Robert Levine of Rand emails this reaction to Paul Krugman's
essay on the state of macroeconomics:
On Krugman, by Robert A. Levine, Rand: Being a saltwater economist, by
ideology and a bicoastal education and career, I of course think that Paul
Krugman’s “How Did Economists Get it So Wrong?” made some major points that
needed making, and as usual made them very well.
But he also left two major omissions, inclusion of which may change the states
of both theory and the economic outlook. Neither has either appeared in
the commentaries I have seen.
The first omission is of Joseph Alois Schumpeter.1
Krugman did mention the name in two sour asides; it apparently does not appear
in any of the commentaries. Schumpeter is remembered by many of his
colleagues as an unpleasant man as well as a political reactionary. I was
not in a position, as an undergraduate in one of his courses shortly before he
died, to judge the former. The latter was certainly true: he was a
He was also one of the seminal economists of the 20th century.
He was a rabid anti-Keynesian, but in fact his central concepts of innovation
and entrepreneurship integrate well with Keynes and fill in a major gap.
Keynes’s discussion of investment provides a complex analysis of the
relationship of profits and interest rates; it says little about where the
profits come from. That is what Schumpeter is about: not the routine
buying and replacing of capital goods, strongly influenced by the close
profit/interest relationship, but the “autonomous” investment stemming from
doing new things in new ways. Such investment then invokes the Keynesian
multiplier, the Keynesian (but post-Keynes) accelerator, and business cycles
endogenous to the narrow profit/interest relationship but exogenously induced.
In particular, Schumpeter’s emphasis on innovation-induced “long waves” (which
he named after their discoverer, Nicolai Kondratieff), starting with the
industrial revolution and continuing through railroads, the telegraph, the
telephone, automobiles, aircraft, radio, and—after Schumpeter—television and
computers and the “information revolution” fills a crucial gap in
the saltwater/freshwater debate. Much of the causation for the really
major macroeconomic movements since World War II simply lies outside of that
debate as now waged..
Schumpeter’s emphasis on the regular periodicity of Kondratieff and other
shorter cycles has been generally and properly criticized; in the last century
such regularity if it existed at all was interrupted at least by the two World
Wars. But the concept of innovation, with creative destruction and all
that goes with it, stands; it is widely accepted by economists—and then ignored
as a macroeconomic factor, e.g., in the current debate.
This leads to the second omission, the failure to treat with the fundamental
causes of the dreadful decade of the 1970s. Krugman covers it as a cause
of the major parting of the waters between salt and fresh, which it is, but in
fact the major cause of the dismal economy and the consequent dismal economics
lay outside of both; rather, it was in the fundamental global redistribution led
by consolidation of OPEC and the oil boycotts stemming from the Yom Kippur war
and then the Iranian revolution. The oil sheiks took control of a crucial
portion of world product. Oil consumers had to adjust, cutting back on
their own portion either by slowing growth and increasing unemployment, or
bidding for what was left, thus engendering inflation. Economists adjusted
by inventing, and then arguing about, rational expectations. Stagflation
brought about no good responses either in the real world or the economics
The 70s can be looked at as a Schumpeterian wave in reverse: instead of
growth-engendering structural change, the assertion of power by the
oil-producers was a growth-inhibiting (at least for the major developed
economies) structural change—with consequences yet to be analyzed.
The developed economies, and the rest of the world, recuperated from the 70s via
a true Schumpeterian wave created by computers and information technology, and
ending, as Schumpeterian waves do, in the bursting of the IT bubble in the late
Whether the housing/financial bubble has anything to do with Schumpeter is
arguable: the attempt to spread home ownership through financial innovation
might be treated as an example of useful entrepreneurship gone bad, or the
pervasive financial devices themselves might be classed in the same genre.
Underlying much of the current malaise, however, is another real-economy factor
not mentioned in the current debate, the rise of the developing economies, led
by China and India. Like the oil producers of the 70s, they are
claiming increasing portions of world product. Unlike the sheiks, however,
they are producing more rather than rather than grabbing existing product.
The needed adjustments for the developed world may nonetheless be traumatic,
including stagflation as the world economy (apparently already led by China and
India) returns to growth.
Whether this is “negative Schumpeterianism” is probably not worth worrying
about. What we should worry about instead is coping with the
consequences—to Us—of major economic restructuring. Financial reform and
short-run monetary or Keynesian stimulus, necessary for short-run melioration
have little to do with the long run. We may have to await the onset of another
truly Schumpeterian technological wave, whenever that occurs.
A term of the 1930s, long-since forgotten, was “secular stagnation”; when
the Great Depression was ended not by technology but by deficit spending to
finance World War II, the fears that growth had ended until an unforeseeable
future were forgotten. One hopes that this time the turnaround will be
based on technology, not war or even indefinite peacetime deficits, with
positive change beginning soon.
In my grandmother’s version of Keynes’s most famous statement, “We should live
1 Another; name, completely
omitted, is that of John Kenneth Galbraith, but his semi-institutional
economics remains, of course, beyond the pale.
(Much of this commentary is based on Robert A. Levine, “Adjusting
to Global Economic Change: the Dangerous Road Ahead”, RAND OP-243-RC)
Posted by Mark Thoma on Thursday, September 10, 2009 at 10:19 AM in Economics, Macroeconomics |