A few years ago, I read several, popular books written by MIT economist Paul Krugman. But I don’t remember reading about any of his own novel contributions to the discipline. I vaguely recall that some of his more important contributions dealt with international trade, but I could be wrong. Can any economists clue me in?
Krugman writes regular columns for the New York Times. Caution, you may have to register to access.
Aah Krugman. He will win the Nobel prize (in about 15 years) and a lot of people will whinge about it. Krugman has some good stuff and packages it so it will get a lot of attention. Krugman’s interests are in trade theory and international finance/ macroeconomics. Trade theorists are as close as our little profession gets to high priests. In the eyes of many economists an idea is not established until it is stated as a theorem in an international trade paper. For example the concept of “rent seeking” (the wasteful expenditure of resources made in pursuit of an existing source of gain) was first published by Gordon Tullock, yet much of the credit is usually given to (trade economists) Anne O Kruger and/ or Jagdish Bhagwati because they formalised it in an international trade setting.
One important paper by Krugman is Is Free Trade Passe? which introduced the notion of Strategic Trade Policy. Some would say that this line of thinking was more sizzle than sausage, since it was at root just a restatement of the problems of scale economies in the large country case of trade theory.
Krugman in recent times has been an enthusiastic proponent of a variation of Keynes’ liquidity trap theory in response to Japan’s economic problems. Broadly speaking he believes that the Bank of Japan can (only) re-establish the Japanese economy by a deliberate and credible policy of increasing inflation for the foreseeable future. Other economists suggest: (i)doing nothing will be fine (ii) depreciation of the yen (widely rumoured to be politically impossible)(iii) big government deficits (iv) having a depression. FWIW I believe (iv) is the only one that will work.
Krugman is also involved in the recent emphasis of what are called increasing returns in economics. It is hard to give much of a flavour of what is going on here. Suffice it to say that much of the dominant neoclassical school has depended on the assumption of diminshing returns to scale to [ahem] solve their equations. This begs some pretty important questions. A number of scholars including Krugman – as well as Arthur, Buchanan and Yoon, Yang and Borland and Arrow – are attempting to integrate increasing returns into the mainstream.
So yes, Krugman is a serious guy as well as a columnist.
bibliophage, jcgmoi, picmr - thanks for the info!!
*Originally posted by picmr *
picmr,
Any chance you could elaborate a bit on increasing returns (if not, can you at least recommend some good sources)?
While Kruger and others sometimes get a nod from journal authors on rent seeking it was James Buchanan that recieved the Nobel Prize in Economics for the notion of rent seeking.
Traditionally, economists have worked on the principle of diminishing returns. This idea states that economic events eventually lead to “negative feedback” and an equilibrium of prices and market share. This was seen as a stabilising force; major economic events trigger other events that counteract them - for example, high oil prices in the 1970s encouraged energy conservation and increased oil exploration, which stabilised prices in the 1980s.
Increasing returns theory states that this isn’t always the case, and that the very opposite can be true. Krugman and others believe that small economic events can be magnified, receiving “positive feedback”. Economic events occur by chance, and it is quite possible for a particular product or nation in a competitive marketplace to become “locked in” to a path where they forge ahead. This is regarded as random as it is not necessarily the “best” outcome.
The example often used is videocassette formats. Initially VHS and Betamax were “equal” in terms of market share and timing. VHS got “lucky” and started to move ahead slightly, and these changes were magnified to the point where VHS has been “locked in” and taken control of the entire cassette market. If Betamax was truly technically superior then it underlines the “random” element; the best system didn’t win.
I hope that this explanation isn’t too wide of the mark. It’s based on about 15 minutes’ reading just now.
I forgot.
Part of the reasoning behind increasing returns:
[ul]
[li]As production increases, unit costs and R&D costs fall, thus profits are continually increasing.[/li][li]As production increases, experience in the process rises and the ability to apply it to improvements or related products rises. This is sometimes pointed out with regard to Japan: experience in the precision instruments market led to increasing returns in the electronics market.[/li][/ul]
mattk is doing a good job on the increasing returns stuff, but I’ll try to think of a good reference eponymous.
I don’t agree with kesagiri’s attribution of rent seeking to Buchanan. He won for his many contributions to public economics in general and public choice in particular. His Nobel prize was for his development of the contractual and constitutional bases for the theory of economic and political decision-making. (from http://nobelprizes.com/nobel/economics/1986a.html )
One of the fundamental aspects of public choice theory is rent seeking behavior.
Also, Buchanan’s notion of constitutions is a means to try and circumvent the problems associated with rent seeking behavior.
From your link
Take, for example, the budget policy aspects. People ask what’s the best example in practice of Public Choice thinking. It’s clearly the explanation of the budget deficit regime. The key to Public Choice, as you said earlier, is common sense. And common sense tells you that a politician is very much like the rest of us. A politician who’s seeking office or seeking to remain in office is responsible, as he should be, to constituents. He wants to go back to a constituency and tell them that he’s either lowered their taxes, or he’s brought them program benefits. You plug that into politics and you have a natural proclivity of a politician to create deficits.
and
*Personally, I’m not the type of economist who does much testifying before Congress or for political parties. I’m very, very much ivory tower. The only policy issue at all that I’ve been on board with is the balanced budget: the constitutional change. So I did a little bit of work during the period when they were trying to get state resolutions for a constitutional convention. *
A couple of points (or worthless centavos):
I would like to know more about the concept of increasing returns and its implication to economic theory. The Betamax - VHS example is IMHO unsatisfying as the market’s selection of VHS was based on that format’s ability to record movies on broadcast and cable - despite Beta’s admited “superior” quality.
The case history of the market choosing “lesser” quality goods is legion. It all depends on what you define as inferior.
The concept of increasing returns to scale, lowering production costs and raising prices is also too numerous to mention - the rise of Standard Oil or Carnegie Steel are typical examples.
Observers outside of the economics profession have for some time derided economic theories that are based on mathematical principles. Their argument (if I can do it justice) is that ecomonics, as a branch of philosophy, and thus dependent on the random acts of consumers/producers can never have as reliable a model of behavoir as in physics or chemistry. Thus most ecomonic papers are almost entirely descriptive of past behavoir and are of only a slight improvement (if at all) in predicting future trends than the classical principles set out 100 years ago by the English and Austrian schools of economics.
As for “Public Choice”, its not clear how this discipline has broached many barriers not knocked down before. The example given that all politicians favor deficit spending seems to me to be contradicted by the history of representative democracy here and abroad. For most of the 19th century (save during the Civil War) and up through the 1920’s, the U.S. ran budget surpluses. Yet those politicians were not much different from those today. The outgoing President, a master politician, has with the GOP Congress, eliminated the Reagan deficit in a astounding short period. Thus, this example too seems IMHO rather unsatisfying.
Rent seeking - or the expenditures to gain market power - goes back to Adam Smith. It’s nothing new. John Rockefeller’s increasing returns to scale gave him additional profits that allowed him to negotiate costly deals with the railroads designed to squeeze out his competitors. Buchanan & Tullock’s contribution I believe was to point out how rent seeking was used most effectively to achieve government sanctioned market power. But this concept - along with the idea that examples of “market failure” (thus a spur to government intervention) are often instead implied private contracts - are neither new nor entirely compelling.
As we read this we are witnessing the fruits of the predictive nature of the economic profession. Chairman Greenspan’s rate hikes earlier this year has cooled the economy (by raising short term interest rates above the long term trend) in hopes of producing a so-called “soft-landing”. The Fed’s models are undoubtably sublime. But they probably did not include the decision this year by the market to discount tech stocks back to the actual level of their financial performance. Nor could they model the wealth effect that that decline entails. We shall see.
I’m sure there will be a number of articles in the Times by Dr. Krugman but many more mathematical “models” in the economics journals. One can wonder whether these “models” are themselves a rent seeking expense as they add little in value but are completely necessary to gain peer-review approval and hence through publication, the monopoly job security of tenure. 
Nixon,
Try reading some of Buchanan’s writings on deficit spending. It is his position (well a simplified version of Buchanan’s position) that Keynesian economic theory gave politicians the excuse they were looking for to engage in deficit spening. It broke down long standing beliefs that deficit spending is bad.
As far as Public Choice, it is older than Buchanan and Tullock. There is the work of Duncan Black, Anthony Downs and Kenneth Arrow. Public Choice just isn’t about deficit spending, it is about using the tools of economics and some of the underlying assumptions to model political actions. Take for example’s Arrows early contribution, his impossibility thoerem. That theorem showed that it is essentially impossible to have a benevolent social planner that isn’t a dictator.
Your joking right? You want to scrap a hypothesis based only on one observation and the fact that you only have at best a cursory understanding of the hypothesis? Have I got that right?
Also, if you look at the CBO forecasts the surpluses that Gore and Bush were/are so keen of using for their respective programs are the optimistic case. Seems to me that if you submit budgets based on the optimistic case you are basically setting yourself up for deficits down the road.
I read the above comments and was reminded of the parenthetical comments in that post. You do realize that those sublime Fed models are the product of those worthless mathematical models that you find in journals. Think of the journals as sort of like a fashion show. Not too many people read them or use their results, but eventually they will filter out to the rest of world, just as the clothes at the fashion shows are worn by everyday people they do influence the styles that are worn by everday people.
It would appear that my humble request for enlightenment on the school of public choice economics has fallen into the all too sad response of: “Well you just don’t understand our jargon and arcana enough.” Here’s 17 books for you to read.
Forgive me but my time is short and I’m not really convinced that there is anything at all there. Seems to me more like a right wing branch of political science. All the public choice economists tools (and all of their horses) will IMHO model political choice as well as the left wing poly sci pundits do now - poorly.
IIRC, is not one of this school’s “findings” is that voting is a paradox? My, my how deep. Forgive my saracasm but it reminds me of the great mathematics debate of 100 years ago about the nature of the number 1.
So, Professor Arrow has “proved” that a benevolent social planner must be dictator? I’m sorry I can’t stop giggling. Gosh darn Sweden must be a hell hole. Oh I’m sure that Sweden is not the example Dr. Arrow was looking at.
Could it be perhaps, that unlike true science, where results count - bear with me now - that Dr. Arrow’s conclusion was in his mind before he set out his proof?
Forgive me but if Dr. Arrow were a card carrying Marxist-Leninist economist and his theory converted him to the free market style, then I might be persuaded.
As for Keynes who (I’m sure you really mean the post-Keynesians) gave deficit-minded politicians the proof that they were waiting for - again I’m sorry that’s another leap of faith the profession of economics is so mired in at present.
Could it be instead that the social democrats in Europe had a definite social agenda regardless of how it was to be paid for? Could it also be that deficit spending has a very long and well documented history before Keynes - for example in Latin America?
No, I’m not joking about the trinity of Clinton, Greenspan, and the GOP that erased the deficit - I’m deadly serious. Facts are reality that must confirm or break philosophical theories. The erasing of this deficit is a fact - and one that IMHO obviates the theory that all politicians are wedded to deficits. Yes, yes “it” is “one” observation - as much as the Great Depression, or America’s WWII deficit spending were “one” observation.
America’s debt during WWII exceeded even the GDP in 44 & 45. Yet those dastardly politicans, Democrats and Republicans paid down the WWII debt retiring it by the late 50’s and early 60’s. Why? And Gosh darn those Germans - both SDP and CDU both were (and are) committed to eliminating their war debt (and all deficit spending) right down to today. Surely if a chemical reaction (or ecomonic principle) works here in the U.S. it must work everywhere.
But this begs the question: is economics a branch of philosophy (from whence it came) or more like the physical sciences?
I am joking about the “sublime” nature of the Fed’s models. They are as good as they get. Nor do I feel that economic models are worthless, just that they can only take you so far. Dr. Greenspan’s struggles with labor productivity this last decade (apparently a key factor in the sublime models) is a good indication of their merit.
As for everyday people lusting after the haute couture of economic fashion shows, I’m sure you know the implications. The Fed’s current credit crunch is already having real implications for everyday people. Monkey Wards and its 35K everyday people may be just the first. Granted no government can or should protect jobs but this credit crunch is self induced - an act not by the market but by big government.
I hope they are right. And wish the general public would take a longer look at this rather hidden part of our government.
Eek! I was going to get back to you Nixon and say that you had some pretty fair points. [This is getting a little Great Debatey and away from topic of Paul Krugman, but anyway…]
No. For starters “non-dictatorship” condition doesn’t mean dictator in that sense. The condition means that no one individual’s preferences can be taken to represent society’s. Nothing to do with anyone’s capacity to impose outcomes. Arrow’s theorem showed *that it is not generally possible to have a decision rule which reflects individual preferences. *
::shrug:: This line of thinking says that we cannot explain the way people vote by pointing to which party is liable to make them better off. I think it is an interesting result.
But economic policies are not economic principles.
Prediction is hard in the social sciences. One reason is that for a great deal of the subject matter controlled experimentation and replication is not possible. We can have a toy financial market in the lab and see whether we get a strong rational expectations equilibrium or whether people free-ride in public goods experiments, but for something like the macro economy it is not possible. We can learn some things about the macroeconomy, but it is pretty unsatisfactory.
Another pretty fundamental problem with prediction at the macro level is that the experimental subjects talk back – and contrary to your remarks, they are quite systematic about it. Suppose I come up with a really good prediction for the US economy (or some financial indicator of it). The model will very shortly lose any predictive power since investors will move to take advantage of the profit opportunities the model (briefly) affords them.
Nonethless we can do some things. We can happily say that putting a price cap on a market will lead to queues (and probably black markets and corruption as well). We can predict that open ocean fisheries will be overfished. We can predict that having a realisations basis (rather than an accruals basis) for the taxation of capital gains will increase asset holding periods. Howe different depreciation regimes will change investments in the mining sector compared to other sectors. And various other things.
As for
Sure, to some degree. And indeed that’s how some regard education in general: a wasteful process for allocating status. Others would seek to dig a little deeper and suppose that[ul][]Academics in general are paid like this beacuse it is very costly to measure output.[]Althought the incentives are somewhat perverse the by-product of all this activity is worth something.[/ul]Nonetheless if you were to say that many top economics journals (the American Economic Review the Journal of Political Economy etc.) are full of articles that have a hundred equations for precious little knowledge, I’d have to agree with you.
*Originally posted by mattk *
How are increasing returns any different from the forces influencing agglomeration effects? Or are the two concepts similar (at least in the impact that the two share on economic decision making and outcomes)?
For a guy who knows nothing about a subject you sure are quick to condemn it. Hmmm, what is this type of person called….closed minded?
Also, I didn’t say read 17 books, I said read some of Buchanan’s writings, not all of them are books. But, as for books try Deficit and Democracy.
And finally, oh Presumptuous One, what makes you think you are the only one who does not have lots of time on their hand? I gave you the basic thrust of Buchanan’s view and a recommendation for more if you are interested. However, since you have already decided that it isn’t worthwhile why are you bitching?
Well I could point you to some research on this, but since you don’t have the time to read I shall not waste your time or mine.
However, the notion of the paradox is that the common way of thinking of voting is that if you assume people vote because of the effect their vote has on the outcome then the logical conclusion is that nobody should vote. However, if nobody is going to vote if you do go to vote your vote will be decisive. What is missing is a more rigorous analysis. What is needed is to put the problem into a game theoretic setting and look at it that way. Some people have, but I shall not bore you with their results, since you already know this is just a bunch of crap.
Whatever.
In lots of economic writing there was reference to an aggregating function for preferences, a social welfare function, such a function would essentially allow one to find the optimal social outcome. Arrow showed that all such functions violated one of several reasonable conditions one would want the social welfare function to have. One was non-dictatorial. The notion of dictatorship in this case is that the a dictatorial social welfare function is where the social welfare function is one person’s welfare function. Hence these appeals to social welfare functions were not really appropriate.
Maybe he had some idea of what the result would be or maybe not. You might want to ask him. However, this is actually a theoretical result for theoretical models not some sort of empirical analysis. In short, it is a mathematical proof. The proof is valid whether you like it or not. Frankly I don’t know what your beef is with it, I gave it as an example of how public choice is about wider issues than you implied. I find your need to try and discredit Arrow Impossibility Theorem strange.
Psst, Nixon, your ignorance is showing. Professor Arrow is not noted for his conservative leanings. Quite the contrary I’d say, but then I have never met the man, I have just read is professional writings.
No, if we are going to talk about shools of economic thought I’d have to say that what Buchanan was referring to is more correctly called the Neo-Keynesians. And no, they didn’t give them any proof, but they undermined the old thinking on fiscal policy, that the best way to promote a sound economy is to keep the budgets balanced. This is one of Buchanan’s hypotheses.
So economics is chemistry? Why am I thinking false analogy?
The actual title of Buchanan and Wagner’s book I mentioned is
Democracy in Deficit : The Political Legacy of Lord Keynes.
Go for the paper bakc version if you do decide to buy it is only $12.00 while the hard cover version is $65.
Sorry, eponymous, but I’m not as familiar with this as picmr or kesagiri, and I don’t want to end up giving you a totally wrong answer!