Robert Levine responds to your comments on "On Krugman":
Response to comments on "On Krugman" by Robert Levine: The variety in content and style of the comments on my rumination “On Krugman” (and on Schumpeter, and on China and India) rather surprised me. So here is my response, or at least to
First, let me try clear up two points on which I was apparently less than lucid:
1. My footnote mention of Galbraith was not intended to introduce his views or even his book, The Great Crash, 1929, into the debate on what seems to be known for the moment as the Great Recession. (If it turns down again, it may become Great Depression II, a la World War II.) Rather, it was a too indirect reference to the fact that his skepticism about mathematical and other rigorous theoretical economics would be likely to extend to all sides of the debate outlined by Krugman. It is a skepticism with which I agree. Richard Parker’s John Kenneth Galbraith: His Life, His Politics, His Economics is an excellent and highly readable exposition, although it does lead one to wonder at points which of the views are Galbraith’s and which are Parker’s.
2. I am as dubious as any of the commentators about the regular periodicity of Schumpeter/Kondratieff waves. As a daily bike rider along Santa Monica beach, I am fully aware that waves arrive in all sizes and at a range of intervals. But they are nonetheless inexorable and difficult to model mathematically, were anyone to try. (To bring in the true predictability of the tides on which they ride, however, would probably push the metaphor too far.}
But the irregularity does not vitiate either the relevance to the current situation of Schumpeter’s wave-producing concentrations of innovation and entrepreneurship, or their absence from the current debate. What lies outside all the models, conceptual as well as mathematical, on which the debate has been based, is that: inventions from the steam engine through the transistor to the world-wide web are transformed into innovations by profit-seeking entrepreneurs not terribly sensitive to interest rates or the state of consumer demand. Entrepreneurs’ starry-eyed views of great wealth to be gained transcend these margins.
The information-revolution/dot-com-bubble provides a near-perfect example. Steve Jobs, Bill Gates, Larry Page and Sergey Brin, and the more diffuse set of progenitors of the internet, (and many others who missed, but you can probably Google their names up) thought they had billion-dollar breakthroughs. The interest rates charged on their initial financing may have changed some timing slightly; the demand for Burroughs electric calculators, Britannica encyclopedias, and communications via Western Union was unlikely to have been changed. The money, for the entrepreneurs and their venture-capital investors was in the huge gains from IPOs and subsequent developments.
Many of the secondary followers made big money too, but the wave extended inevitably into the silly dot.coms, and the bubble expanded and burst as it always does. Nonetheless, the result for was a true revolution in the ways of providing and distributing goods and services: the economy of 2008 would not be recognizable from 1978, nor was it predicted. (I think that the current housing/financial boom/bubble can be interpreted the same way, but that interpretation would have to be more complex.)
As Gary Rondeau’s comment on my initial piece noted, the World Dynamics models of Forrester and Meadows do cover such systemic changes. But they are not models referenced in the current debate. Additionally, although it is in bad taste to continue to refer to one’s own writings, I will mention one more of mine, “Thinking Big”, in the Milken Institute Review, first quarter 2001 (too early to be on line, but hard copy reprints available FREE at www.rand.org/pubs/reprints/RP938) in which I discussed the deep cultural reasons why the U.S. leads (led?) the world in entrepreneurship.
Which introduces the other subject of my piece and the comments—China, India, et al—about which I have less to say because my rumination was more ruminative. The fast-developing countries have based their development thus far on combining our technology with their low wages (a combination made possible by the information revolution). But Chinese and Indian peoples, noted centuries ago for their inventions, have been in recent years among the most innovative—the technology/low-wage nexus being a major case in point.
Even if we are not on the way to losing our entrepreneurial advantage, however, that which has happened and continues to happen is profoundly disruptive. Whether or not the changes can be understood as a “negative” Schumpeterian phenomenon as I suggested, they are fundamental changes in the real global economy that cannot be coped with very well using either saltwater or freshwater models.
None of this is intended to suggest that the debate or its models are trivial. They may not, as I have suggested, cover the basic causes of our current troubles, but they do treat with the melioration of the results. And melioration is crucial: left alone as they were before 1933, the downsides of Schumpeter/Kontratieff waves and lesser cycles have in the past caused immense human misery and immense, if pre-nuclear, wars. They must be meliorated better than they were in the first half of the 20th century.
And I will end this comment on comments as I did my initial contribution. Depending on Schumpeterian innovation on the one side, and developing-country competition on the other, we may be in for a long trough—the “secular stagnation” of the 1930s. In that case, I am firmly on the ultra-Keynesian (and what may be the Krugman) side with regard to means of melioration. Secular stagnation may mean secular deficits; so be it, it is better than the alternatives.