a monologue about the plausibility of one's story. The effects of raising the minimum wage. A recent, excellent book by Princeton economists David Card and Alan Krueger, Myth and Measurement, showed that we need not necessarily expect a higher minimum wage to cost jobs. You can only imagine the trouble this one stirred up. Is there a crisis of the Social Security system? The most recent issue of Challenge carries a fine assortment of views on this vexing question. Of these, the most persuasive argue that there is no crisis, that possible shortfalls in Social Security can be fixed by very modest adjustments, at most. Unfortunately, alarmists like the dedicated anti-Social Security campaigner Pete Peterson, an investment banker, are dominating this debate. It is regrettable that certain serious economists--it might disrupt present comity if I named a name--have recently stated their categorical support for the alarmist position.

These are only examples. I don't raise them to pick particular fights, only to illustrate that real fights are going on. Those of us who hold minority views within the profession on quite a few policy matters would very much like the outside world to know this.

What, then, about those journalists? I have no objection to correcting other people's mistakes. But, having spent quite a few years off the academic reservation, I may be a bit more respectful, as a rule, of what noneconomists have to say. I have found that professional policy specialists very often have areas of expertise that university-based economists sometimes lack. So I tend to read the former for what they know, rather than for their bloopers.

Paul is surely correct, though, in saying that I'm more critical of professional economists than he is. Professionals should be held to a high standard. Attacking them, when they lapse, is more of a challenge. And when it comes to discussions of economics in the strict sense, to me, the interesting debates are among people who have a pretty good idea what they are talking about to begin with.

From: Paul Krugman
To: James K. Galbraith
Posted: Monday, November 11, 1996, at 4:30 p.m. PT

First of all, a mea culpa of my own. Ignore Galbraith's coyness: I was the economist who went overboard in supporting Pete Peterson's position on entitlements and demographics. Demographics play a smaller role in Peterson's forecasts, and debatable projections of medical costs a larger one, than I realized when I recently reviewed his book for the New York Times. I broke my own rule that you should always check an argument both with a back-of-the-envelope calculation and by consulting with the real experts, no matter how plausible and reasonable its author sounds. Do as I say and normally do, not as I unfortunately did in this case.

I make this admission partly out of a general belief that it is better to own up to a mistake than to dig yourself in ever deeper by trying to deny it--although few people seem to follow that practice. (Let me offer Galbraith an opportunity. In his essay on doing economics, his prime example of the closed-mindedness of economists is their failure to pay due attention to Adrian Wood's work, which Galbraith calls a "devastating critique" of standard estimates of the impact of trade on wages. If you actually read Wood's book, however, you discover that the main reason he reports such large numbers is that, on finding that his estimation technique yields more or less the same answers that other researchers have found, he arbitrarily multiplies his own results by four. Will Galbraith concede that he has given excessive credence to an alarmist position, and, moreover, that he has done his colleagues a considerable injustice?)

But I also want to eliminate the coyness because I refuse to accept the ground rule that we should not name names. I'll explain why in a minute. Anyway, Galbraith, like many critics of economics, seems to believe in the following syllogism:

1) Economists disagree about some important issues, and some economists with impeccable credentials say silly things. 2) Therefore, there is no need for a smart individual to brush up on economics--say by reading an undergraduate textbook--before making pronouncements on the subject.

Although Galbraith systematically exaggerates and misrepresents the actual disagreements, 1) is obviously true about economics--and about medicine, and physics, and law, and any other discipline you choose to name. Did you know that astronomers cannot agree on the age of the universe, and that the current best estimates suggest that the oldest stars are older than the universe in which they shine? So maybe Copernicus was wrong!

The point is that in each of these disciplines, we all understand that while there are major disagreements about some questions, there is also a large area on which the experts do agree, and in which their expertise is real. Only in a few subjects, economics among them, do intellectuals--and yes, especially intellectuals who are comfortable with words but not with even simple math--feel that the undoubted limitations of the field and human frailties of its practitioners mean that anything goes. Legal scholars disagree intensely about some issues, and many lawyers are fools; still, few would suggest that the chief justice of the Supreme Court ought to be someone without a law degree, far less that not having any legal training was a positive asset for the job. Yet Robert Kuttner, Jeff Faux, and others have made precisely that argument with regard to the chairmanship of the Council of Economic Advisers.

Because of this attitude, most of the criticism economists face is not over issues where there is legitimate disagreement. Instead, the heavy majority of the challenges are simply wrong on the arithmetic. That is, the doctrines asserted either do not add up, can be shown to be flatly untrue using readily available data, or can be shown by simple calculations to involve effects much too small to bear the weight being placed on them. The problem one encounters when saying this is that you run into what Maureen Dowd has called the "Moi?" defense. How can you say that such fine, upstanding people would do such a thing? I don't know any way to deal with that defense other than to provide specific examples--which I have done, over and over again, in recent years.

So one more time, this time in response to Galbraith's list of areas where economists disagree (How shocking! Of course, in real sciences, there are never controversies.), let me offer a sample list (there are others) of six widespread doctrines that are simply wrong--not doctrines where I disagree with the assumptions, but where the arithmetic is simply, unambiguously wrong. And, as a counter to the "Moi?" defense, let me be rude and indicate, following each doctrine, some important writers or institutions (again there are others) whom I happened to notice endorsing these doctrines in print.

1) Wages in America have stagnated because we have lost high-wage manufacturing jobs to imports. (Galbraith has carefully avoided responding to my previous mentions of this doctrine, tacitly pretending that the only example I offered involved the quotation from Lind.) Proponents: Barry Bluestone, Robert Kuttner, Lester Thurow.

2) Workers are hurting because labor has failed to share in national productivity gains. Proponents: Michael Lind, of course, but also Robert Reich, Business Week.

3) A country's economic success depends on its ability to move into industries with high value added per worker. Proponents: Chalmers Johnson, Robert Kuttner, Ira Magaziner.

4) Manufacturing has a multiplier effect on living standards because countries with high manufacturing productivity also have high wages in the service sector. Proponents: Lawrence Chimerine, Clyde Prestowitz.

5) Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses. Proponents: World Economic Forum, James Goldsmith.

6) There are some industries in which Third World countries have achieved near-Western productivity, yet wages in those industries remain far below Western levels; therefore, rising productivity will not lead to higher wages in the developing world. Proponents: Edward Luttwak, Walter Russell Mead, William Milberg.

All of these arguments are just plain wrong--you don't have to believe that markets are perfect, or that orthodox economics explains everything, to discover that they just cannot be made to hang together. (But you do have to be willing to do a little algebra; I have deliberately chosen statements that sound extremely plausible to most people, including ones who are very intelligent and well read. I am not retracting my claim that the lack of a mathematical sensibility among intellectuals is the central reason why doctrines like these flourish).

Now we all make mistakes. But the peculiar thing here is that in each of these cases, the proponents imagine themselves to have achieved a higher level of understanding, to have transcended the narrowness of conventional economics. Somebody needs to point out to them and to their audiences that, on the contrary, they are simply misunderstanding basic arithmetic.

I often regret the feeling of obligation that led me to take on that unpopular role. For one thing, there is no better way to make a man hate you than to tell him that while he was walking around priding himself on being at the intellectual cutting edge, in fact he was merely insisting that two and two must add up to at least 25. And I would much rather have interesting arguments with people who might be right than spend my time trying to explain freshman-level concepts to unwilling listeners.

I would hope that Galbraith will agree with me that all these doctrines are silly. If so, he and I can go on to discuss the "real" issues. But how many people realize that these are silly doctrines? In the eyes of the world, including the vast majority of people who believe themselves well informed, these are real issues raised by serious people. And I am not yet cynical enough to believe that this doesn't matter.

From: James K. Galbraith
To: Paul Krugman
Posted: Friday, November 15, 1996, at 4:30 p.m. PT

My hat is off to Paul Krugman for his frank repudiation of Peter Peterson's book on Social Security. Given the speed and fairness of Paul's self-correction on this point, I will apologize for being coy.

Still, I am not going to take up the invitation to defame Adrian Wood, a meticulous economist, by comparing him to Peterson. The cases are very different. The differences can usefully illustrate the nature of serious disagreements that exist between economists. They also illustrate the distinction between a dispute over research results and a dispute over the reputability of the researcher.

Economists generally agree (I think) that there has been a decline over several decades in the demand for less-skilled labor, of about 20 percent overall. The question is: How much of this can be attributed to the effect of trade?

At the time Adrian Wood published his book North South Trade, Employment and Inequality, the mainstream answer was on the order of 0.5 percent, or one-fortieth of the total effect--an insignificant amount. But Wood showed that these estimates were based on the labor demands of industries that remained in advanced countries after North-South trade took root. The industries that had departed were much more labor-intensive. Correcting for this source of bias raises the estimate of the trade effect on the demand for unskilled labor by a factor of 10, to 5 percent, from one-fortieth to one-fourth of the total. This was Wood's fundamental contribution.

It is also true, as I wrote, that Wood's challenge was ignored by many economists writing after it was published, in papers where citation would have been appropriate. (More recently, this situation has improved, thanks to the editors of the Journal of Economic Perspectives, who published a symposium on these issues.)

Wood did go on to suggest that his own core estimate of a 5 percent trade effect was too small. This is the "flaw" Krugman accuses him of, but in fact the argument is not arbitrary, capricious, or irresponsible. It is based on phenomena that are known to exist: "defensive innovation" by import-competing firms and trade in services. Neither of these is measured by looking at the labor coefficients in imported manufactures. Hence, their existence suggests that the actual effect of trade on unskilled-labor demand is bigger than 5 percent. How much bigger? In both cases, Wood does quite explicitly guess at magnitudes--a factor of two in each case. But he is very upfront about this, carefully drawing the line between what he knows and what he is guessing at. Leaving out these final steps does not affect the validity of Wood's criticism of earlier work.

Having said all that, do I believe that trade accounts for the whole increase in wage inequality? The answer, I have said before, is no. I think unemployment is a more important force. And I think the effects of trade work mainly through overvaluation of the dollar. But this is not a criticism of Wood's work, either. Our analyses are not based on the same data or methods; nor are they addressed to precisely the same question.

Let's move on. I'll overlook the silly syllogism Paul attributes to me, and his claim, offered without evidence, that I "systematically exaggerate and misrepresent" the disagreements between economists. Readers should just look again at that syllogism, and judge for themselves who is exaggerating and misrepresenting.

Let me turn, instead, to Paul's six theses, distilled from his heavy reading and attributed to a wide variety of people, myself not included. I want to be careful. In most cases, I cannot verify that Krugman has summarized accurately the writing of the people he names. I'm inclined to distrust him on this point, with all due respect, given the cavalier way he summarizes mine.

In the six theses, Paul Krugman presents us with statements intended to be rejected as categorical nonsense. As worded, none of them is sensible. Some of them are pure nonsense. In a few cases, there may be an element of truth, or a bit of a reasonable thought, hidden here and there. In some (No. 4), the wording is so imprecise that it's hard to tell. But I'll happily concede that all contain errors. This is easy: They all do.

Yet, the list of errors fabricated in this way is potentially endless. And the popular press is full of similar errors from the right and also from the allegedly mainstream center. The most galling of these nowadays, in my view, is the idea that balancing the budget will have identifiable economic benefits. There are many more errors, and many of them stem from the fact that the popular press does not know what the actual disagreements between serious economists are. I get frustrated too, frankly, when my ostensible political allies make themselves easy targets by messing up. I'm equally frustrated when correctly stated critiques of mainstream propositions are ignored, or irresponsibly misstated in the rebuttal.

Krugman's real point, however, is not about his so-called doctrines. It's about the people who allegedly believe them. And here we do, once again, disagree. Based on my own reading, I'm perfectly happy to drop Pete Peterson, Edward Luttwak, and few others down a well. I'll take Krugman's word on James Goldsmith and the World Economic Forum. I haven't read Michael Lind, except for bits of his fine critique of the American Right. But Lester Thurow? Robert Kuttner? Bob Reich? Larry Chimerine? Adrian Wood? To me, these are reputable people--insightful writers and knowledgeable students of the world. Some of them have been well ahead of the economic mainstream on important issues in the past. There views deserve to be taken seriously, as a rule.

We all make judgment calls. We all make mistakes. Many of us can even write bad books and only realize it later on. But if you want to make someone out to be a fool, you really have to present a documented, discriminating, systematic case. Paul Krugman shoots a bit wildly for my taste, both here and in other work.

From: Paul Krugman
To: James K. Galbraith
Posted: Sunday, November 17, 1996, at 4:30 p.m. PT

Enough already! I bet nobody who reads this debate cares about Adrian Wood. Let's just say that other trade economists took his analysis very seriously, but that on close reading, it appears to be a case of bait-and-switch: What looks like a rigorous, number-heavy analysis turns out to be mainly driven by unsupported assumptions.

But anyway, this (really, truly) last message is not for Galbraith, but for readers--if any remain. It is this: Save my list of fallacious doctrines, and check it when you read or hear solemn, seemingly knowledgeable commentary about the global economy. I guarantee that you will encounter over and over again exactly these propositions, stated authoritatively by writers or speakers who believe themselves to have a deep understanding of the issue. And that is an empirically testable proposition.

Comments

[James Killus]

An interesting and enlightening exchange.

Let me simply interject a splinter from my own hobby horse. It is possible for international trade to be used as a negotiating tool (read: method of blackmail), to wring substantial wage concessions from workers, tax breaks from governments, etc., even when the actual effects would be small, or even (strange concept this) when moving manufacturing from a high income to a low income country makes no business sense whatsoever.

In this, I note an appeal (and a mea culpa, as I paid the arguments little heed at the time), to James' father, in The New Industrial State. There, he makes the case that the general ethos of the managerial class can be of critical importance to an economy, and, at the time, I thought that there would be some market discipline at work. The past several decades have demonstrated that no such discipline exists, that powerful managers can acquire vast sums from failing enterprises, and that an entire country can become victim to control fraud at the highest levels.

[Winslow R.]

ECONOMICS RIVALS
Intellectuals split on erosion of American worker's well-being.

SYNOPSIS: Compares Krugman's work to Thurow's. Evenhanded, spends a lot of time talking about person rather than dispute.

http://www.pkarchive.org/others/thurow.html

Kind of hard to relate to either Krugman or Thurow when they are pulling in $15,000 to $30,000 / speech respectively often times to international banker types if I recall correctly.

It would be nice to have an update.

[Bruce Wilder]

All of these arguments are just plain wrong -- you don't have to believe that markets are perfect, or that orthodox economics explains everything, to discover that they just cannot be made to hang together. . . . Save my list of fallacious doctrines, and check it when you read or hear solemn, seemingly knowledgeable commentary about the global economy. I guarantee that you will encounter over and over again exactly these propositions, stated authoritatively by writers or speakers who believe themselves to have a deep understanding of the issue.

1.) Wages in America have stagnated because we have lost high-wage manufacturing jobs to imports.

2.) Workers are hurting because labor has failed to share in national productivity gains.

3.) A country's economic success depends on its ability to move into industries with high value added per worker.

4.) Manufacturing has a multiplier effect on living standards because countries with high manufacturing productivity also have high wages in the service sector.

5.) Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses.

6.) There are some industries in which Third World countries have achieved near-Western productivity, yet wages in those industries remain far below Western levels; therefore, rising productivity will not lead to higher wages in the developing world.

Hmmm.

[Lafayette]

Hear ye, Cambridgians

Article: Paul is a moderately liberal neoclassical economist, formed at MIT. I am an unreconstructed and very thoroughgoing Cambridge Keynesian.

And, this demonstrates a world of difference from two campuses in Cambridge that are less than two miles apart one from the other?

Somehow, I think Jamie better reflect upon how the "world" of economics has morphed and reformed itself into an amalgam not quite as distinctive as he implies.

Besides, economics will remain in its neat academic cocoon until it learns to express its ideas, theories and conclusions in more common nonsensical (read practical) and less mathematically deductive ways. Besides, thinking that human behaviour is predictable mathematically is instinctively... uh, inhuman. It's like saying that asteroids and humans have easily observable and therefore predictable comportments.

Finally, many have come to believe that the soft-sciences (economics included) have much to learn about and from one another. There is, perhaps, insufficient diffusion of thought and theory amongst them. And, if they have not done so, who is responsible for the compartmentalization of the disciplines -- if not university departmentalization? Meaning, the "us" versus "them" syndrome of academic behaviour. (Particularly, I dare say, on the East Coast?)

Mine is just a wee-wicked opinion from someone schooled (in economics) from the "other side of the Charles River" -- a place Cambridgians refused to recognize existed. Academia does not have its Pride & Prejudices? Oh, indeed, it does.

As I recall ... it was all such a long time ago. When Jamie's father was forging the fundamentals of Understandable Economics and its relation to Public Policy at Harvard.

And we are left to wonder what he would have said of the plutocracy that has manifested its ugly head in America.

[Geb]

Has anybody done the arithmetics again? Particularly productive growth vs wage growth? And which positions has Galbraith or Krugman changed their views on over these 15 years?

[hari]

Mark is upto academic mischief here, I think.

There's a lot of disconnect in the body politics today; the media is no longer controlled by the establishment; internet and blogosphere has proliferated with all sorts of *opinions* from Darwinism to social economic analysis. Lots of people - younger generation - don't read the printed press anymore. They've their own internet press and more....

Rosser tried to get me to define *academic* qualification to comment n politics today. It was a rhetorical q's, if I understood him correctly. Because the guy knows full well we're in a prolific age of *opinions* and *views* - as expressed above by Jamie/Paul on economics.

The bottomline is what Mark introduced - not long ago - on *sociology* of economic science and whatnot. *Behavioral* approach to economic analysis is right now in blogosphere and elsewhere. So, it may be we're entering a new generation of social sciences in which economics, as we've known it, may no longer meet the day-to-day requirement of the masses to understand the nature of social developments in a country and society.

Anecdotes from past remind me of a session in which Jamie's father and Myrdal were discussing *challenge to affluence*.
Their concept of economics was basically its political framework and impact on society-at-large. Namely, political economy. That was essentially their domain of intellectual discourse. Not all this mathematical metrics trying to decode the *real* world of political economy. Like an x-ray photo of a human body, it's a reflection of that moment. Not more.

So, as I know Pauls work and intrinsically consider them stuff which might one day give him *official* recognition in international trade policy, Jamie is nevertheless arguing my principal thesis, namely quantitative analysis must not be limited to algebric or mathematical formula(s). Dani Roderik argued with me that my conclusions can only be based on some thoretical assumption (or not). I've avoided proximity to theoretical economics in decision-making policy setup and promoted a bit more socalled *sociological imagination* to try and focus on the real world out there - I suggest that is the real tool of economic analysis.

[acerimusdux]

1. "Wages in America have stagnated because we have lost high-wage manufacturing jobs to imports"

Here, Krugman argues that wages on the whole have not stagnated. But he is counting everyone, including management, including all sorts of advanced degrees, doctors, lawyers, etc. And, as James points out: "trade has displaced relatively low-wage manufacturing jobs, not high-wage jobs".

But did the average person, on hearing someone like Lester Thurow refer to the loss of "high wage manufacturing jobs", really believe that he was suggesting that these manufacturing jobs were at the very top of the pay scale, alongside CEOs (yes they are also included in the broad compensation statistics cited--at least as far as salaried compensation), and Cy Young winners? Was it not clear that what was being talked about were the type of jobs that were "high paying" only compared to the other opportunities then available to relatively uneducated workers? Like the typical unionized automobile industry factory job that at the time in discussion, say the 1980's, might have paid $15 an hour when the minimum wage was $3.50?

It seems to me the statement can mostly be corrected by referring to "wages for unskilled, or lowly skilled, workers" rather than merely "wages".

2. "Workers are hurting because labor has failed to share in national productivity gains."

Again, I think we can likely correct this by simply replacing "labor" with "unskilled labor".

3. "A country's economic success depends on its ability to move into industries with high value added per worker."

Well, I'm not sure what is meant here. Value added per time? Isn't that pretty much a definition of productivity? Would it be wrong to say that as productivity increases, output increases? Not knowing what sources Krugman is addressing here I'm not sure whether this is what was meant or not.

4. "Manufacturing has a multiplier effect on living standards because countries with high manufacturing productivity also have high wages in the service sector."

Again, I would guess that what is meant here is that productivity increases in one sector of the economy (such as manufacturing) can also lead to higher wages in the another sector (specifically the service sector). This seems plausible, as increased incomes would likely lead to increased demand for services. But if it was asserted that this was uniquely true of manufacturing, that might be incorrect.

5. "Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses."

What is meant here? Always will? Or that they can? Or is it a prediction that some would? (China?) Or is the objection that a trade surplus would be expected to lead to a capital account surplus (and thus outflows)? Obviously, "large capital inflows" might not preclude a net capital account deficit.

6. "There are some industries in which Third World countries have achieved near-Western productivity, yet wages in those industries remain far below Western levels; therefore, rising productivity will not lead to higher wages in the developing world."

This seems to be more of an outright error. Maybe the underlying point is that increases in productivity don't always translate into increases in wages. But to imply the never do, or should be expected not to, is a bit much.

[a]

Very interesting exchange, thanks for posting it.

"there is also a large area on which the experts do agree..." There's a very useful exercise which one can conduct about any assertion, however trivial. How do we know? Commutative Law of Addition: how do we know? Theory of Relativity: how do we know? OK, so there is a large area on which the economic experts agree. Unfortunately, Krugman doesn't actually provide an example; he instead provides 6 assertions which are false, but nothing which are true (and agreed to be true by the "experts"). So what is an example of a complicated economic assertion on which the experts do agree? (I want something more than the simple, "For most goods, which price goes up, demand goes down.") And more importantly, how do they know it?

Now there's an assumption behind Krugman's thinking: that if the experts agree, then they are right. But for any empirical science, of which I think economists would claim their subject is one, the implication doesn't necessarily follow. For instance, all the experts in 19th century physics believed in Newton, but Newton wasn't, or at least as we believe today, right. And there can be structural biases among any set of people. You (MT) posted that maybe a chemical causes a certain type of thinking among economists. Krugman recently posted about a poll of business economists that showed 75% thought McCain's economic policies more responsible.

Now I'm sorry this gets people's backs up. Sorry for that.

[Lafayette]

acer: 3. "A country's economic success depends on its ability to move into industries with high value added per worker."

Well, I'm not sure what is meant here. Value added per time? Isn't that pretty much a definition of productivity?

Not only, but innovation as well. Productivity is part of the competitive equation, but when a nation can no longer compete on wages, just where does it compete?

It must make up the disadvantage with innovation of old methods and invention of new products -- not necessarily new technologies, but these as well.

If, for instance, GPS becomes a popular overnight sensation, then car manufacturers must see that they are integrated in their new models. And not just the top end. [Why do they innovate only at the top end? In the shortsighted belief that the innovation is an inducement that will attract people who would preferably buy a bit lower in the range. But, cars are products of highly Conspicuous Consumption. So, a high end car is bought for its trademark and not necessarily its gadgets.]

Old methods require changing. Wine making in France is a prime example. Is it really smart to forbid a water-drip in a crop suffering from a summer drought? Well, in France, you can't in wine regions of specified appellation. Which means, if a bad year yields a bad wine, it's Mother Nature's will. Which is kinda stupid. Especially in a market with very heavy global competition.

As regards productivity: One of the pitfalls of production economies of scale is that the mechanism breaks if a company changes product components too often. The minimum price is reached at only maximum production rates. So, companies are really quite reluctant to increase unit product costs by continual changes. And yet, in some industries, this can lead to market disaster.

So, when Market Analysis exacts that a Product Design must be enhanced for the product to remain viable, then it becomes a crucial business imperative. It is surprising how many companies do not understand this rule -- only to find themselves inevitably with inventory accumulations that they must rebate in order to sell.

Those that do observe the rule, however, are likely to want to dislocate manufacturing off-shore to maintain defensively a product's competitive viability in its marketplace. They don't have much choice, because if they don't get to market "firstest with the mostest", then their competition WILL.

NB: And, none of the above has been found by regressing any data. It was learned the hard way ... empirically.

[hari]

What is amazing right now is economic developments on mainland China, and also India. May be Indian macro developments will more or less reflect Cambridge (UK) intellectual influence than US.

However, mainland China may be ploughing-in a quantitatively different paradigm shift in (global) economic metrix - none of which is calculated in Jamie/Pauls discourse.

The q's of efficacy of a social system based on an ideological platform of equality and *scientific development* (without any perceived opposition), and including its SWF, may lead us into a totally different ballgame sooner than later.

[anne]

http://krugman.blogs.nytimes.com/2008/05/08/why-you-should-hate-economists/

May 8, 2008

Why You Should Hate Economists
By Paul Krugman

From the WSJ: *

"Almost half of the economists in the latest Wall Street Journal forecasting survey decided against answering a question on which presidential candidate offers the most responsible fiscal policies. However, Sen. John McCain was the clear favorite of those who answered the question."

McCain offers the most responsible fiscal policies? Notice that this wasn't about who you think will be most economically sound in general, or who you think would be better at fiscal management in practice — although even there, nothing in the Republican party's past 30 years offers any reason to believe that it would be responsible in any way shape or form. But this question was about what the candidate is offering — and McCain's proposals are, demonstrably, ** wildly irresponsible.

It's true that the WSJ seems to have surveyed business economists rather than academics. But this is still shocking.

* http://blogs.wsj.com/economics/2008/05/08/many-economists-back-mccain-but-more-are-silent/

** http://taxvox.taxpolicycenter.org/blog/_archives/2008/4/17/3644448.html

[anne]

http://www.nytimes.com/2008/05/06/books/06kaku.html

May 6, 2008

A Challenge for the U.S.: Sun Rising on the East
By MICHIKO KAKUTANI

THE POST-AMERICAN WORLD
By Fareed Zakaria

What a difference five years — and one war — make!

In a 2003 article in Newsweek, written on the eve of the invasion of Iraq, Fareed Zakaria — a columnist for the magazine and the editor of its international edition — wrote: "It is now clear that the current era can really have only one name, the unipolar world — an age with only one global power. America's position today is unprecedented." He went on to declare that "American dominance is not simply military. The U.S. economy is as large as the next three — Japan, Germany and Britain — put together," adding that "it is more dynamic economically, more youthful demographically and more flexible culturally than any other part of the world." What worries people around the world above all else, he wrote, "is living in a world shaped and dominated by one country — the United States."

In his new book, "The Post-American World," Mr. Zakaria writes that America remains a politico-military superpower, but "in every other dimension — industrial, financial, educational, social, cultural — the distribution of power is shifting, moving away from American dominance." With the rise of China, India and other emerging markets, with economic growth sweeping much of the planet, and the world becoming increasingly decentralized and interconnected, he contends, "we are moving into a post-American world, one defined and directed from many places and by many people."

For that matter, Mr. Zakaria argues that we are now in the midst of the third great tectonic power shift to occur over the last 500 years: the first was the rise of the West, which produced "modernity as we know it: science and technology, commerce and capitalism, the agricultural and industrial revolutions"; the second was the rise of the United States in the 20th century; and the third is what he calls "the rise of the rest," with China and India "becoming bigger players in their neighborhoods and beyond," Russia becoming more aggressive, and Europe acting with "immense strength and purpose" on matters of trade and economics....

[anne]

http://www.nytimes.com/2008/05/06/books/chapters/books.html

May 6, 2008

'The Post-American World'
By FAREED ZAKARIA

The Rise of the Rest

This is a book not about the decline of America but rather about the rise of everyone else. It is about the great transformation taking place around the world, a transformation that, though often discussed, remains poorly understood. This is natural. Changes, even sea changes, take place gradually. Though we talk about a new era, the world seems to be one with which we are familiar. But in fact, it is very different.

There have been three tectonic power shifts over the last five hundred years, fundamental changes in the distribution of power that have reshaped international life - its politics, economics, and culture. The first was the rise of the Western world, a process that began in the fifteenth century and accelerated dramatically in the late eighteenth century. It produced modernity as we know it: science and technology, commerce and capitalism, the agricultural and industrial revolutions. It also produced the prolonged political dominance of the nations of the West. The second shift, which took place in the closing years of the nineteenth century, was the rise of the United States. Soon after it industrialized, the United States became the most powerful nation since imperial Rome, and the only one that was stronger than any likely combination of other nations. For most of the last century, the United States has dominated global economics, politics, science, and culture. For the last twenty years, that dominance has been unrivaled, a phenomenon unprecedented in modern history.

We are now living through the third great power shift of the modern era. It could be called "the rise of the rest." Over the past few decades, countries all over the world have been experiencing rates of economic growth that were once unthinkable. While they have had booms and busts, the overall trend has been unambiguously upward. This growth has been most visible in Asia but is no longer confined to it. That is why to call this shift "the rise of Asia" does not describe it accurately. In 2006 and 2007, 124 countries grew at a rate of 4 percent or more. That includes more than 30 countries in Africa, two-thirds of the continent. Antoine van Agtmael, the fund manager who coined the term "emerging markets," has identified the 25 companies most likely to be the world's next great multinationals. His list includes four companies each from Brazil, Mexico, South Korea, and Taiwan; three from India; two from China; and one each from Argentina, Chile, Malaysia, and South Africa.

Look around....

[save_the_rustbelt]

I know a gentlemen who manages a speaker's series, Krugman's agent quoted $35,000 for an hour speech. Wowser. Now.....

Economist steel cage death match!

Problem is, a lot of ordinary folks can suffer when these eggheads are wrong.

The idea that we could make a quick transition from a manufacturing economy to a service economy was ludicrous, but those who are safely tenured on the east coast have trouble understanding this reality.

If average real wages are going up, then everything is groovy.

Given that several thousand US newspapers are available on the Internet, the ignorance displayed by the economic elite is appalling.

[save_the_rustbelt]

old joke revised:

Bill Gates takes 9 homeless guys to a bar to buy them a drink.

Paul Krugman stops by, and correctly calculates that the average net worth of the ten men is $5 billion each.

[ken melvin]

Could have such Lincoln/Douglas style debates more often if we had a better media. In lieu thereof (this better), and in stead thereof, perhaps a people's TV on the internet using webcams. What PBS was in it's heyday, what?

[2slugbaits]

One quick point to Lafayette....Krugman was talking about the other Cambridge.

This exchange between Galbraith and Krugman did not end up going where I thought it would go. I thought the argument would be about purely formal (or mathematical) economics versus something like applied Alfred Marshallian economics or perhaps cliometrics. Afterall, it was around this time (1996) that Krugman and Deidre McCloskey (one of my old mentors) started a longrunning argument about the proper role of mathematics in economics. When people talk about mathematics in economics they usually have three different notions of math. On the one hand there is the sense in which math in economics simply means that things have to add up or quantitatively hang together. That's the sense in which Krugman was using the term. But there is a second, although related meaning of mathematical economics. When you say that the numbers should add up, you are also implicitly assuming that there is some formal mathematical model that tells you how the numbers should add up. In other words, Krugman's critique seems to be that non-economists are simply guilty of not actually checking the data. That's fine, but I think Galbraith's point was a little different. Galbraith's point was that before you go and check the data, you have to have in mind some theoretical model that tells you which data to check. And a lot of mathemtetical economics is purely formal; i.e., you write set down some assumptions that make intuitive sense, manipulate the differential equations or check to see if the Hessian matrix is always negative definite, blah, blah, blah...and eventually you arrive at a mathematical conclusion. You are then left with two choices: (1) test the theory by comparing it to the real world data, or (2) test the data to see if it matches theory. Economists do both. The third sense in which people understand mathematical economics is in the dispute between theoretical economics and the relatively atheoretical nature of applied statistical economics (a.k.a., econometrics). For example, a cointegrating relationship might be statistically important but may not have any intuitive or theoretical economic meaning.

So while the exchange between Galbraith and Krugman was interesting, at the end of the day I was a bit disappointed. I thought it could have gone down more interesting avenues.

[Lee]

Paul Krugman says: "...still, few would suggest that the chief justice of the Supreme Court ought to be someone without a law degree, far less that not having any legal training was a positive asset for the job."

Huh? As a lawyer by trade I find that statement offensive. I, and many lawyers I know, would love to have a non-lawyer -- and someone without legal training -- on the Supreme Court. The job of justice is not primarily a legal one. It's about writing skills, logic, and thought. Maybe Mr. Krugman is being wishy washy by using the qualifier "chief justice" rather than a mere justice, but I would love to have a philosopher, scientist, novelist, or other intellectual on the Court.

[Bruce Wilder]

Krugman asserts that people's "stories" should hang together, which I interpret to mean, to be arithemetically consistent, given some model of the relationships among variables.

Stories are narratives, rather than analytical models. Narratives concern a sequence of events, tied together by moral factors. Hero confronted a great challenge, labored hard and fought valiantly, overcame the challenge, achieved new insight, and lived happily ever after (or died tragically). That's a basic template for narrative, and from narrative, we derive a notion of cause and effect, the bastard adoptees of science.

Economics supplies an analytical framework in which to build mathematical, analytical models, which define systematic relations among various parameters and variables. An economic model informs narrative, allowing substitution of a well-understood systematic relationship for a merely moral one.

Economics, as practiced on the op-ed page and even in the elementary textbooks, is prone to slip back into purely moral narratives, with no relation to the analysis of system. We can see this, whenever the moral virtue of a balanced budget or the hazards of moral hazard are discussed. Professionals are by no means exempt; Greg Mankiw's Ten Principles of Economics exemplify.

The analysis of systems is, to my mind, the essence of science: it is trying to figure out how the machine hidden in the black box of the physical world, of the natural world or society functions. If narrative is about meaning, analysis is about function.

Pure analysis is strictly imaginative, and the world of analysis is, as the philsophers might say, a priori, and, perhaps strangely, bereft of factual implications. And, though analysis may establish relationships among various factors, there's no moral narrative, or even a "cause-and-effect" "because", but simply interdependent relationships. The law of gravity establishes a relationship between mass and weight; it doesn't explain "why" my diet isn't "working".

Marshall's Supply and Demand framework, for example, does not tell us anything about a particular market, if we don't supply any constraining facts, any values for the variables. But, of course, economists do let some stylized facts slip into the models. The Supply curves slope; the Demand curves slope; the "Law of Diminishing Returns" is confidently invoked -- facts that make "intuitive sense" are readily admitted. But, the filter on facts is selective, and a lot of what Dani Rodrik calls "first-best economics" (and what I call right-wing claptrap) derives from a heavy and selective filter on facts combined with arrogant pride in the mastery of a particular analysis of system. (An odd-ball, corrupt or actually despicable set of personal preferences rounds out the make-up of the modern right-wing economist. Never underestimate the importance of bad taste and plain meanness hidden behind the intellectual pyrotechnics.)

As acerimus dux ably points out, Krugman's six doctrines, which are "simply wrong" can be viewed, instead, as somewhat fuzzy descriptive propositions, that don't seem "simply wrong" because they don't have a necessary connection to any particular analysis of relationships.

5. Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses.

sounds like a common impression about China. The "because" makes it a narrative story not an analysis, but the rules of narrative only require a moral relationship -- in this case, sacrifice, in the form of "low wages". So the moral sacrifice of low wages "attracts" (another moral relationship, perfectly OK in narratives) trade surpluses and foreign investment (which are, by implication, "good things" -- again reinforcing a moral relationship).

I cannot read minds, and I won't attempt to read Krugman's. Economists have been trying to disabuse people of the idea that, say, a trade surplus is a "good thing" for as long such things have been discussed. The "balance of trade" was a 17th century (16th?) invention, and a surplus has always been counted a good thing in the popular imagination, as has a "strong" currency. The balance of payments has just as lengthy a lineage, and just try to convince a gringo that the balance of payments always balances.

[bernard Yomtov]

Lafayette,

Please. The word is "Cantabrigians."

[anne]

Lee:

"I, and many lawyers I know, would love to have a non-lawyer -- and someone without legal training -- on the Supreme Court. The job of justice is not primarily a legal one. It's about writing skills, logic, and thought. Maybe Mr. Krugman is being wishy washy by using the qualifier 'chief justice' rather than a mere justice, but I would love to have a philosopher, scientist, novelist, or other intellectual on the Court."

Agreed completely, as does my legal-type sister.

[save_the_rustbelt]

My barber understands the effect of trade on blue collar wages better than Krugman does.

Not much of an advertisement for economics.

[ken melvin]

Ah yes STR, again the difference between the real and the abstract.

[s]

5. Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses.

Putting aside Bangladesh for a moment, can someone explain why this statement is wrong when viewd through the China model prism?

I amke no claim to beoing serious intellectual, but strikes me that anyone who would claim the current vendor financing relationship the US has embeddedin the global system is a healthy develpments needs to a checkup from the headup?

Previous poster alludes to the notion of innovation as an extension of productivity. My question is if the current trade system is so efficient at allocating resources and repatriating capital to the US in lieu of low cost manufacturing jobs, why is it China will only allow entry of high tech with technology transfer - think intel? OR why are they so reluctant to free up their financial systems so we can capitalize on our "innovation advantage?"

Seems economics is best left for the classroom unless Krugram can get everyone around the world to cooperate with US innovation and even then I am suspect. At least they called it trade and not free trade.

[ndd]

I confess that as I write this, I have only read half of the correspondence above. Nevertheless...

Wouldn't it be most interesting to juxtapose Krugman 1996 with Krugman 2008? Has he not embraced some of the very positions he disparages in this correspondence? (Didn't he recently acknowledge that something like 1/3 of the increase in inequality in this country can be laid at the doorstep of globalization?). And what does that say about embracing the algebraic story for coherence if 12 years later the algebra has been shown to have missed a crucial variable?

[paine]

krugman circa 96
ought to pay a visit to his descendent krugman 2008

brash ???
yes
then and now
has paul 96 aged like a fine wine ??
nope

is the krugman vinyard produces a beter wine today
still brash but ......

YES YES INDEED

some particularly bright
double domed types
with a deep past
as cheerleaders
for an untrammeled globality
may not now sport
an 'umble hair shirt of utter self-diffidence

butthen there was 97
and now there is the summer of 07
and yes
all that has run amock past us in between times
here on terra economica

[James Killus]

"My barber understands the effect of trade on blue collar wages better than Krugman does." -- STR

Everyone should be held accountable for their assumed models. In this model, STR is the ultimate judge of who best understands the effects of trade on blue collar wages.

What a surprise.

[john woolley]

2slugbaits:
"So while the exchange between Galbraith and Krugman was interesting, at the end of the day I was a bit disappointed. I thought it could have gone down more interesting avenues."

I agree, they never got into the "real" issues.

[Lafayette]

bY: Lafayette, Please. The word is "Cantabrigians."

Oh, really? Google the word "Cambridgians".

You're welcome, btw.

[Lafayette]

2s: Krugman was talking about the other Cambridge.

Galbraith trained at Harvard. Krugman at MIT.

Both are in Cambridge, Massachusetts -- just across the Charles River from Boston.

I may not know economics as well as these two individuals, but I'm pretty good at geography.

[2slugbaits]

Lafayette,

Here's Galbraith's quote from their exchange: "Within economic theory, our differences can be stated even more simply, for those who know the jargon. Paul is a moderately liberal neoclassical economist, formed at MIT. I am an unreconstructed and very thoroughgoing Cambridge Keynesian."

The term "Cambridge Keynesian" has a very specific meaning. Here it is: http://cepa.newschool.edu/het/schools/cambridge.htm

[save_the_rustbelt]

James:

Reread Krugman's six point list.

Does he really think he is that much smarter than Thurow, Reich, Bluestone, Kuttner, and etc.?

Krugman may be a lot smarter than me, but that entire list?

Until last year Krugman insisted trade had a negligible impact on wages. I suppose if you sit in Princeton and average investment bankers with unemployed auto parts workers that could be true, statistically anyway.

It does not, however, reflect reality.

If you want to know what is happening to blue collar wages, talk to a barber or a bartender in a blue collar area.

But then maybe Krugman really doesn't care all that much, as long as his grand globalization schemes are moving forward.

[ken melvin]

J.K. - I'll bet you that the barber knows before the economist. Back before offshore, Craig;s list, and the huge increase in illegals; one could tell more from the want ads for engineers than they could from reading economists projections. During this time, I could tell more from how many budgets were approved than from reading any business section. The question is, how do the advisers and decision makers get a better read.

[Lafayette]

2s: The term "Cambridge Keynesian" has a very specific meaning.

For you. Btw, I don't dispute what you say.

I maintain that there is an academic rivalry at issue here between MIT and Harvard, regardless of what jargon James Galbraith employed.

And, that is perhaps part of the problem, because it is certainly not part of the solution. It is to be found throughout academia, not just in Economics.

[Lafayette]

Cognitive dissonance at play

s-t-r: as long as his (Krugman) grand globalization schemes are moving forward.

You don't like globalization so Krugman has "grand globalization schemes"?

C'mon, give the guy a break. You may not like what he has to say about globalization, or me for that matter, but it is not off base.

The industrial paradigm has changed radically and some Americans refuse to acknowledge that evident fact. Which is the raison d'etre of their nearly-fundamentalist protectionism.

[Student]

O.K. I'll bite. Speaking as someone who knows little formal economics (the residue of courses taken during the administration of President Harding) but still desires to learn: would one of the learned explain why this:

"A country's economic success depends on its ability to move into industries with high value added per worker."

is wrong? So far, everyone has taken the stance that for sophisticates such as everyone here no explanation for something so obvious need be given.

Also, couldn't this:

"Because of their low wages, developing countries will simultaneously attract large capital inflows and run large trade surpluses."

be rescued by changing "trade surpluses" to "current account surpluses?" I'd imagine most people mean that, although it's technically wrong, just as most people do regard the percentage of GDP going to wages to have shrunk because they don't think of billion-dollar compensation packages as "wages" or the top 0.1% as "labor."

Finally, I'd like to point out that PK himself has explained why he changed his mind between 1996 and the present: no one then anticipated how large the volume of trade with China would become. Changing views due to changing circumstances isn't inconsistency, it's good sense.

[Alex Tolley]

I find it interesting that economists don't, apparently as a rule, do the arithmetic - if I understand PK correctly. Of course it is important that the arithmetic one does do is the appropriate one.

In harder sciences, experiments and predictions will quickly determine if the arithmetic is correct. As a description of reality, economics seems to suffer from a lack of good models that can predict outcomes - possibly because of the nature of the beast. As BW says, the economics narrative can take on moral tones, not something one would expect of a science discipline.

[save_the_rustbelt]

Lafayette:

I'm not saying globalization shouldn't or won't happen.

What I am saying is that from a tenured chair in a faculty office it is easy to pontificate and scheme and theorize without having any skin in the game.

I frequently compare economists to sports writers - they want to control the conversation from the safety of the sidelines.

[2slugbaits]

STR,

The fact that economists don't have any "skin in the game" strikes me as a reason to pay attention to what they say. Another word for it is "objectivity." Or to take a medical analogy, just because someone has a terminal disease, that does not make that person on expert on the diagnosis, prognosis or treatment. Similarly, just because rustbelt workers are feeling pain does not mean they correctly understand why they are feeling pain, what can be done about it, or how to go about ameliorating their condition. Being a victim doesn't make you an expert.

[save_the_rustbelt]

Being a victim doesn't make you an expert.

True, but being an macroeconomist does not provide one with a license to pontificate, let alone trash talk anyone who does not see the world in exactly the same way.

Krugman's career and economic position are highly unlikely to change regardless of what happens with globalization and trade, in fact, if blue collar wages are depressed his pay check may actually go further.

No skin in the game indeed.

[Lafayette]

stud: would one of the learned explain why this: "A country's economic success depends on its ability to move into industries with high value added per worker." is wrong?

Well, it wasn't wrong for as long as it worked, and because it apparently does not work presently it is considered wrong; but when it seems to work again in the future, it will return to our good graces.

Get it? Things that work in economics seem faddish. They come in and out of fads as explanations of phenomena.

Anyone who anchors themselves to a fixed and invariable definition of "what works" is in for a bumpy ride in this game. Why? Because the soft-sciences are just that, soft. An experiment in physics is predictable because it renders the same result, which is why it is believed true.

The soft-sciences, including economics, does not work always in the same repetitive manner -- even thought we would like to think it should. Collective human behaviour has an element of herd-instinct, which is wholly unpredictable, and therefore economics must also demonstrate this herd-instinct at work. That ain't easy.

Methinks.

[Eric Dewey]

Great post, Prof Thoma - thanks from a non-economist whose focus is on logic and clarity of thought.

Although I'm late to the discussion, three thoughts occur to me that I have not seen in the comments above.

1) Is it possible that the real challenge here is the language being used to talk about what PK calls "the arithmetic"? To an outsider with only minimal econ, but a fair grasp of math concepts, it seems as if the fight here is less about the economics than it is about a lack of agreement on the quality of proofs derived using mathematic tools, and whether proofs derived accurately are being appropriately applied.

2) With regard to the concern about whether the larger audiences (comprised of economists, politicians, and the general public) understand the challenge or are being led astray, it seems as if the real point may be that, in the US at least, most are not really taught to use mathematical logic (or even philosophical logic) - we're taught to use tools like calculators or computers to do the heavy, difficult thinking. A natural result is that our thinking is obscured with unproven assumptions that we don't bother to investigate (but this has ALWAYS been true of most of our species...)

3) Alfred Crosby, a historian and geographer at the University of Texas, has a fascination essay about the rise of quantification in Western culture called "The Measure of Reality". Anyone truly interested in tracking the PK/JG argument back thru history should pick it up - it's a short read.

[James Galbraith]

To clarify a minor point, the Cambridge I referred to was, indeed, the one in England.

JG