Asymmetrical Information

"For example, in his opus on income inequality, (Paul) Krugman wrote, "if the rich get more, that leaves less for everyone else."

Holy cow, I was unaware that Krugman ever said something this stupid. One expects such zero sum thinking from a radical Marxist nut ball, but isn't Krugman suppose to be a highly respected economics professor? My guess is that Krugman so desperately wants to be perceived as a liberal among his academic colleagues--and the New York Times editorial board--that the man has damaged his ability to think and follow a logical argument.

I also highly recommend that those wishing to start an internet business read Arnold Kling’s “Under the Rader.” This book deserved a much larger audience, but unfortunately was released shortly before 9/11. It’s apparently now out of print, but you might wish to hunt down a copy.

It just goes to show what a mouthpiece-parrot hack Krugman is.

No sense in 'defending' Krugman. It's clear by now that there is no nonsense partisans won't believe if it fits their notions of how the world works.

But if you guys are really interested in learning about economics, there is only one way. It's not easy, it requires study and lots of mathematics.

And reading Internet articles by HIGH SCHOOL professors is no substitute. That's like reading Ayn Rand and thinking you have mastered philosophy.

As for bad economics one of the few economic 'truths' that is completely counterintuitive is that of comparative advantage. maybe some of you should explain it to this White House and ask them why they imposed those steel tariffs?

He's got a PhD from MIT, GT, and he worked for a Federal agency until he left to start his own business. You'd be advised to check your sources before you start insulting them.

Sorry, that tells me quite little. He's completely distorting Krugman's point (which is mathematically true). So he either is an idiot or a liar. Which do you choose?

Well before you mouth off on how dumb Krugman is or make dittohead comments, why don't you go and read the paragraph that follows the quote. As far as the more economics based Krugman columns go this one was poor, but it is not as dumb as selective quoting makes it out to be.

There you go Jane, you got two people calling Krugman idiots, and two people defending him. Your work is now done.

Oh, and there are hundreds and thousands of people with PhD freom top universities.

Only a very small portion go on to be professors and academic researchers.

An even smaller portion go on to be professors at the top schools.

And even within that gorup an even smaller portion go on to be considered the top in their field.

Finally, even among those only 10 in the last 20 years have been awarded the distinction of being considered the best economists under 40 (Clark Medal).

So if someone who has probably never done any academic research and has no reputation on that matter is going to comment on the writing on the economist that the MIT economics department described as the 'preeminent economist of his generation' he should be a bit more humble and make sure he understands what is being described.

I have found that the use of the word Idoltarian is often the result of a complete misunderstanding of the positions being labeled as such. For instance the writer of the article suggests that "Idoltarians" consider drug company profits as evil. Are there people who see profit as evil? I guess there are, but there are those who point out quite reasonably that manipulation of the legislative process by industry lobbyists have produced laws that skew the principals of market pricing. This creates a governmentally protected profit stream that would not exist unless the industry had the benefit of the governments exclusive police power protecting it. The profit itself is not evil, the profit being made as a result of inequitable manipulation of the free market is.

The author also points out the absurdity of that idea that our economy is a zero sum game. What he doesn't mention, and is equally absurd, is that wealth creation is bandwidth on demand. Resources such as raw materials, labor, skills, capital and so forth are not unlimited therefore the creation of wealth has a ceiling at any given time.

The author confuses sloganisum for economic thought. "Tax cuts for the rich" not unlike its equally moronic twin, "Class Warfare" are merely icons for concepts that are too complex to discuss in the 15 second sound bite. While there are undoubtedly people who believe that sound bite politics is a valid substitution for sound economic thought, there are also people who are convinced we never landed on the moon. So what?

I have heard many tell me that by cutting taxes the economy will create enough jobs to return to the treasury enough revenue to wipe out the deficit. Really? Has anyone done this math? How many new jobs must we create in order to increase federal revenues by 400 billion dollars? My back of an Eskimo Pie wrapper calculations say between 40 and 60 million. Do people who believe this qualify as Idoltarians?

“And reading Internet articles by HIGH SCHOOL professors is no substitute.”

Argument ad hominem attacks are a poor substitute for reasoned analysis. A defender of Paul Krugman should instead deal with his peculiar remarks. Are they taken out of context? Was Krugman not feeling well when he wrote them? Did the editor accidentally delete a few lines? Have space aliens taken over Krugman’s identity? Can anyone offer an explanation that makes him sound even half way sensible?

GT, Kling didn't say that Krugman didn't understand the concept; he said his writing sounded suspiciously un-economic. As it does; few economists I know use zero-sum economic models.

I wasn't saying that Kling was better credentialed than Krugman: just better credentialed than you. If you want to play that game, you're as unqualified to comment on Kling as he is on Krugman. And you can't justify everything Krugman says with his credentials, because I'd be happy to drag up multiple Clark medal winners who disagree with pretty much every assertion you defend. For example, given your politics, I'm sure you're not going to want to unreservedly accept everything Kevin Murphy says because he's got THE CLARK MEDAL. All of which is irrelevant, because none of the stuff in Krugman's columns, except a few on steel tariffs, is even vaguely related to the work that got him the medal; he's not really more qualified to comment on, say, energy or labor policy than your average economics grad student. So why don't we keep it on the merits of the argument, hmmm?

Of course, the quote is pulled out of context. The next sentence in Krugman's piece puts it in context; he states that "if the rich get more, that leaves less for everyone else" is a simple matter of arithmetic.

This makes it clear that "get" is being used in an intransitive sense which I regard as grotesque but comprehensible. For any given level of income, the larger the fraction x, the smaller the fraction not-x. Krugman ought to use "have" here rather than "get", but any but the most heroic grammarian would have to admit that that boat sailed long ago.

I would also note that Kling's own statement immediately following the bit where he calls Krugman an idiot is, IMO, truly idiotic. He says that "that when someone earns a high income this is because the contributions that the individual makes in the economy have a high market value". If I were to play substantially less fast and loose with transitive and intransitive senses than Kling does, I would note that "making a contribution" is usually understood to refer to an action, and that much of the income of many of the very wealthy comes not from "making a contribution" under the ordinary language meaning of the term, but rather from ownership of wealth, which, whatever else it is, is not an activity.

Don't they teach you at MIT that it makes you look like a crank to put capital letters on Common Phrases in the Middle Of Sentences? Or at the very least, it raises suspicions that you are rather ashamed of the way in which you are trying to use words. Maybe Kling went to school in Germany or something, but even so.

I think most of us commenting on this board are less qualified than Kling.

However, the fact is that what Kling would LIKE Krugman to be saying - which is that the economy is a zero sum game in which a bigger slice of the pie for one implies a smaller slice of the pie for the rest- is NOT what he IS saying.

Krugman's statement is that if the top 1% have a larger share of a pie that has grown in size, they must have taken more of that growth than everyone else. As a statement this is factually correct, and does NOT qualify for idiotarian economics.

Now there may be many people who reasonably agree that the conclusion Krugman draws from it: namely that we should be concerned about the top 1% getting more of that growth in the pie is just wrong. In fact, that kind of debate provocation I would argue is the point of such an article. But to take one misleading sentence nad brand it idiotarian economics while taking shots at Krugman strikes me as, well slightly idiotic.

Of course, I suppose it's pretty natural that MIT doesn't teach a decent course on Marx, but someone who is ignorant(arian) enough to think that:

>>Marx did not portray capitalism as an impersonal system of Market Pricing. Instead, he viewed it as a mechanism for Authoritarian Ranking, in which the capitalist class exploits the working class. The alternative, naturally, was Communal Sharing: from each according to his abilities, to each according to his needs.

really ought to either note that Marx's analysis of the wage-labour relation did not differ in any important particular from that of Adam Smith, or (preferably) to shut up about it.

His analysis of the micro transaction was similar, but his analysis of the macro picture fits Kling's analysis. Labor theory of surplus value, anyone?

>>As it does; few economists I know use zero-sum economic models.

Krugman is here doing his usual, useful job of reminding people of an adding-up constraint; the amount of production in a year, less the amount taken by the rich, less the amount taken by the non-rich, must sum to zero. You surely can't interpret the following paragraph of Krugman's article to indicate that he is using a zero-sum model in any other sense?

In any case, what do you mean, "zero-sum models"? Are you claiming that the majority of economists you know don't use general equilibrium arguments? Bizarre.

It looked like he might have an interesting point in there about the way in which economic thinking is, like much of statistics and science in general, counter-intuitve to people. But I wasn't able to finish it since I was so annoyed at his determination that "idiot" was synonomous with "people who disagree with me."

You can argue that free markets give you the best result. You can argue that to much communal sharing is actually bad for everyone. But simply labeling anyone that puts any value on communal sharing as an idiot is ridiculous, and makes me completely uninterested in anything else you have to say.

And judging from his apparent willingness to utterly distort the words of Krugman (or that he even bothered trotting out such a hoary old hot-button whipping boy), I'd say my initial impression was right.

Are you arguing that general equilibrium is the same as saying that there is a 1-for-1 correspondance between forward-looking tax reductions and the amount of income that gets redistributed to the poor?

>>His analysis of the micro transaction was similar, but his analysis of the macro picture fits Kling's analysis. Labor theory of surplus value, anyone?

C'mon, you're bluffing. I'm happy to explain this if people are interested, but I first would appreciate it if you'd admit that you were bluffing when you claimed to understand the distinction between Adam Smith's political economy and that of Karl Marx, in the particular context of the wage-labour relation.

Feel free to enlighten me, D^2. I've read most of the original works, although it's been some time, but I don't claim to be an expert in Marxist theory. I'm more than willing to learn how the labor theory of surplus value does not, in fact, illustrate the the belief that capital is stealing from the commons. Could you also touch on the deliberate impoverishment of workers is consistent with the market pricing model? Or reality?

Doug, I don't think that's what he's saying. I think he's saying that when people frame market pricing behavior as authoritarian behavior in order to frame it as stealing from the commons, they're very wrong. I'd agree.

>>Are you arguing that general equilibrium is the same as saying that there is a 1-for-1 correspondance between forward-looking tax reductions and the amount of income that gets redistributed to the poor?

Dunno. Maybe. Maybe not. Not sure what you mean, to be honest. But since Krugman has never made this claim in anything I've read, I don't necessarily think it's a productive discussion to be having. Particularly, the article "For Richer..." is not about redistribution and doesn't have much in it about the poor.

And just to clear up a point upthread, Krugman is supremely qualified to comment on labour economics as he has written some excellent papers in this field (admittedly, related to the effects of trade on labour), which certainly were part of the work which got him the prize. The game-theoretic analysis he applied to the California case also looked structurally very similar to some of his work on trade.

And with a bit more reading of that article ... (god what a rambling portmanteu post), I notice that Krugman has a direct argument against Kling's contention that "that when someone earns a high income this is because the contributions that the individual makes in the economy have a high market value". The conclusion to section III is built around the argument that "it's not the invisible hand of the market that leads to those monumental executive incomes; it's the invisible handshake in the boardroom. ". To ignore such a direct argument against one's own position while calling someone an idiot for ignoring it, is pretty intellectually dishonest(arian).

"Are you arguing that general equilibrium is the same as saying that there is a 1-for-1 correspondance between forward-looking tax reductions and the amount of income that gets redistributed to the poor?"

I am not sure what you are getting at with that remark, Jane so I won't comment directly on it. But on the tax issue that Kling raises, he says that

"The phrase "tax cuts for the rich" is designed to trigger an idiotarian response. You are supposed to see a conflict between the Communal Sharing of the tax revenue that naturally belongs to all of us and the Authoritarian Ranking of powerful rich people stealing from this communal resource."

I think this is flat wrong too. The argument here is that one purpose of the tax cuts are designed to achieve stimulus, many have argued quite validly that the magnitude of the tax cuts overall dwarfs stimulus. So then you are left with three possible arguments:

1) The liberal one, which is that from the many different strams of taxes that make up this "communal pool" Bush is picking the one that would help the rich the most if cut.

2) The conservative one, which is that this is an important distortion that should be removed regardless of the distributional effect.

3) The supply side one, which is that the economy will grow like crazy as a result and netiher tax revenues nor distributional effects will be much more than second-order effects.

There is no idiotarian economics in the phrase "tax cuts for the rich" as it has emerged in the current context. Kling again would like to take the phrase out of context but he is ignoring many more obvious examples of idiotarian economics: farm subsidies, steel tariffs, extensions of patents on existing works that don't fit into his political ideology.

“...but I don't claim to be an expert in Marxist theory.”

Heck, I’ll take it one step further. Karl Marx was not even “an expert on Marxist theory.” Interpreting Karl Marx is like taking a rorschach test. Has anyone really tried to read Das Kapital?

King’s analysis rings true with me. I have often discussed issues of economics with people (very smart people) who spent their college careers studying journalism, philosophy, literature, etc. It’s not that they “don’t get it”, sometimes they do (after a while), it’s that the very concepts are so foreign to them. It is a little like explaining simple algebra to someone who has spent their life doing only arithmetic and is completely unaware of the concept of algebra.

I remember talking about the minimum wage with a relative of mine (very smart, high school valedictorian, nearly a 4.0 GPA in college). I explained to him that raising the minimum wage might discourage employers from hiring people they otherwise would have hired. Furthermore, the very people that might not get hired would be those with the least skills, often poor, who were not “worth” the higher wage.

The point here isn’t the minimum wage – I want to keep this as non-partisan as possible – the point is the look on his face as he reasoned through this. It was like watching someone try to figure out a rubik’s cube. It was a thought that had never occurred to him. More important, it was a thought that never would have occurred to him had someone not pointed it out.

This is the silver lining that I find in (don’t shoot me) Paul Krugman. Besides conservatives who want to rant, his audience is generally the highly liberal liberal-arts majors who like what he is saying about politics in general and Bush in particular. Though I virtually never agree with his conclusions, he often introduces such people to economic (market-price) reasoning.

A good example is the energy crisis/shortage in California that became his crusade. As wrong as his conclusions were, he actually did a pretty good job of explaining the breakdown in the economic cause and effect chain. Trust me, your typical graduate from the Columbia School of Journalism had never heard such reasoning before.

>>I've read most of the original works, although it's been some time,

You've read Wealth of Nations, Ricardo's Principles, Capital, the Critique of the Gotha Program and the German Ideology? Chrikey! You must be older than I think, or have had a lot of spare time at some point. Capital is like three volumes long. I haven't read any of them from cover to cover except the Manifesto 1844 manuscripts and those weren't mainly about economics; I did the sensible thing and bought a good commentary and only read excerpts.

>> but I don't claim to be an expert in Marxist theory. I'm more than willing to learn how the labor theory of surplus value

Well, it's been a long time, but maybe you'll recall that there is a "labour theory of value" and a concept of "surplus value", which are not the same thing.

>> does not, in fact, illustrate the the belief that capital is stealing from the commons.

the accepted translation is "alienating", a less value-laden term. Since Marx agrees with Smith that all value is measured in hours of productive labour, the fact that there is a positive return to ownership means that, since this value comes from somewhere, it must come from the wage-labourer. This is ground on which Marx, Smith and Ricardo all agree; Marx's new departure is in stating that the capitalist owner is not necessary to the production process. Under Marx's analysis, all that the capitalist contributes is entrepreneurship and the generation of new ideas. Thus, under historical materialism, there will come a (utopian, but Marx thought we were near to it in 1830!) point at which new technologies are no longer needed to provide a decent life for everybody and the capital-owner will at that point also no longer be necessary. He will at that point have adopted the status of the noble under feudalism or king under slavery and be part of a class dependent on a social relation which no longer serves the dialectic process of human development. Hence revolution, etc, etc. Marx himself believed that that time was nigh and that we should have a revolution, but it wasn't necessary to his theory.

>>Could you also touch on the deliberate impoverishment of workers is consistent with the market pricing model? Or reality?

Marx had a relatively simple model under which price competition between capitalists drove down prices, while the need to keep on redeploying an ever-increasing capital stock under decreasing returns to a fixed factor meant that capitalists could only earn a positive return on capital by driving down wages to the minimum, which meant the subsistence level. It's not a particularly good model, IMO, and it hasn't explained the last hundred years pretty well, but it's very clearly based on market pricing, and is not at all based on the error Kling ignorantly imputes to it. Surely in your perusal of Capital you must have come across some of the myriad references to capitalism as an impersonal process with its own inexorable logic?

sheesh.

D^2:

That's undoubtedly true at the corporate CEO level. I wouldn't disagree; I think an adequate solution to the principal-agent problem is one of the most interesting questions in economics right now. But CEO or other incestuous executive pay is a tiny fraction of people paying the taxes Krugman is talking about. The top bracket kicks in at just around $200K; those folks are highly compensated, mostly professional, but they aren't getting their salary as what Galbraith called "a warm personal gift from the CEO to himself." I had a friend who was pulling in nearly 3/4 of a million a year as a technology consultant, not because he knew someone, but because he was damn good at what he did. Trying to structure our tax policy around Michael Eisner may be emotionally satisfying, but it's also stupid.

>>Has anyone really tried to read Das Kapital?

David, plenty of English translations of Das Kapital are available, usually entitled "Capital". You really are making things tough for yourself if you insist on trying to read it in the original when you have no background in the field.

Perhaps my memory fails me, or my childish college socialism. I've been meaning to get back to Marx, but unwilling to lay out cash for those pricy tomes that are all they ever seem to have in stock. Nonethless, if memory serves, there is a model under which all the value in excess of the input factors belongs to labor, and capital siphons it off, nu?

1) I read very, very fast -- about 3 textbook pages a minute.

2) I was a socialist in college.

Which is not to say that I properly understood what I read; only that I read it.

>>I had a friend who was pulling in nearly 3/4 of a million a year as a technology consultant, not because he knew someone, but because he was damn good at what he did.

Jane, Krugman wasn't writing a whole article about the top tax bracket. He's quite clear that he's writing about the top 1% (starts around $300k?), and within that, most particularly about the top 0.1 per cent. And his whole argument is that they're not a "tiny minority"; they've been doing well enough to skew the whole distribution. I dunno if it's true or not because I haven't done the work, but give the guy credit for what he's saying.

>> Trying to structure our tax policy around Michael Eisner may be emotionally satisfying, but it's also stupid.

Well are you going to tell the current government that or should I?

My point is that even among that top 0.1%, there are 280,000 people. There are 500 CEO's of Fortune 500 firms. There are 5000 CEO's of companies large enough to have noticeable market caps, and of those CEO's, only a small fraction will see compensation in the $1m+ range. Krugman is telling us that we need to tax all 280,000 more heavily because 500-1000 of them - 0.15-0.3% - are getting sweetheart deals. You could deal with another large chunk by spiking the return to capital, but that's not such a hot idea.

>>Nonethless, if memory serves, there is a model under which all the value in excess of the input factors belongs to labor, and capital siphons it off, nu?

In fairness to Jane, this is a quite common interpretation of Marx; although G A Cohen has a very good couple of hundred thousand words about how it's wrong, it's not uncommon and not without support from things Marx said. But my point is that if Marx is committed to it, so's Smith, from the point of view of economic theory, because they both agree that the only source of value is labour, and they both make the distinction between capital and labour.

I myself have never understood what the big deal about the labor thoery of value was. Admitting that labor is the source of all value does not, in my opinion, necessarily lead to the conclusion that capitalists are useless parasites. The coxswain provides no motive power to the rowboat; does that mean he should be thrown overboard?

As I say, I am certainly no Marxist theorist; 19-year-old fellow travelers generally don't have very well developed political leanings. But the question, I believe, is not whether or not Adam Smith made what Kling considers this idiotic mistake (and Adam Smith wasn't really much of a macroeconomist), but whether a reasonable interpretation could conclude that Marx did. I think the general reading of Marxist theory supports Kling's assertion, even if a more sophisticated analysis might disqualify it. Especially since most economists probably understand Marx's work through the later summaries in marxist literature, not close reading of the originals.

I'd like to see Krugman revisit his article now that the income distribution stats are so wildly skewed by equity-based compensation. If one divides the 280,000 top 0.1% by the 5000 CEOs, then one only needs 56 directors and general managers on adventurous stock-option plans per CEO, which seems high but in the ballpark. But obviously, showing the extent to which it was all about stock options means that using the 2000 data was likely to be horrendously misleading.

Interesting point, jimbo. Actually, Marx deals with this in making a distinction between the "wages of supervision" and the "returns of ownership", arguably foreshadowing the development of the modern Berle/Means corporation with separation of ownership and control.

Of course, nobody was "much of a macroeconomist" before Keynes published the General Theory ... but I don't accept your defence of Kling. Nobody who had read any Marxist economics at all could have failed to grasp that Marx's analysis was explicitly based on the operation of the price mechanism.

“In fairness to Jane, this is a quite common interpretation of Marx; although G A Cohen has a very good couple of hundred thousand words about how it's wrong..”

There is no such thing as an authoritative interpretation of Karl Marx’s works. It’s usually a matter of whatever floats your boat. The stuff was such gobbledegook that even Marx probably couldn’t explain it. One is perhaps better off interpreting Nostradamus.

Then one gets into what "supevision" is: is it just the barking out of orders on the factory floor, or does it take into account the whole structure of financial markets that reward certain endeavors and punish others in the marketplace? Like I said, one can admit that all value comes from labor while admitting that the whole structure of capitalism is necessary in order for labor to be properly directed. (I believe that evolutionary game theory would be quite good at explianing this...) Conventional economists seem to have a need to make capital into something "real", apart from its existance as "crystalized labor", which leads to much foolishness, IMO... (Cambridge capital controversy, anyone?)

>>Like I said, one can admit that all value comes from labor while admitting that the whole structure of capitalism is necessary in order for labor to be properly directed

Add "at this point in historic time", and you've got a reasonable summary of Marx's historical materialism, subject to much cavilling on the matter of what value judgments lurk beneath the word "properly".

I read parts of the Krugman piece to see if he "idiotarian" or not - and it seems to me he is dancing around the zero-sum model of economics. He wants to assert it, and he wants to suggest it, but he knows its not right, so the most he can bring himself to do is say things like "you can make a case that our society would be richer if its richest members didn't get quite so much... I could make this argument on historical grounds." Well sure you could, but will you? Then he gives an argument on historical grounds, so you are meant to believe he thinks it is decisive. But he never says clearly that he thinks the economy is zero-sum.

On a tangent, I was quite amused to find this in the middle of the piece. Krugman is talking about corporate "looting":

Economists who study crime tell us that crime is inefficient -- that is, the costs of crime to the economy are much larger than the amount stolen. Crime, and the fear of crime, divert resources away from productive uses: criminals spend their time stealing rather than producing, and potential victims spend time and money trying to protect their property. Also, the things people do to avoid becoming victims -- like avoiding dangerous districts -- have a cost even if they succeed in averting an actual crime.

Jane,

I was going to address the specific deficiencies of Kling’s article but d^2 has done it so much better.

I raised the point of relative credentials not because Kling is unqualified to comment on Krugman but rather that the wide disparity should make him more aware of the need to be as precise as possible (and, by the way, he is not more qualified than me. Based on what I read I would argue the opposite, but in any case that is not the issue.)

Krugman’s academic credentials do not mean he is always right. If he consistently made silly or simple mistakes regarding economics (let’s leave his more subjective political views aside for the time being) than all the Clark Medals in the world would not compensate for that.

But I see in this thread what is now clear to me is a common theme across the blogging world. Accusations against Krugman’s economic points fly with ease but, upon further analysis, they all seem to be based on either outright lies or an inability to understand the points being made.

Such is the case of the “if the rich get more, that leaves less for everyone else." argument. But d^2 already dealt with that.

I have pointed out, in previous threads, the many times you yourself have made specific comments against Krugman that turned out to be wrong once they were look at more carefully. You never responded to my very specific comments so I won’t bother repeating them yet again.

There is a deeper issue here. Kling is wrong from the very first sentence, where he quotes Glenn Reynolds as saying What bloggers are more than anything, I think, is anti-idiot."

This is completely false. Bloggers, I think, tend to view themselves that way but in reality much, if not most, of political/economic blogging is simply a reprise of talk radio. Posters start with pre-determined views and are generally unwilling or unable to accept when they are wrong. That’s just how it works, I guess.

One of the few things I’ve written on my blog is a comment on something Don Luskin wrote, about how bloggers will overtake the NYT. It is this kind of delusion, mixed with the arrogance of the ignorant that will probably lead to blogging never living up to the potential many believe it has.

Oh, please. Do you really think that Paul Krugman is so ignorant as to believe that taxes don't cause a net loss? Of course taxes have a net cost and I expect every single undergraduate economics major understands this. Perhaps in your fantasy world stupid liberal economists are ignorant of the distortions of the income tax, but I doubt that is the case in reality. Perhaps you should pose the question yourself at Delong's website, where a lot of liberal economists seem to gather.

Unfortunately, things like public goods, social preferences, and political influence ensures that we need government expenditures and therefore tax revenue is required. Economists of all stripes seem to disagree on exactly what spending is needed, how taxes should be assessed etc, but that is very different from arguing that taxes don't cause a loss. The relevant argument is trying to figure out what taxes are the most appropriate way of raising revenue (i.e. what is the least distorting). Other than Thatcher's brief unpopular experiment with poll-taxes I don't know of any recent examples of non-distroting taxes but I'll be the first to say I am not a history buff.

>>But he never says clearly that he thinks the economy is zero-sum

Presumably it's just because I'm coming at it from a more sympathetic angle, but I think that what you're seeing here is a quite clever argument from Krugman that some levels of inequality are positive sum (say, those prevailing in the 1950s), while some levels of inequality (say, those prevailing in Russia in the 1990s) are *negative-sum*, because, like very equal societies, very unequal societies create perverse incentives. I really don't think that PK can be accused of the simple lump-of-output fallacy; whatever his argument is, it's obviously based on an understanding that dynamic efficiency matters.

Why, no Achilles, I don't think he's that stupid. But I've never seen him say anywhere in his columns that it does. No one thinks he believes his simplistic column-world, and that's exactly the point. His omissions are, shall we say, strategic.

I think you're reading in a good argument that's not there, D^2. It's like the folks I talked to in the financial community who said things like "What kind of idiot would buy something based on a stock analyst's recommendation?" Well, if you didn't know how the system worked, you. It seems to me that y'all are trying to parse what he said on the basis of "Well, of course he couldn't believe such a simplistic thing", which is true, but not useful, because I don't want to know what he believes -- I want to know what his readers will believe when they are through. Reading what he actually said, as opposed to how it would be interpreted by a reader with above-average understanding of matters of political economy, he seems to me to indeed be conveying an argument to the general reader that the reason the rich are getting richer is that they are stealing from the commons.

Jane,

One last point,

You claim that Krugman is not really more qualified to comment on, say, energy or labor policy than your average economics grad student.

As d^2 explained you are factually wrong.

But you are also conceptually wrong.

The idea that Krugman, or any other top economist for that matter, is no better than the average graduate student on topics he has not written on is simply ludicrous. Economics, as much as it can claim to be a scientific endeavor, comprises a set of methods and models that are common across the discipline. A top economist has shown, by definition, an ability to think in economic terms (something that not all PhDs manage, IMO) and use those basic models and methods.

That’s probably what explains why Krugman got the CA energy crisis so right (another one of your mistakes you never owned up to). He is no expert on energy economics. But he is a good enough economist to know what questions to ask (and that’s usually half the challenge). Something that can’t be said of most graduate students or most people, for that matter.

Damn, the computer ate my last post so now I have to write again.

Jane, I think you have Krugman's column world exactly backwards. In a simple world, lower taxes have less cost than higher taxes. No one who has studied economics will disagree with that, I don't think. But Krugman's column deals with the world we face today in which the primary benefit of lower taxes is a) more stimulus b) reducing economic inefficiency and the primary costs are c) higher budget deficits in the long run and d) greater income inequality. In a simple world c) and d) are not typically factored into the analysis.

So I don't think it is correct to say that Krugman does not lay out both sides of a tax issue. his columns have very directly addressed the four points I raised above [See columns on 2/28/01, 3/17/01, 3/18/01, 5/16/01, 7/18/01 and 7/29/01 for a partial list of examples (I lost the rest in my earlier post) and any of the recent columns on dividend taxes].

You and I can disagree on the relative merits of d), and that Club for Growth guy and I can disagree on the relative merits of c), but disagreeing with how Krugman weights these things is very different from calling him a deceiver who doesn't lay out the facts. So yes, I think Leonard is deluding himself if he thinks Krugman does not understand the cost of taxes.

I think Krugman's old columns were better than his new ones, and I think his tendency to take political potshots often means that he writes less about economics than he should. Alas, those political potshots have brought in a whole bunch of people who like nothing better than to believe the man is stupid and will jump on any half-assed out of context paraphrasing to confirm their own world view.

Sure, Achilles, if you hold spending constant.

GT: although I agree with you on the particular point of Krugman's competence on economics matters he hasn't written about in professional journals, Jane makes a valid general point: just because an economist is an expert in a particular field does not guarantee that he will not say appallingly stupid things in another field.

Case in point: Maurice Allais, who won the Nobel in 1988 (on general equilibrium theories), and who has repeatedly made ludicrous comments about globalization, including the exact arguments debunked in Krugman’s “hot dogs and buns” parable.

“I think Krugman's old columns were better than his new ones, and I think his tendency to take political potshots often means that he writes less about economics than he should.”

I totally agree. One merely needs to read Paul Krugman’s older Slate.com pieces. Unfortunately, he must now dance to the tune demanded by the New York Times ultra left wing editorial board. It recently dawned upon me why neo-Liberal economists Paul Krugman and Brad DeLong get so goofy. Theses guys are trying to survive on Liberal campuses and therefore it behooves them to prove that they aren’t right wing conservative Republicans. It scares the living hell out of them when realizing that at the end of the day---they have far more in common with Milton Friedman and Ludwig Von Mises than Karl Marx.

Jane makes a valid general point: just because an economist is an expert in a particular field does not guarantee that he will not say appallingly stupid things in another field

I don’t think that’s exactly what Jane said. Her point, as I understood it, was that someone like Krugman had no special claim to expertise beyond a graduate student on areas not directly of his expertise. I disagree. But let's leave that aside.

I agree with your point and would take it even further. Even an expert on one field can say stupid things about that very field. If Krugman said something stupid about international economics it would remain stupid despite that it is an area of his expertise. So has he said really stupid things?

The problem with most if not all of the criticisms I have read of Krugman on economic grounds is that, every time I look at them carefully they end up like the one we are discussing now. Simply the result of a misunderstanding (or worse, a bald-faced lie) on the part of the accuser.

Please David, spare me the stuff about Princeton being a liberal campus that would punish Paul Krugman if he seemd too right wing. And if you think the students at Berkeley (especially those wacky left-wing undergrads you like to make fun of) have any influence over Brad De Long you grossly overestimate how much tenured professors in research universities (much less professors of the caliber of DeLong and Krugman)care about currying favor with their undergrads.

Krugman's columns in NYT are more frequent, and less long. I think those two factors are the primary explanation (perhaps added to the fact that he has to write more about domestic economics than international economics) than any meddling by the editorial board. And Krugman is a pretty irascible guy in general, he has been exceptionaly mean in putting down economists that certain members of the far left idolize like Robert Kuttner or J.K. Galbraith.

More than anything though, you are too blinded by what you like to believe. I doubt there are no more than a handful of academic economists who don't believe that they owe more to Milton Friedman than to Karl Marx. It is only in your fantasy world that Brad De Long and Paul Krugman identify with Karl Marx and are shocked to find out they agree more with Friedman than with Marx.

The problem is either frequency or obsession. Every single one of his columns is "Bush administration evil"; it's no more appealing in a liberal columnist than "Bill Clinton: Second Coming of Satan" was from the usual suspects on the right. I don't think anyone's calling him a Marxist.

And Achilles, Princeton and Berkely are the bastions of liberal economics. It's not their campuses, but their departments. Just as you expect to find a certain kind of economist at Chicago or Rochester, you expect to find another kind in those two programs. So that's not inaccurate.

Liberal economics?

What's that?

Two points. David's argument was that"Theses guys are trying to survive on Liberal campuses and therefore it behooves them to prove that they aren’t right wing conservative Republicans", quite a different one from yours, in that it focused on the ideology of the campus and the students and not the department and that was what I was responding to.

But to respond to yours. So why do you say Princeton is a "bastion" of liberal economics? It is certainly more liberal than Chicago, but does that in and of itself constitute a "bastion?" My limited knowledge helps me identify three liberal economists: krugman, Krueger and Blinder. Looking at their website I see another guy Bernanke who is currently on the Fed, another guy Woodford who was a professor at Chicago, three other guys Honore, Williams and Kimmel who got their Ph.D. from Chicago, a guy SIms who was big in the Rochester, Minnesota circles, and a guy Shimer who did some econometric work (IIRC) on the Bush side of Bush v. Gore. Now I know very little about the rest but perhaps you can explain better to me why this is a "bastion of liberal economics".

Berkeley is more fitting of a bastion (Yellen, Tyson, Auerbach, DeLong, Card etc are all names I have seen in the Clinton adminsitration's time or in Brookings papers). It is still along way to go from that to say that Brad DeLong is liberal because he wants to curry favor with his students.

And let's be clear.

Although many of the faculty may be liberal, and so could be described as liberal economists, that is not the same thing as liberal economics.

What is liberal economics?

Is it just economic work done by academics who happen to be liberal?

When a department is predominantly staffed with economists who would, say, never work for a Republican administration, but joyously join almost any Democratic administration that asked, I think it's fair to call it a liberal economics department. And you know what I mean and I am now calling a halt to semantic arguments about trivialities.

In other words you have nothing to back up your claim about why Princeton is a 'bastion' of liberal economics. Unless you know that Princeton professor as a general rule avidly vow never to work for Republican ADministrations.

But sure, we can call it semantics and call a halt.

Well, I don't know what you mean.

I wasn't sure if you were implying that there is some subset of economic theory that could be called liberal economics.

If all you are saying is that there is a greater preponderance of economists that vote for the Dems in Berkeley or Princeton than in Chicago I would agree.

But if that somehow were used to imply that they practiced a different sort of economics then that is a different matter altogether.

Richard Hofstadter rightfully criticized the anti-intellectualism of the idiots. There is nothing good to be said about those who condemn rational thought. However, there is a very valid “anti-intellectual” tradition that Americans should be proud to advocate: we tend to suspect that those possessing an advanced degree behind their name might be a bit nutty. I know that I’m not being totally fair, but so often professional academics are to put it mildly--downright weird! Indeed, earning a living as a professional academic, especially in the “soft” sciences, seems to cause more harm than good. And make no mistake about it, an economist is first, last, and foremost, a philosopher who uses a lot of math to back up their arguments.

"an economist is first, last, and foremost, a philosopher who uses a lot of math to back up their arguments."

Really, I always thought an economist was a social scientist who knew too much math or a physicist who didn't know enough :)

“But if that somehow were used to imply that they practiced a different sort of economics then that is a different matter altogether.”

Imply? Heck, I’m explicitly stating this as a fact. Hard scientists might usually be on the same page because 2+2 always equals 4. The economic philosophers, however, will reach dramatically different conclusions due to the premises underpinning their reasoning. For instance, does one believe that human beings are innately good? I strongly hold that the at least metaphorical reality of Original Sin is alive and well on planet Earth. My economic conclusions will therefore almost certainly contradict those embracing a Marxist perspective.

David,

Given your previous posts forgive me for not giving much weight to your understanding of academic economics.

David, you are railing against demons that don't exist. Go to the 20 best known economics departments in the land, see if you can find 5, heck see if you can find any marxists teaching there. And modern day economics, as far as I understand it, is certainly not built on metaphorical realities and philosophy. In fact I would be so bold as to say that outside of a History of Thought class, all that hi-faluting Marxist stuff that Jane and D^2 were arguing over will not appear in any undergraduate (or graduate) course in economics.

Let’s go the text, shall we? Here’s the full context of Krugman’s statement:

“After all, we really are the richest major nation, with real G.D.P. per capita about 20 percent higher than Canada's. And it has been an article of faith in this country that a rising tide lifts all boats. Doesn't our high and rising national wealth translate into a high standard of living -- including good medical care -- for all Americans?

"Well, no. Although America has higher per capita income than other advanced countries, it turns out that that's mainly because our rich are much richer. And here's a radical thought: if the rich get more, that leaves less for everyone else. That statement -- which is simply a matter of arithmetic -- is guaranteed to bring accusations of class warfare”

So Krugman's statement is made in the context of statistical comparisons of income levels across countries. He’s talking about arithmetic, not economic theory. If country A has a higher per capita income than country B, that doesn’t necessarily mean the majority of people in country A are better off. It might just be a few people at the top of the income distribution are a lot better off. That’s all he’s saying.
If a reader is confused as to what Krugman is saying, then that confusion ought to get cleared up in the very next sentences, when he switches to talking about economic theory:

“If the accuser gets more specific, he'll probably offer two reasons that it's foolish to make a fuss over the high incomes of a few people at the top of the income distribution. First, he'll tell you that what the elite get may look like a lot of money, but it's still a small share of the total -- that is, when all is said and done the rich aren't getting that big a piece of the pie. Second, he'll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.

"These arguments for lack of concern are plausible. And they were entirely correct, once upon a time -- namely, back when we had a middle-class society. But there's a lot less truth to them now.”

Then, after a discussion of various statistical data, Krugman goes on to say (in a clear example of nonzero sum thinking):

“The moral of this comparison is that even if you think that America's high levels of inequality are the price of our high level of national income, it's not at all clear that this price is worth paying. The reason conservatives engage in bouts of Sweden-bashing is that they want to convince us that there is no tradeoff between economic efficiency and equity -- that if you try to take from the rich and give to the poor, you actually make everyone worse off. But the comparison between the U.S. and other advanced countries doesn't support this conclusion at all. Yes, we are the richest major nation. But because so much of our national income is concentrated in relatively few hands, large numbers of Americans are worse off economically than their counterparts in other advanced countries.
And we might even offer a challenge from the other side: inequality in the United States has arguably reached levels where it is counterproductive. That is, you can make a case that our society would be richer if its richest members didn't get quite so much.
I could make this argument on historical grounds. The most impressive economic growth in U.S. history coincided with the middle-class interregnum, the post-World War II generation, when incomes were most evenly distributed.”

So Krugman discusses the counter-arguments to his, even going so far as to brand them ‘plausible’. He acknowledges the generally understood tradeoff between equity and efficiency, and when he speculates based on empirical data that in certain cases this relationship might actually be reversed, he correctly acknowledges that this is a conjecture.

So where exactly is Krugman being irresponsible? It’s instructive in this case to contrast Krugman’s nuanced arguments to Kling, who flagrantly misrepresents Krugman, and brands people who disagree with him as ‘idotarian’ while presenting almost nothing in the way of actual economic theory or empirical data.

Actually, I'd always thought that an economist was someone who was good with numbers, but lacked the personality to be an accountant...

“David, you are railing against demons that don't exist. Go to the 20 best known economics departments in the land, see if you can find 5, heck see if you can find any marxists teaching there.”

I sure there are very few per se Marxists teaching at the major American universities. That’s not my point. However, there are vast differences of opinion regarding how much government should be involved in the economy. These arguments almost certainly revolve around one’s view of human nature. Nobody truly leaves their ideological baggage at the door.

I agree with you there. But for someone who claims that Marxism was not their point the owrd 'Marx' appeared a staggering number of times in your prior posts.

Well anyway, I like R. Simberg's idea and hope that that the provision of many more economist bashing jokes becomes the future goal of this thread so I have something to bust my friends' chops over.

This would be the same anti-idiotarian crowd that fell head over heels for that absurd "Black Mississippi residents are richer than Swedes" study?

The point here isn’t the minimum wage – I want to keep this as non-partisan as possible – the point is the look on his face as he reasoned through this. It was like watching someone try to figure out a rubik’s cube. It was a thought that had never occurred to him. More important, it was a thought that never would have occurred to him had someone not pointed it out.

Have you considered that the reason it was such a difficult thing to reason through is that in real life a) we have a minimum wage but b) we don't have mass unemployment? A $30/hour minimum wage would lead to those kind of distortions, but we haven't ever seen that in the US. It doesn't change the underlying truth that, in general, the minimum wage increases unemployment, but in the specific implementation we have it doesn't seem to do all that much.

But CEO or other incestuous executive pay is a tiny fraction of people paying the taxes Krugman is talking about. The top bracket kicks in at just around $200K; those folks are highly compensated, mostly professional, but they aren't getting their salary as what Galbraith called "a warm personal gift from the CEO to himself."

Maybe this is just a thread I pick up in his stuff, but Krugman rarely talks about the piddling ~$200k earners. It's all about the bazillionaries.

Just plug in "tax" for "crime" and he makes the case against himself quite handily.

You forgot "taxation pays for government services to the public." Otherwise.....

I started to post a long comment, but re-reading Krugman's article just makes me annoyed at his tunnel vision. So I'll confine myself to two short points. (Besides, GT assures us that economics requires a lot of math. It must have changed a lot since I got my BA, then.)

David Thomson says: I also highly recommend that those wishing to start an internet business read Arnold Kling’s “Under the Rader.” (That s/b Under the Radar, of course.) It's still in print, or at least Amazon still has it, with used copies as low as $3.75: click here

As for Krugman's article, I tend to agree with Leonard's post that Krugman's piece dances around a zero-sum analysis without actually endorsing it. His overall argument is that when rich people make more, there's less for the rest of us. Sure, that's mathematically true, but not in a dynamic economic model. And any rational economic model has to be dynamic, doesn't it? Except that Krugman's whole article is static: no mention of families moving in and out of the quintiles of income distribution, conflating 1950s CEO "salary" and 1990s CEO "pay packages", as well as the all too common theme that "rich"="high income".

That's probably true, Jason, although it's almost certainly raising the minimum employable IQ, but there are a large number of people out there who think it would be a boon to the poor if we just raised the minimum wage to $15.

Have you considered that the reason it was such a difficult thing to reason through is that in real life a) we have a minimum wage but b) we don't have mass unemployment? A $30/hour minimum wage would lead to those kind of distortions, but we haven't ever seen that in the US. It doesn't change the underlying truth that, in general, the minimum wage increases unemployment, but in the specific implementation we have it doesn't seem to do all that much.

Jason,

The studies I remember showed a significant jump in unemployment among minority teens and young adults whenever the minimum wage was raised. It's exactly this least-skilled sector where you would expect to see the results.

I agree, the results would be much more noticeable at $30/hr, or even $10/hr. Which is why Ted Kennedy never goes that high.

Actually, I think some of the "living wage" laws passed by some cities go as high as $10 or even $12/hr; has anyone seen studies on the damage resulting from these? (And what kind of jobs do high school students get in those cities, anyway?)

Jason: crime pays for criminal services to the public. You know - boosting retail spending to pump the economy, wealth tranfer from rich to poor to help reduce social income disparities, providing extra money that can be redistributed as charity to selected women and children, providing "protection", and defense against the threat that some other gang will move into the turf.

PJ: the effets of an increase of the minimum wage on wages and employment are lots more complex than what's suggested in a simple supply/demand model.
See for instance Card/Krueger; googling for card-krueger shows up plenty of controversy.

Jane,

That's probably true, Jason, although it's almost certainly raising the minimum employable IQ, but there are a large number of people out there who think it would be a boon to the poor if we just raised the minimum wage to $15.

And a lot of them live in San Francisco.

Seriously, I think the very idea that a high minimum wage would make some people effectively unemployable is simply completely unfamiliar to a lot of people. If any jurisdiction were actually to try a "living wage" proposal on the $12/hr. order (I mean not just for city contracts — SF has that already — but for all employment), it would become obvious, but it isn't now.

Dsquared said:

"Well, it's been a long time, but maybe you'll recall that there is a "labour theory of value" and a concept of "surplus value", which are not the same thing."

No, but the latter is entirely based on the former, so that it should really be called the theory of the surplus value of labor. The whole basis of Marx's theory was the notion that while a laborer puts in, say, 10 hours of work a day, the food, clothing and housing required to keep him alive for that day requires something less than 10 hours to produce--say, 8 hours. So, since the labor theory of value dictates that you pay for things in proportion to the labor required to produce them, the capitalist pays wages equivalent to 8 hours of labor (the cost of "producing" a day's worth of labor power) and in return receives 10 hours of labor. In Marx's world, it's only this unique property of commodified labor--that it gives the purchaser more in value than it costs to purchase--that makes profit possible.

Dsquared also says:
"[Kling] really ought to either note that Marx's analysis of the wage-labour relation did not differ in any important particular from that of Adam Smith, or (preferably) to shut up about it."

Smith believed in the labor theory of value, yes. But where did he provide an "analysis of the wage-labour relation" that draws the same conclusions as Marx? I'd be interested to read it, if you can point me to the appropriate chapter.

"PJ: the effets of an increase of the minimum wage on wages and employment are lots more complex than what's suggested in a simple supply/demand model."

That's absolutely false. A so called "simple supply/demand model" is always of paramount importance. The book you cite "Myth and Measurement: The New Economics of the Minimum Wage" by David Card and Alan B. Krueger, is only able to contend that up to now the national minimum wage law has not impacted negatively on employment rates. Common sense dictates, however, that sooner or later, this will not be the case. The only legitimate question is where the line will be drawn. Will it be an hourly wage of $7, $8, $9, or higher? Regardless, no restaurant owner will be able to pay their dishwashers $100.00 per hour and stay in business.

A few observations:

Regardless of one's understanding of classical growth theory, why does it make any sense to redistribute money away from one economy (or individual) merely because on a per capita basis it is richer than the other?

The 15 largest economies in Europe have a combined population of 375 million, yet they have a combined GDP of nearly $2T less than the US (which also has 80 million fewer people).

To me this suggests that Europe has the labor potential to eclispe the US or at least become equal to the US. Yet, we know that are large part of Europe's problem is its own fault because of the high cost of regulation (compared to the US).

So if Europe is doing everything it possibly could to mitigate endemic problems in its economy (such as lack of cheap real estate), I might be willing to say maybe we should redistribute money to them to fill the gap. Yet, we clearly know that Europe isn't doing everything it can.

Now I've used a non-emotional example of why it doesn't make sense to redistribute wealth. At least I hope no one here is overwhelmed with guilt about Europe's situation.

So why should we feel guilty about Africa's situation or Asia's? I'm not arguing that we shouldn't give them any money at all, I'm just questioning why we should give them money without also asking them to get their house in order.

Let's take India for example. The country clearly turns out an educated class that bar none is the smartest in the world. So why then isn't India's economy also the largest in the world?

I would suggest that it is largely because India's government hasn't done all that it could to reform its economy. Nor has it done all that it can do to make opportunities available to its citizens.

And what about Saudi Arabia? or Egypt? Or Kenya? Nigeria? The Phillipines? Indionesia? Thailand? South Korea? And the list goes on.

In the face of such logic, we (the US) are often told that merely asking other countries to reform is a kind of economic colonialism. And yet, the question stands, why should we unquestionably help those who will not help themselves?

Why wouldn't the same logic also work for the individual?

I find it interesting that dsquared and others have taken the argument down a road where in order for one to participate, one must have extensive knowledge of Marx. While it's certainly noble for one to understand Marxism in its entirety, it is clearly not essential to require it for this discussion unless someone has an axe to grind. Furthermore, I find it odd that Marx has suddenly gained credibility as economic theory when it has been resoundly defeated as an illogical and intellectually incomplete social and political theory.

“While it's certainly noble for one to understand Marxism in its entirety, it is clearly not essential to require it for this discussion unless someone has an axe to grind.”

The radical Left loves to claim that one has no right to speak about their intellectual darlings like Karl Marx, Jacques Derrida, Teilhard DeChardin, or Michael Foucault, unless you have read virtually every single word they have ever written. It’s a form of one-upmanship that dishonestly gets away from the essential point that these clowns really don’t have substantially much to say.

Why is anyone seriously studying Karl Marx? On a priority list of one through ten, Marx rates a negative twenty. A student needs to know something about this disgusting man, and the incredible evil he has caused throughout the world. But there is no logical reason to do any advanced studies on this mediocre individual. There are many other more brilliant economic philosophers and ideas deserving of your attention. This is what should said to someone claiming to be a Marxist scholar: “Dude, you have too much time on your hands. Why don’t you go fishing, play checkers, or do something else that might make some sense? I am afraid that you have essentially wasted your life away.”

Kimon, thanks for the Card/Krueger mention; I was thinking of them when I read the earlier posts about "liberal economics", but couldn't remember any names.

I remember reading about their original study in Reason, and found it online here. Sorry, the tables don't seem to be available online.

I also followed a Google search link to here, where the National Center for Policy Analysis (a conservative group, I'm guessing) has a minimum wage overview highly critical of Card/Krueger.

Not sure this qualifies as controversy so much as some limited debate. I think Card and Krueger will need better data to overcome the effect of other studies (as well as simple logic); I'll put their book on my reading list and see if they found better data. Even if they did, their argument is more that "raising the minimum wage doesn't have much effect" than a direct contradiction of the CW.

I find it interesting that dsquared and others have taken the argument down a road where in order for one to participate, one must have extensive knowledge of Marx. While it's certainly noble for one to understand Marxism in its entirety, it is clearly not essential to require it for this discussion unless someone has an axe to grind.

Yeah, understanding Marx is pretty pointless when you're discussing how Kling apparently doesn't understand Marx.

CNN: I'll have a look for the reference. Marx cites Smith throughout the relevant section of Capital.

Everyone else: would somebody like to admit that the "obvious", supply/demand model of the minimum wage, is a static, zero-sum model? Please?

Oopsie, fixing

Wealth of Nations, Book 1, Chapter 6, "Of the Component Parts of the Price of Commodities". Obviously, this isn't a complete exposition of surplus value a hundred years before its time, but a similar concept is there, as noted by Marx in "Theories of Surplus Value". Importantly given that the context of the argument is Kling's claim, Smith in this passage also notes that the surplus value arises from a political-hierarchical structure; the fact that the entire world is owned. This wasn't controversial before about 1830.

---------
[07] ... the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.

[08] As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces
--------------------

Yeah, understanding Marx is pretty pointless when you're discussing how Kling apparently doesn't understand Marx.

I thought we were talking about how Kling thinks Krugman is an idiot. While it may be helpful to compare one idiot (Marx) to another idiot (Krugman) in order to establish a relative baseline, I would suggest (and have) that the only reason one would pick Marx would be because somehow they didn't like their chances in the original discussion.

Krugman doesn't talk about redistributing between economies at all, so I'm not sure of the relevance. For individuals, there's the old thought experiment of a the gold-mining society, where income is based entirely on luck. Obviously life isn't like that, but it isn't 100% Randian self-reliance, either.

My point in talking about economies was simple. If an economic theory justifies a purpose for the distribution of wealth amongst individuals shouldn't it also justify the same for aggregate groups of individuals (ie, an economy)? Using the examples that I did was just an easy way for me to highlight the irrationality of the notion that wealth is randomly assigned.

To suggest that executives are rich merely because they are lucky is to suggest that America is rich merely because it is lucky. Yet we clearly know that America is rich because it is less regulated than other economies that otherwise would have a similar probability for generating wealth.

To suggest that executives are rich merely because they are lucky is to suggest that America is rich merely because it is lucky. Yet we clearly know that America is rich because it is less regulated than other economies that otherwise would have a similar probability for generating wealth.

Hmm, ok. Let's try it:

America is rich because, in addition to having a grand old incentive system for productive inventions and getting those inventions into use, we were the luckiest bastards in human history. We have a continent to ourselves, practically. The only thing we needed to "defend" ourselves from(after 1812) was native americans; their pre-industrial state, and vulnerability to european diseases, let us drive them off all the valuable areas with an amazingly tiny proportion of national output. I'm not particularly sure where the civil war fits in, but note that we only had an army for the bare minimum of time it took to finish it. We also stole 1/3rd of the continent from Mexico, thanks to their weakness on emerging from colonialism, and bought 1/3rd of it at a cut rate from the French, thanks to their interest in funding great power wars.

We have virtually every resource in abundance; coal, iron, wood, oil, farmland, grazing land, you name it, all in a temperate climate. We started out with a population of skilled artisans, little to no disruptive class issues, and we outright stole half of Britain's inventions. To boot, we stole the labor of black americans for 100 years, in a strict sense, and to a lesser extent continued to extract labor at below-market rates (we got a lot more from them than we paid them, that's for sure) for another 100.

By comparision, all of the other nation states started with a losing hand. Add in the two world wars bleeding every last one of the great powers dry, and is it any wonder we're ahead of anyone else? As a particularly amusing analogy, ignoring governments and culture, in a historical game of Civilization, which nation would *you* like to play in 1850?

We have an extremely good history of productivity growth, partly due to culture and partly due to governmen. However, we also had a particularly ludicrous disparity in factor endowments and the other powers made horrible decisions (the Louisiana Purchase, the British fucking up the war of 1812.)

I thought we were talking about how Kling thinks Krugman is an idiot. While it may be helpful to compare one idiot (Marx) to another idiot (Krugman) in order to establish a relative baseline, I would suggest (and have) that the only reason one would pick Marx would be because somehow they didn't like their chances in the original discussion.

Kling made a claim about Marx, dsquared said he was wrong, then there was much discussion of whether Kling was right or not; after all, it's kind of central to his thesis, isn't it?

Jason -- you could make almost all the same arguments about Argentina or Brazil. Nor did our growth slow noticeably during periods of hog-wild defense spending. Nor do natural resources seem to be correlated with national wealth -- the reverse, if anything. Any capital created through slave labor was destroyed by the Union troops, especially Sherman, even before we try to calculate the rest of the cost of the war. Black labor was certainly kept at lower wages, but it was also lower-productivity, because blacks were kept in the lowest level jobs and domestic work, which has very low productivity. As for the two wars bleeding everyone else dry -- Japan surpassed them all from a much lower baseline, plus we destroyed them too. The "America stole it" and "America lucked out" models just don't seem to me to have much empirical basis.

I note this display of class prejudice:

>> So if someone who has probably never done any academic research and has no reputation on that matter is going to comment on the writing on the economist that the MIT economics department described as the 'preeminent economist of his generation' he should be a bit more humble and make sure he understands what is being described.

The "preminent economist of his generation" being the same guy who made a jackass of himself with a chapter in his book, "Peddling Prosperity", which was titled: "The Economics of Qwerty". And which he had to repudiate in an interview with Lee Gomes in the WSJ.

But even more hilarious, who is better qualified to comment on economics, Those Who Can (and do) build a multimillion dollar business from scratch and retire in their forties (as someone else mentioned, Kling wrote a book about his experience, that is very instructive)?

Or Those Who Can't, but merely teach?

Those of you defending Krugman, do you dispute this statement:

"if the [poor] get more, that leaves less for everyone else." ?

The notion that abundant narural resources are essential to, or a guarantor of, national wealth generation is too silly for words, contradicted by so many historical examples to the contrary that it begs one to ask if it really is necessary to list them. First and foremost, culture is the key determinant to wealth generation, and one aspect of American culture that has been observed by outside observers since it's inception is the the unusual degree to which the making of money is highly esteemed in American culture. Yeah, such a focus has it's crass effects, but it is the best predictor of a society's economic output, as long as it is combined with a tradition of relative neutrality in the application of the rule of law. It was not Marxism alone that made Russia backward and poor, and not lack of natural resources, and Jason, there were these fellas known as "serfs" who had their labor stolen from them, right into the 20th century, without greatly increasing national wealth. In fact, state-sanctioned and enforced theft of labor or property is an inhibitor of wealth generation.

More of Krugman's disingenuous, at best, claims:

>> "You are one of only a handful of major players selling wholesale electricity. Surely the thought has to occur to you: what would happen to prices if one of my plants just happened to go off line? And when companies act on that thought . . . well, you get the picture."

Krugman wrote that in March 2001, and repeated it in September 2002. And it isn't true. Generating capacity was in use during the worst of the crisis at levels never seen before, even in the drought year of 1994.

More Krugman:

>> And that's the real mystery of the California crisis: how could a $30 billion robbery take place in broad daylight?

>> True, it was always hard to pin down specific acts of market manipulation. Stanford's Frank Wolak ....

>> But the evidence is starting to pile up. First there were those Enron memos.

I selected the above because Frank Wolak specifically said the strategies in the Enron memos had either nothing, or very little, to do with the crisis. They were garden variety arbitrage strategies used not only in California, but elsewhere in the U.S. Krugman knows this, because he referenced Wolak's study in a piece on his website.

So, why is Krugman lying?

For all you conspiracy buffs, here's what Frank Wolak had to say about the Enron memos:

...the vast majority of the strategies described in sufficient detail to
understand them are *standard arbitrage strategies* that were known to the
independent market monitoring committees for California ISO and Power
Exchange well before the summer of 2000.

Power markets are not fundamentally different from common stock, commodity,
and foreign exchange markets. Traders in financial markets constantly
attempt to earn profits from arbitraging differences in the prices for same
product across time, space and maturity. .. Because 1 kilowatt-hour (KWh) of
electricity contains the same amount of energy regardless of which firm
produces it and the cost of transporting electricity over very long
distances is extremely low, we would expect that there are many
opportunities for power traders to earn profits from arbitraging small
differences in electricity prices across locations in the transmission
network.

[First ]..versions of most of these strategies exist in the wholesale
electricity markets operating in the eastern US.

Second, none of these strategies *involved zero risk* on the part of the
trader executing them. For example, a trader would lose money from buying
energy in the day-ahead market and selling it in the real-time market if
contrary to the trader's expectations, the price in the ISO's real-time
market was less than the price in the PX's day-ahead market, a circumstance
which often occurred in the California market.

Third, all of the arbitrage strategies described in the Enron memos were
available to all buyers and sellers in the California market. Like all
arbitrage strategies, as more market participants gained experience
participating in the California market, their profitability most likely
declined.

An argument can even be made that many of these strategies *enhanced the
efficiency* of the California electricity market. ..

The above logic implies that the strategies described in the Enron memos
are, at best, a small part of the cause of the California electricity
crisis. ..
----------endquote-------->>

D^2: Everyone else: would somebody like to admit that the "obvious", supply/demand model of the minimum wage, is a static, zero-sum model? Please?

Well, the usual model isn't static, since we're (at minimum) looking at before and after. I haven't heard anyone suggest that the total wages to all minimum wage workers remains unchanged (is that the zero-sum you mean?), ie a minimum wage raise from $5 to $6 leads to firing of 1/6 the workers (ie, 5/6 get raises, 1/6 lose jobs, total wages remain constant).

One of the criticisms of Card/Krueger is that they may be missing some of the dynamic changes, such as fast-food restaurants that close shop.

The standard minimum-wage model, as I understand it, says lowest-productivity workers will be fired (or never hired) as the incentives shift to hire more productive workers, or to replace workers with capital (eg, instead of two people cleaning your McDonald's, you hire one with a cleaning machine). This would presumably happen over time, perhaps over a year or more, as various businesses adjust.

Patrick,

You provided selective quotes from Krugman, and I know very little about energy so I am just asking some clarification questions here.

I read throught Wolak's congressionsal testimony on Enron ftp://zia.stanford.edu/pub/papers/commerce.senate.test.pdf

and I came across the section under the title "Market Power, Market Manipulation and the California Crisis" on page 6. This section, in which Wolak describes firms exercising what he calls 'unilateral market pricing power' sounds exactly like what the first passage of Krugman you quote is. Wolak points out that this is not illegal under U.S. anti-trust law, so it is wrong if Krugman claimed it was illegal. But Wolak concludes that unilateral market power was the 'cause of the unjust and unreasonable [sic]in electricity prices". I don't see why generating capacity being higher than the drought of 1994 has anything to do with it, by 1999 Silicon valley had a lot more people and a lot more companies, as did the rest of the California economy so demand would be MUCH higher wouldn't it? So I guess I don't understand how you say Krugman lied about this when his words seem to match word for word, Wolak's description of what happened, unless of ocurse Krugman called it illegal.

The last three quotes were incomplete so I have no idea what you were getting at. Wolak does conclude that Enron's trading strategies were legitimate but it is not as clean as you would like it to be (of course not!). On page 6 of Wolak's memo he informs us that the strategies that 'were described in sufficient detail to understand them' in memos were standard arbitrage strategies, and that 'some of the strategies outlined in the Enron memos may be violations of market rules or illegal under U.S. anti-trust law but it is difficult to tell for sure because of the incomplete and sometimes inconsistent descriptions given in the memos'.
Not exactly as cut and dry as your selective reading may like us to believe. But as I said, I know nothing about energy markets and perhaps someone who knows more about energy economics perhaps at DeLong's site can tell us more.

Wow, Patrick, now you are dragging out the QWERTY brush to tar Krugman as being an idiot, oh excuse me a 'jackass'. The economics of QWERTY was a famous economics papers written by Paul David, who is now an eminent historian at Oxford. For a long time QWERTY was accepted wisdom in the field, Liebowitz and Margolis' paper destroyed the conventional wisdom as good researchers do. I don't know what interview you were talking about, but a quick Google search produced the following Lee Gomes piece:
http://www.elmhurst.edu/~darrinh/eco210article15.html

in which it certainly sounds like Krugman thinks that Liebowitz and Margolis are right, but Paul David does not seem to still buy their story. So Krugman is a jackass because he changed his mind when someone made a more convincing economic argument that showed conventional wisdom on QWERTY was wrong?

Phew, I hope you are not a professor for teh sake of your students! Oh, wait, I forgot, only those who don't understand economics teach and write columns. Those who do truly understand economics build companies from scratch and presumably, issue scathing rebukes of economists on random blogs.

Jason,

You usually make some pretty good points, and you keep the conservative/libertarians on the forum (like me)honest.

But your argument that America "got lucky" is just plain crazy. It makes you sound like the worst sort of ecomomic populist. It is the kind of thing Ross Perot would say.

I agree with PJ on the minimum wage thing. Card and Krueger's piece got a lot of press because it showed that minimum wages did not seem to cause much job loss. But even if the results hold up, it can only be an aberration in talking about small increases in minimum wages. The living wage stuff is not talking about small changes in wages, and is in my opinion extremely counterproductive.

achilles,

Krugman wrote several pieces over time on the CA crisis. His very first one explained pretty well what happened and, more importantly, how to solve it.

Several of the following ones focused on different aspects of the CA crisis including the botched deregulation.

On march on '01 he explained what is now widely acccepted as the main explanation of the crisis, the exercise of market power. Nobody really debates that. In fact Wolak is one of Krugman's main sources and Krugman credit Wolak in his web page (Wolak and Krugman were colleagues in Stanford a few years ago). You may be interested in this.

The following item may be interest:

“But the Card-Krueger study compiled its data through a telephone survey of fast-food joints -- a method that may not produce the best results if the fellow at the other end is answering questions while hovering over the deep-fat fryer. In fact, as the Employment Policies Institute points out, "[t]he data set used in the New Jersey study bears no relation to numbers drawn from the payroll records of the restaurants the New Jersey study claims to cover."

“To be specific, after economists David Neumark and William Wascher recreated the study using information drawn from actual payroll records rather than a chat with a teenager in a paper hat, they found that "the New Jersey minimum wage increase led to a 4.6 percent decrease in employment in New Jersey relative to the Pennsylvania control group."

http://www.free-market.net/spotlight/regulation/in-depth/

Sooner or later mandated higher wages will force employers to seek alternatives. It's merely a question where the line will be drawn. One can employ all the macroeconomic jargon they so desire, but reality has a way of squashing such dream world theorizing.

"To boot, we stole the labor of black americans for 100 years"

Slavery did not enrich America, but hindered its economic development. The reliance on coerced low cost laborers discourages investment in more efficient machinery. It is analogous to the frog who is unaware of being boiled alive because the cooking process is slow and gradual. The South would have been far wealthier if it had never permitted slavery. Furthermore, making it illegal to educate the slaves considerably worsened the situation. What can be dumber than to outlaw the education of so many of those residing within your territory?

A slave nation is inherently a poor one. Any wealth it generates will be restricted to a mere small handful of its leaders. The middle class will be very small, or even nonexistent.

achilles, I would suggest you take it up with the guy who raised the credentials issue. All I was doing was pointing out how he betrayed his prejudices in so doing. But, since you asked:

>> The idea that Krugman, or any other top economist for that matter, is no better than the average graduate student on topics he has not written on is simply ludicrous.

The above is why I brought up the QWERTY issue. Not only was Krugman not "better than the average graduate student" on this, he was inferior to someone with no economics degree at all; namely me. The first time I heard of this particular urban legend, alarm bells went off immediately. Why didn't they for a John Bates Clark medal holder?

BTW, do you find it as amusing as I do that Paul David (and Brian Arthur, and their acolytes) is now claiming that it doesn't matter that the typewriter keyboard story has turned out to be false, yet hasn't bothered to re-name his paper along the lines of "Clio and the Economics of 'A Market Failure To Be Named Later'"?

" The reliance on coerced low cost laborers discourages investment in more efficient machinery. "

So... in other words, making labor more expensive provides incentives to invest in more efficient machinary. So, if we want to increase productivity, we should... raise the minimum wage! Thanks, David, I couldn't have put it better myself...

Patrick,

A couple of responses to your last post:

1) The quote you seem to attribute to me about the relative knowledge of Krugman and graduate students was NOT made by me.

2) I am impressed that reading about QWERTY set of alarm bells immediately in your mind even before you had read the Liebowitz/Margolis paper. My understanding was that Paul David's piece was conventional wisdom for a while until the new paper came along, but maybe those economists were just not seeing the obvious. Typical.

3) I still don't understand how you can claim that Krugman was going against conventional wisdom when he wrote the QWERTY piece given what conventional wisdom was. I know nothing about this but was there a firestorm of articles in 1994 pointing out that Krugman was an idiot for putting that in his book? He has clearly changed his mind now, once the Liebowitz/Margolin argument has sunk in - as the article I posted made clear.

4) I completely AGREE with you that it is embarassing that Paul David has not acknowledged that his original piece now seems to be in serious disrepute. Which is why I found it curious that you initially ripped on the guy who recognized that the new research was correct and left the guy who refused to acknowledge it alone.

Jason -- you could make almost all the same arguments about Argentina or Brazil.

Brazil's jungle-heavy geography isn't anywhere near as good; virtually the entire population lives in 10% of the country. Argentina's a good counter-example; they basically screwed up their government and suffered for it. That still doesn't change my point that we have the *best* factor endowments, and all other things being equal, you'd expect the nation with the best endowments to be the richest.

The "America stole it" and "America lucked out" models just don't seem to me to have much empirical basis.

Wow. I thought "the US had the best factor endowments on earth, and it's part of the reason we're richer than everyone else" would be about as controversial as "the sky is blue." Apparently not.

The above is why I brought up the QWERTY issue. Not only was Krugman not "better than the average graduate student" on this, he was inferior to someone with no economics degree at all; namely me. The first time I heard of this particular urban legend, alarm bells went off immediately. Why didn't they for a John Bates Clark medal holder?

Maybe if "alarm bells went off," you should have submitted a paper saying so. Certainly no one else did for a few years.

Krugman wrote that in March 2001, and repeated it in September 2002. And it isn't true. Generating capacity was in use during the worst of the crisis at levels never seen before, even in the drought year of 1994.

Ah, yes, *online* generating capacity was in use at a "rate never seen before", but what about the dog that didn't bark? In Figure 8 of this chart from FERC, between April 2000 and April 2001 the number of megawatts offline went from about 3000 (trendline) to 15000. No doubt the remaining capacity was 100% in use; these two data points together are entirely consistent with the market manipulation model Krugman reiterated from Wolak.

A slave nation is inherently a poor one. Any wealth it generates will be restricted to a mere small handful of its leaders. The middle class will be very small, or even nonexistent.

Maybe true, but we had slavery and got a middle class, didn't we?

So... in other words, making labor more expensive provides incentives to invest in more efficient machinary. So, if we want to increase productivity, we should... raise the minimum wage! Thanks, David, I couldn't have put it better myself...

Well, yes, as a matter of fact, it would be quite effective, if you don't mind throwing large numbers of the least employable out of work...

wow - 103 comments so far. Is this a new record for most comments on a single Jane Galt article?

Speaking of, I don't know how many of you were on the Internet back in '91, but the Gulf War was a watershed moment for the Internet, particuarly IRC (internet relay chat). There were many people on the ground in the middle east who fed back their experiences in real time using IRC.

I'm certainly not proposing that we go to war merely because it would be cool for the blogosphere, but one has to wonder: given the role that it has already played in helping the nation come to grips with understanding 9/11, will war with Iraq transform the blogosphere to an even more important medium? (just as the first war did with IRC).

wow - 103 comments so far. Is this a new record for most comments on a single Jane Galt article?

Speaking of, I don't know how many of you were on the Internet back in '91, but the Gulf War was a watershed moment for the Internet, particuarly IRC (internet relay chat). There were many people on the ground in the middle east who fed back their experiences in real time using IRC.

I'm certainly not proposing that we go to war merely because it would be cool for the blogosphere, but one has to wonder: given the role that it has already played in helping the nation come to grips with understanding 9/11, will war with Iraq transform the blogosphere to an even more important medium? (just as the first war did with IRC).

“So... in other words, making labor more expensive provides incentives to invest in more efficient machinary. So, if we want to increase productivity, we should... raise the minimum wage! Thanks, David, I couldn't have put it better myself...”

Yup, that’s definitely true. This is why I am somewhat ambivalent about minimum wage laws. I am sure that there are many instances where long run productivity gains will occur if we mandate higher minimum wage laws. A restaurant owner that shies away from purchasing the super duper dish washer may very well do so once the law mandates that they must pay a worker $15.00. Sooner or later, the lower educated worker will be unable to earn even a modest living.

Self service would also become more of the norm. A restaurant owner compelled to pay waiters $20 per hour will most assuredly get rid of them. This will result in more cafeterias. Also, a theater owner legally obligated to pay ticket window personnel an exorbitant amount of money will likely sell tickets only by machine. Is this what you want? be careful what you wish for---you might get it!

I agree that lower-productivity jobs will be lost in the short term, but it is unclear to me why those workers whould be unemployable in the long term. (I would refer you to Krugman's old Slate piece on hotdogs and buns...) Total employment depends on aggregate demand, which is determined by monetary factors, not technical ones. Higher minimum wages (widespread ones - not "living wages" in local jurisdictions, which only serve to move jobs to lower wage adjoining jurisdictions) would, given monetary policies to maintain full employment, have two effects: redistribution of income toward lower-producitivity workers, and an increase in overall productivity. It's possible to go too far, of course - set too high, you would get inflation and other bad effects, but you could find a balance.

"I agree that lower-productivity jobs will be lost in the short term, but it is unclear to me why those workers whould be unemployable in the long term."

The worker would not unemployed in the long run---if they acquire further education. However, that might be the rub. Dishwashers are usually marginally to functionally illiterate. What will they do in the meantime while they attend the necessary classes? Also, what does the mentally challenged individual do? I’m sorry that I make life so difficult for everyone. There’s just some things you better think about right here and now.

One should never forget the harsh principle of unintended consequences. Tradeoffs are inevitable. The gods of creative destruction must be appeased. Thus, it is intellectually dishonest and cowardly not to thoroughly dwell upon the proposed legislation---before it is enacted into law.

You're missing my larger point: the total level of employment does not depend on anything but the level of aggregate demand in the economy. For the same reason that jobs "lost" to trade are not really lost, but moved from industries with lower competitive advantage to those with higher, jobs can't be "lost" in the economy as a whole by increased productivity (or by minimum wages), not in the long term.

So one of the dishwashers loses his job. The remaining one will find a job that is not so easily automated, or that can more-successfully pass on the added expense to it's customers. The price of some things would rise (in particular those with a higher labor component), but this would have the effect of distributing wealth downwards.

As to Krugman and electricity, for those who wish to learn from an actual specialist, I recommend the work of Northwestern's Lynne Kiesling. You can start by clicking on the link to her blog, "The Knowledge Problem", that Assymetrical Information provides.

Now, GT is, first, correct that Krugman's column of January 7, 2001 does a pretty good job explaining what the problem was: Price controls at the retail level, increasing demand, no new generating capacity, drought in the Pacific Northwest, and a very poorly thought out market design. All that, and the planets lining up just so.

Take note what Krugman said was NOT a big problem in this column:

" Some analysts believe that these power companies have actually withheld power from the market for the same reason, though this is not the core of the crisis."

But only two months later, he's writing:

>> Imagine the situation: it's a hot summer, and the California electricity market is very tight. You are one of only a handful of major players selling wholesale electricity. Surely the thought has to occur to you: what would happen to prices if one of my plants just happened to go off line? And when companies act on that thought . . . well, you get the picture.

Which he repeated in September 0f 2002, and proudly patted himself on the back for his insight into what is now "the core of the crisis".

BTW, Krugman ended his January 2001 column in a typically nasty way:

>> But George W. Bush doesn't just have an ideological attachment to free markets; he has close personal ties to some of the companies that are making such huge profits in California right now.

>> Mr. Bush has been conspicuously silent on the California crisis. But in the end it's his decision. Will he help California find an answer that does not involve paying a huge ransom to his friends?

In case it isn't obvious, the day the column appeared Bill Clinton was President, not George W. Bush. And Bush's transition was over a month behind thanks to the legal gimmickry of David Boies on behalf of Al Gore in the 2000 election. Even if the federal government was responsible for the crisis, why not blame Clinton?

Now, as to why I said Krugman is lying, I thought it was clear. He's lying about the Enron memos and their relevance. In the other piece GT links to (on Krugman's website) Krugman again does a pretty good job explaining Frank Wolak's model of the crisis. However, he had to have read that Wolak said the Enron memos only described standard arbitrage strategies, that were not without risk, were known to everyone, and might have alleviated the crisis. Yet, Krugman then goes on to link, approvingly, to a Joe Conason piece, where we can read:

>>...however, with the exposure of internal Enron documents that describe the market-rigging strategies nicknamed "Fat Boy," "Death Star" and "Get Shorty," we have a clearer idea of what really happened. Now we have seen proof, in memos written by Enron's own lawyers, that the West Coast energy crisis was exacerbated by the powermongers, perhaps by criminal means. Now
we know about the trading schemes used by Enron to game the California system, even at the risk of dangerous blackouts. Now we are learning that
deregulation permitted Enron, and apparently other firms, to "launder" electricity and falsify congestion on the power grid, in order to rob tens
of billions of dollars from California consumers and businesses.

And, with the personal touch for which Krugman is famous, we're told that those who don't agree with Conason are guilty of: "Ideological blindness", "Intellectual laziness", and "Media whoredom"

I hope Frank Wolak appreciated that.

So, just what did Wolak claim happened? He spelled it out somewhat better than Krugman:

>> The major cause of the California electricity crisis was the unilateral exercise of market power by suppliers to the California ISO control area. A firm exercises its unilateral market power by withdrawing generating capacity from the market either ***by bidding extremely high prices for some or all of its capacity*** or by refusing to make a portion of its capacity available to the market at any price.

Those are my ***s, in the above, and what it means is that the energy generators were compelled to engage in bidding strategies by the design of the California market. NOT that they were doing what Krugman claims; flipping the off switches at their plants (though there were shutdowns for maintenance that were planned in advance, and at one nuclear plant there was a fire that kept it offline for longer than expected).

Weirdly, Krugman knew this too, because he also wrote about it in his columns. What Krugman doesn't tell you is just how these markets actually were set up (that would take all the fun out of it, and he wouldn't get to write lines about billion dollar robbery). For that, you are going to have to invest a little time reading a lengthy--but very clearly written--article by Nguyen Quan and Robert Michaels, that comes with the Lynne Kiesling Seal of Approval.

Games or Opportunities: Bidding in the California
Markets

In California, generators bid hourly supply schedules with up to 15 segments in many markets, amounting to potential price decisions over a day running into the thousands. In this environment, analyses of market power are so complex as to be, for all practical purposes, impossible to perform.

In theory, short-term electricity
markets should look like textbook
diagrams of supply and demand. In practice, they look like the aggregate of dissimilar trading
arenas operated by the California
Power Exchange (PX) and the California
Independent System Operator
(ISO). Failure to appreciate the
differences between abstraction
and reality is at the root of numerous
misunderstandings and
charges of “market power” and
“gaming” seen in recent months.

Market participants must make
complex and often irreversible
decisions on short notice, in a constantly
changing environment about which they have limited
information. Both buyers and sellers have latitude to reallocate their transactions among the many PX and ISO markets, and their best
choices vary with system conditions
and expectations for the near future.

In the textbook, well-informed
competitors trade a single simple commodity in a universal exchange. Their straightforward
choices do not begin to describe those that generators and buyers must make when they
operate across numerous markets and past commitments constrain their options for the future.
------endquote------>>

Those who do not bother to go to:

http://www.electricity-online.com/pdf/99.pdf

and read about how the market actually functioned are disqualified from any further talk about "market manipulation".

"So one of the dishwashers loses his job."

What does the fired dishwasher do? I'm glad that you are able to throw around macroeconomic terms--but you are ignoring the central issues. Please go back and address the points that I made.

Those are my ***s, in the above, and what it means is that the energy generators were compelled to engage in bidding strategies by the design of the California market. NOT that they were doing what Krugman claims; flipping the off switches at their plants (though there were shutdowns for maintenance that were planned in advance, and at one nuclear plant there was a fire that kept it offline for longer than expected).

Customer: "Why did you steal my money?"

Enron: "The market made me do it!"

Sorry - I mangled my point. I should have said "the other one", not "the remaining one".

And what I was trying to say was, the dishwasher will find another job, because there will still be work to be done, provided that the total level of spending in the economy is enough to support it.

Put it another way: say a factory, without an increase in the minimum wage, is able to increase it's productivity and fire half it's workers. Are those workers S.O.L.? No - because either the remaining workers will be paid more, the investors in the plant will get higher returns, the customers or its products will pay less, or (most likely) a combination of all three. The additional money all these other groups get will then be free to be spent on other goods and services - and the increased demand for those goods and services will lead other companies to start hiring. This is the "creative destruction" that you speak of.

So what happens with a minimum wage? Labor gets more expensive, so less-productive labor (or at least, labor which is easily replacable with current technology) is let go. This is the exact same process as above, except in this case most of the benefit from the added productivity goes to the workers, in the form of higher wages. But the underlying dynamic is the same - those remaining workers spend the money, it leads to more demand in other industries, which will hire the fired workers. Over the long term, supply must equal demand.

All of this is fairly standard Econ 101 - conservatives seem to be able to follow it in the case of international trade and increased productivity (which tends to distribute income upward) while missing it in the case of minimum wages (which distributes it downwards.) I wonder why?

Thanks for all the cites Patrick, good educational reading. Even though I maintain that Krugman and Wolak are much more in agreement than your initial posting seemed to indicate, the link to Joe Conason is indeed counterproductive for Krugman. Joe Conason knows nothing about economics, and that is Krugman trying to score political cheap shot points without saying it himself or as you point out Krugman adding "his personal touch".

I was doing some more reading on Wolak's site and found the following pieces. Apparently even though exercising unilateral market pricing power is not illegal under anti-trust law it is illegal under the Federal Power act. Wolak has a couple of pieces that seems to indicate that FERC and the administration were being a little lax in enforcing its duties under the act. I still have not sorted out where Enron's rules fall under this Federal Power act. I doubt I can make sense of it, but the following two pieces are easy reading from Wolak:

ftp://zia.stanford.edu/pub/papers/latimes.oped.pdf
ftp://zia.stanford.edu/pub/papers/economists.let.pdf

I have to stop now because I am violating Patrick's ban.

Which is precisely why Krugman is such an obnoxious hack. Unlike run of the mill hacks like Conanson or Limbaugh, Krugman employs a deserved sterling academic reputation to advance his agenda, often by intellectually dishonest means, which usually entails informing his readers what an awful human being George W. Bush is. It really is quite boring; if one's tastes run toward hackery, one may as well get it in it's unvarnished form, without the the patina of academic respectability.

achilles, you're still missing the point. And I did not attribute the remarks vis a vis Krugman and grad students to you (we both know very well who made it). What I did was provide an example of a monumental blunder by the guy who it was claimed would never make such. And, Krugman tied "The Economics of QWERTY" to international trade--his specialty--in his book.

There's no special credit due me for saying to myself something like: "This doesn't sound right. How did we get from 33-1/3 rpm LPs to CDs then, etc etc". My point was, how could Krugman have not checked this out before publishing his book? Maybe he made the same mistake GT did; overestimating the abilities of Phds?

Anyway, David published his paper in 1985. In 1989 Liebowitz and Margolis sent him copies of their work, which he ignored. They published their first paper in 1990 in the Journal of Law and Economics, and several more papers in scholarly journals throughout the 90s. If you're correct that Peddling Prosperity came out in 1994, then Krugman had plenty of time to find out the facts.

Jane said:

because I don't want to know what he believes -- I want to know what his readers will believe when they are through.

I don't know where I qualifty on that scale, since I've had "101" college courses in general economics and macro and do consult the literature occassionally as part of my continuing education, but I did read the Krugman column in full for the first time the other night.

The general sense I received is that because we are in a phase where the rich are now getting richer at an exponentially faster rate, everyone else is getting screwed (zero-sum). He does concomitantly acknowledge that the present "middle class" income has increased -- just at a significantly slower rate. Thus everyone's incomes have improved, but a limited number's incomes have improved with extreme rapidity (positive sum). IOW I found evidence of both at work but the former received the emphasis.

I personally think his observations about an "emerging plutocracy" wielding disproportionate political influence is a valid outcome-concern, but then, when has this not happened in US history ANYway?

Additionally, it would have been interesting if he had compared the number of corporations and their relative 'size' magnitudes (employees, economic output, etc.) during his three time periods -- pre 1930, post-1930 through 1980, and 1980-present. The results may have strengthened or weakened his argument a lot, because a few corporate CEOs pulling in ghastly sums of money are uninteresting to me if the post-WWII boom era happened to result in a lot of new enterprises arising, disributing 'CEO' wages more broadly as a side-effect (followed by consolidations or bankruptcies in the stagnant seventies).

IF that were the case then Krugman is still welcome to reminisce fondly about the time period, but some of his conclusions could be weakened by the information.

>> Customer: "Why did you steal my money?"

>> Enron: "The market made me do it!"

What a surprise that the first person to shoot off his mouth before informing himself how the market was designed, was Jason.

Those who don't wish to make similarly egregious fools of themselves can go to:

http://www.electricity-online.com/pdf/99.pdf

The standard minimum-wage model, as I understand it, says lowest-productivity workers will be fired (or never hired) as the incentives shift to hire more productive workers, or to replace workers with capital (eg, instead of two people cleaning your McDonald's, you hire one with a cleaning machine). This would presumably happen over time, perhaps over a year or more, as various businesses adjust.

Having worked at one of the state's busiest and arguably best-managed McDonalds locations (franchise store) in the state of Colorado during the latter two years of my high-school education, I question the value of this logic. The typical procedure was that there were many things you could get 'written up' for, and the third write-up was potentially a firing offense.

Really good employees were written up only if they really, REALLY fouled something up. Bad.

Mediocre employees might get written up many times for offenses both major and minor, but were generally retained unless they went noticably overboard.

Only truly bad employees -- i.e. the ones who wouldn't do any work at all without a constant whip-cracking -- would be written up on the first three possible occassions, and then sent walking.

The reason for this approach, near as I could tell, was the high natural rate of employee turnover. (Even among the entry and middle-level management positions.) There were some full-timers who were there to make their living wage, and other full- and part-timers who had an employed spouse but enjoyed nicer vacation travels as a result of the extra income. But these were essentially a stable base for keeping the store running; a significant portion of labor, especially in the evenings, was provided by part-timers like myself, and with a handful of exceptions, those came and went on a regular basis. I rarely saw anyone interviewed who, unless they changed their own mind after the interview process, didn't show up in uniform the next morning. Most of them left on their own volition in three to six months.

The store couldn't "seek" high-productivity workers, even though those would tend to get more work-hours at scheduling time, because the turn-over at the lower end was rapid of its own accord. Again, this was at a very well-managed store.

I should add, I was working across the 4.25 => 5.15 minimum wage increase. I saw no change in behavior at the store, albeit again they were busy and could justify the expense.

“But the Card-Krueger study compiled its data through a telephone survey of fast-food joints -- a method that may not produce the best results if the fellow at the other end is answering questions while hovering over the deep-fat fryer."

Sounds good in a column, but not very useful as presented. Even fast-food restaurants tend to have offices, and managers. Whether the pollers got meaningful responses would have varied more depending on the quality of the stores they called, and the time of day.

Patrick,

Clio and the Economics of QWERTY was on reading lists in college in the 1990s, that I know for sure. I have no idea when the consensus changed, if you can credibly convince me that the economics profession believed Liebowitz but Krugman sided with David at the time he wrote the book, then I buy your argument. DeLong seems to respect your fact finding abilities (I recall him mentioning you in a subject heading: why don't you email and ask him when exatcly the consensus that David's paper was wrong appeared? As a historian he would know, and he would respond to you.)

Otherwise, all the evidence seems to be that at one time David's paper was conventional wisdom and Krugman wrote a chapter in his book focusing and building on that paper. Now that conventional wisdom has been changed, and Krugman acknowledges it has changed.

In this particular case, it seems like the real villain is David (and perhaps Arthur) even though you like to pin it on Krugman. And if you read Krugman through the 1990s, you would also remember that one of those people he liked to rip on mericlessly was .... Brian Arthur. So on this one I am going to stay with krugman: god knows I would not hesitate citing the work of a famous economist if it was good enough to get the author tenure at Stanford and Oxford, unless of course I had very clear evidence that the rest of the profession believed that paper was false.

"What a surprise that the first person to shoot off his mouth before informing himself how the market was designed, was Jason."

You missed the point: just because the market is designed to make it really easy to manipulate doesn't absolve the companies of responsibility. More importantly, if we all agree to refrain from the blame game and work towards a solution: CA's problems had nothing to do with environmentalism, or the permitting process, or any of that other claptrap; it was strictly the result of a horribly designed deregulation, which companies took advantage of in a possibly-technically-legal but outrageous manner. Fix the dereg, no more crises.

Krugman wrote a lot about the CA crisis and at different points emphasized different things.

Personally I think that at in some articles he made too much of market abuse by Enron-types. It's true it existed but it seems to have been tangential.

But it does not detract from the basic point that:

a) he explained BEFORE ANYONE ELSE IN THE MEDIA what was going on and

b) he gave the correct solution (and one the Bush adminstration finally imposed after much back and forth) again BEFORE ANYONE ELSE IN THE MEDIA.

If some of you want to make a big deal about him overemphasizing the Enron-type actions over the exercise of market power, be my guest.

Compared to 99% of the alternatives he is so much better it's not even in the same league. It's like emphasizing that some NBA star is weak on freethrows but forgetting that all the alternatives don't even qualify for high school basketball.

I suggest all those interested in what modern economics is and what makes a 'top' economist read Krugman's description of Wolak's paper. The ability to come up with a model like Wolak's, and express it mathematically, is the essence of a top economist. The more basic the issue the greater impact of the model and therefore usually the better an economist will be perceived to be by his peers.

Krugman's point was simply that "reductionism is bad." Pointing to the relative size of our GDP and asserting the normative point that we are the "wealthiest" and therefore most optimal society is hazardous, because it ignores distribution. Anybody who took 101 classes knows that the crucial assumption of a neoclassical model is that redistribution is central to asserting the normative point that aggregate "most" = overall "best".

And yet this is exactly the philosophical divide on this post.

Kling's thesis and the whole "anti-idiotarian" mindset is reductivist in another sense: it ignores the political ramifications of time. "In the long run" a free market lifts all boats. From a political perspective, always legislating for the long run can result in unacceptable consequences in the short run. Moreover, staggering inequality in the short run can create pathologies in the market that make the long run unattainable. Free markets are a good tonic, but you don't want to kill the patient.

Snore. Colonel Kling, like many conservatives, thinks his theories would apply in the real world if people would just do it his way. Market Pricing? I'm going to kill you child. Market Price that. You can't, because the value of your child is infinite.

Snore.

Also, for those that haven't noticed, TechCentralStation is a sham site that publishes advertising and propoganda for the Carbon Club.

Snore. Colonel Kling, like many conservatives, thinks his theories would apply in the real world if people would just do it his way. Market Pricing? I'm going to kill you child. Market Price that. You can't, because the value of your child is infinite.

Snore.

Also, for those that haven't noticed, TechCentralStation is a sham site that publishes advertising and propoganda for the Carbon Club.

“And what I was trying to say was, the dishwasher will find another job, because there will still be work to be done, provided that the total level of spending in the economy is enough to support it.”

Your point would be valid only if everybody’s wages were raised at the same time. In that case, though, there is no point in raising the minimum wage. The far more likely scenario is that the general public would resort to do it yourself strategies. Indeed, cafeterias would become the norm if all restaurants were compelled to pay waiters $50.00 per hour.

“Put it another way: say a factory, without an increase in the minimum wage, is able to increase it's productivity and fire half it's workers. Are those workers S.O.L.? No - because either the remaining workers will be paid more, the investors in the plant will get higher returns, the customers or its products will pay less, or (most likely) a combination of all three. The additional money all these other groups get will then be free to be spent on other goods and services - and the increased demand for those goods and services will lead other companies to start hiring. This is the "creative destruction" that you speak of.”

This is only half true. Once again, it all depends on how much is the minimum wage increase. There’s always a point where the principle of unintended consequences rears its ugly head. Will this point be reached at a increase of $1.00 , $2, $3, or ...?

All of this is fairly standard Econ 101 - conservatives seem to be able to follow it in the case of international trade and increased productivity (which tends to distribute income upward) while missing it in the case of minimum wages (which distributes it downwards.) I wonder why?

I agree that a number of conservatives make too much of our minimum wage laws. The tradeoff, admittedly, might often be worth the price. Still, it is inescapable that some lower skilled laborers will minimally be temporarily pushed out of the job market.

Jason digs the hole deeper:

>> You missed the point: just because the market is designed to make it really easy to manipulate doesn't absolve the companies of responsibility.

No, it is still you missing the point (and refusing to inform yourself?). Even GT has had the sense to back off from this claim. Perhaps because he's read the Krugman piece and noticed this cat out of bag moment:

" So what's the Nash equilibrium of this game...."

Which is the kind of insight one would expect from an economist. The participants in the California electricity market were driven to the dominant strategy. There was no way around it, and Jason's attempt at a joke turns out to be literally true (and not funny if you lived in California).

And that's the big difference between Krugman and Wolak, the latter pretty much keeps his eye on the ball. Krugman on the other hand, in the same article, jumps from "Nash Equilibrium" to billion dollar robbery (via Joe Conason). But you can't legitimately draw that conclusion.

By definition, selling into California made the sellers participants in THE GAME. Krugman can't have it both ways. There is no way to avoid "gaming" except by not selling at all. It was when the rules of the game were changed (and Krugman admits this in the piece) that the crisis ended. There is no justification for all the slanders on the electricity generators, but that's not stopping Krugman.

Jason, is it even grammatically accurate to label a regime as "deregulation" when wholesale prices can float, but retail prices are fixed?

achilles, I can't make it any clearer, Krugman made a huge error (that it was originally David's doesn't exonerate Krugman's sloppiness). And there are thousands of copies of "Peddling Prosperity" circulating that continue to misinform anyone who hasn't either read that brief article in the WSJ or who know of L&M.

Krugman has never done anything to publicize his error (and mitigate the damage he's done). It was only when Gomes tracked him down and put the question directly to him that he admitted it. Even in his article bashing Arthur he doesn't directly admit the error (though he does link to an L&M paper), but only criticizes Arthur for taking credit not due him for work on "increasing returns".

As for Brad DeLong, he knows little of this issue. Certainly much less than I (if you doubt me, e-mail Stan Liebowitz and ask him). When I (and Deirdre McCloskey, and Stan and his editor Peter Lewin) tried to engage DeLong in debate, on two different fora, he disappeared from the debate.

You need to drop entirely this "conventional wisdom" trope. And in any case it isn't clear what that is, as Shapiro and Varian were repeating parts of the David-Arthur story in their "Information Rules". See, Liebowitz's recent book, "Re-Thinking the Network Economy", for the details.

Or, go to Google Advanced Group Search, type in Varian, Liebowitz, QWERTY; for the group "sci.econ", and you'll find over 200 posts that pretty much exhaust the issue.

“There is no justification for all the slanders on the electricity generators, but that's not stopping Krugman.”

This is further evidence that Paul Krugman is now no more than a cheap shot hack. It seems virtually impossible to keep one’s intellectual balance if they have to survive in a pervasive Liberal social milieu. I realize that the New York Times pressures Krugman to be the Stephen Fetchet of economists, but isn’t this getting a bit too ridiculous? Doesn't Krugman have any sense of shame whatsoever?

I just noticed that in my previous post, I failed to put the following in quotes:

"All of this is fairly standard Econ 101 - conservatives seem to be able to follow it in the case of international trade and increased productivity (which tends to distribute income upward) while missing it in the case of minimum wages (which distributes it downwards.) I wonder why?"

The above comments are those of "Jimbo," and not my own. Sorry about that.

I see the Krugman bashers still persist.

Just two comments.

On the QWERTY issue. I was in school at the time Krugman published his book and, as achilles points out, it was still considered CW at that point. The idea that at the time Krugman wrote his book QWERTY had been completely discredited in mainstream economics is a flat out LIE.

It's important to remember that theories neither appear nor disappear overnight. Even though some of the articles challenging QWERTY had already been published when Krugman wrote his book they were not yet mainstream. This ‘lagged’ process is quite common in the hard sciences (Kuhn anyone?) and even more so in the social sciences where the data is so much softer. One need only look at the development of macroeconomics this century to see how theories go back and forth, considered obsolete at some point only to return in somewhat altered fashion a few years later.

Did Krugman make a mistake then? Not really. His basic point was about market failures. And he used QWERTY as an example. Even though the QWERTY example is now seemingly discredited (and I say seemingly because these things go in cycles and some new research could always bring it back in a different form) market failures are most certainly not. Path dependence is still, TODAY, a valid field of inquiry and was much more so 10 years ago when Krugman wrote his book. Yes, he relied on research that was later refuted but that was AT THE TIME HE WROTE THE BOOK generally accepted as valid. This is the crucial point.

These discussions require a minimum level of intellectual honesty. Without it all debate is useless.

The intellectual honesty comes from admitting that there are mistakes and errors in EVERYTHING that is written. If Krugman, or any other author, had to wait until everything he wrote had been found completely true nothing would ever be written. If Krugman, or any other author, would only write about things that had unanimous support they could probably write about very little. There are ALWAYS counterarguments.

So to grab on to this QWERTY comment as some example of Krugman’s intellectual inability is pretty silly. As achilles wrote it would ONLY hold water if when Krugman wrote his book—1993—the QWERTY argument had already been fully discredited in the academic literature, which it wasn’t.

There are mistakes in all writings. Recognizing that is part of basic intellectual honesty.

My second point is about the CA energy crisis. First, let me make clear that I am NOT backing away from ‘blaming the companies’. I am simply pointing out that one of the explanations, the market manipulations a-la-Enron, is probably the smaller part of the story. It in no way invalidates Krugman’s simply incomparable contribution in this area.

A simple thought experiment will make this clearer. Imagine you could go back in time to early 2001. Imagine you met a person who was interested in understanding what was going on in the CA electricity crisis but, like 99.9% of Americans, had neither the time, energy, nor knowledge to dedicate to research the issue on his own or read original documents. Imagine the person asks you, “You are from the future. What can I read in the mainstream media that will best explain what the hell is going on?”

What would you say?

Could you recommend Thomas Sowell, Larry Kudlow, Stephen Moore or any other of the conservative economists that have ready opinions about everything? Could you recommend Wills, or Kelly, Krauthammer, or Novak or any of the other more politically-oriented conservative columnists?

No. Not a single one of them understood what was going on or how to deal with it. If they wrote on the matter it was wrong, by asserting that ‘it was all the normal functioning of the market’ at work.

If you were honest you could only say something like this “There is no one perfect source for this. But among the mainstream media commentators you will find no better source than Paul Krugman’s work. It is not perfect and he may exaggerate some points. But he will correctly explain what happened, why it was not simply the laws of supply and demand working in a free market, and what the correct solution is. He will explain what the government should do long before the government actually does it.”

But if the Krugman bashers feel more comfortable nitpicking on side issues while missing the big picture, go right ahead. That idiotic duo of Luskin and Sullivan did it again this week with Krugman’s comment on Bush’s poll numbers. Do we really need more fools like that?

Patrick

Thanks for all the info, I will definitely read up on all the issues on sci.econ.

However, I think once again we will have to respectfully disagree on the central question: I believe intellectual fraud is committed when you knowingly publish something that is false, or fail to acknowledge something is false when it has been shown to be so. Krugman has certainly shown that he has changed his mind, and the argument that there are still copies of 'Peddling Prosperity' floating around is kind of silly: the chapter was on path dependence and I don't know why you would issue a recall notice for a book because one example in one chapter has been disproven since the book was published.

If Krugman or his publisher are issuing new editions of the book without making corrections, I will be much more sympathetic to your argument but to call him dishonest, because 8 year old editions of a book is a little much. By that definition, David and Christina Romer should ask Milton Friedman and Anna Schwarz to pull copies of their treatise from the shelves and call them dishonest given that they showed that Friedman and Schwarz tended to cherry-pick their examples and left out instances which went against their main point. I don't think Friedman was intellectually dishonest because subsequent work showed holes in the argument, and I don't think Krugman was dishonest on this either, unless as I said it, the conventional wisdom was different at the time he wrote it.

So that's where we disagree, I believe that intellectual honesty and state of common knowledge and conventional wisdom are very inter-related and you don't, but I appreciate you taking the time to explain the issues.

I made a mistake. I based my comments on the QWERTY chapter from memory.

Rereading it shows that criticisms of the QWERTY example are even dumber than I thought. The Economics of Qwerty chapter talks about how initial conditions can affect ultimate outcomes. It leads directly to one of Krugman's main acadeic accomplishments, the new trade theory.

The history of QWERTY is but a simple example of many he has in that chapter and taking it out altogether changes nothing of substance (other than the need of a new chapter title).

Can the Pauldolatry get more fervent than:

>> The idea that at the time Krugman wrote his book QWERTY had been completely discredited in mainstream economics is a flat out LIE.

Would GT care to demonstrate when anyone ever said this? Particularly in light of my just telling the nice comments section that Varian and Shapiro seemed to be (at least partly) under the spell of the QWERTY Fairy when they published "Information Rules" in 1999.

In fact, Varian still seems to be under the influence, given some of his responses to David Friedman and myself just this past November.

But, could GT give us a hard and fast rule when it is appropriate for an economist to perpetuate urban legends, and when not? Something other than it's okay for Krugman, not okay for Larry Kudlow (or the grad students you were denigrating a few posts ago), I mean.

Now, to the question of who could someone read to find out what was going on in California in early 2001. I'd suggest Gregg Easterbrook's February 19, 2001 column at:

http://www.thenewrepublic.com/021901/easterbrook021901.html

Or James Surowiecki's New Yorker piece of Feb. 12th of that year. Or Cato's Jerry Taylor, or Michael Lynch's Reason Magazine stuff, or Lynne Kiesling.

Or even my sci.econ stuff from 2000-2001. We all knew what the problem was, and we didn't blame it on the Governor of Texas.

It is not an urban legend if it is widely accepted in the profession. One can't have it both ways.

Either Krugman willingly wrote about something the the economic community already discarted or he didn't.

The answer is clear.

He didn't.

At the time of his writing that the QWERTY example was widely accepted. So there was no mistake of any kind.

I'll take a look at Easterbrook's and Lynch's article.

I'll start by noticing tha both were written AFTER Krugman's first piece.

I'll also quickly note that Easterbrook's article is about 5 times bigger than Krugman's and Lynch's about 7.5 times. It's not clear that they are really direct competitors but let's see.

I'll also quickly note that Easterbrook's article is about 5 times bigger than Krugman's and Lynch's about 7.5 times. It's not clear that they are really direct competitors but let's see.

I’m all for public intellectuals communicating with the hoi polloi and not being restricted to the halls of the ivory towers. Making occasional mistakes is the risk one increasingly takes when writing so often. Still, there is a noticeable shrillness and vicious unfairness since Paul Krugman began his column for the New York Times. This wasn’t the case while he still was with Slate.com. And yes, I believe it’s due to the fact that in his heart of hearts, Krugman wishes to be loved by the Liberal elite.

And if, as you say, Varian and others still accept the QWERTY example then I truly fail to see what EXACTLY you are complaining about.

It's already clear that the QWERTY example, although it is the basis of the chapter title, is not crucial in any way to the substance of Krugman's point, which spends a lot more time discussing Boeng vs Airbus. All part of his basic point that initial conditions can affect final outcomes which is an analytical part of one of his main academic contributions.

So the QWERTY example, revealing as it is if true, is not something Krugman's chapter depends on. There are several other examples in that chapter and nobody has put any of those other examples in doubt, have they?

And we know that at the time Krugman wrote that it was considered true (or as true as anything is in social sciences).

Since then doubts have been cast on that particular example.

But now you tell us that, in fact, some very prominent economists still think that the QWERTY example has validity.In other words even today, accorduing to you, there is no final consensus on QWERTY not being true.

So your point is what then?

I wish the Krugman bashers were clear about what they dislike, like you are David. Most seem to jump from one point to another.

My view is that he has become much harsher but I sincerely doubt he cares one bit to be loved by the Liberal elite.

For much of the 90s he seemed to love to attack liberal commentators and called Clinton's 1993 economic summit a waste of time. More recently James Carville, who probably agrees 100% with Krugman, said that Krugman treated him like an idiot when he asked him some questions on economics.

I think Krugman only cares about his reputation in the economics community.

Patrick,

I read the sci.econ posts and I noticed a few things. Most important thing I noticed was reinforement of why I don't read USENET newsgroups: people attacking each other in ridiculous and malicious ways. Second, QWERTY and denouncing David is your life's work or so it seems. Had I known this I would never have gotten involved in a discussion because it is clear that your mind is set. Third, you (and David Friedman and others) strongly believe that Paul David is dishonest in not retracting some of his claims: I am inclined to agree with you. Fourth, the attempts to drag Krugman into this are pitifully weak by comparison and there is nothing there that even remotely shows that Krugman's book was written in an intellectually dishonest way.

I am done with this discussion, since I don't believe that your mind can be changed on this topic, regardless of what I or GT or anyone else can write. I do hope that deep down inside, you recognize that your real fight is with David, and your attempts to tar Krugman with the David brush reflect something other than logical thinking. Regardless, thanks for the info. Lots more sad and serious stuff to have on ones mind today.

In Paul Krugman's own words:

"My emotional reference group consisted of the most successful economists of my generation, and I was not generally counted among their number."

http://www.washingtonpost.com/wp-dyn/articles/A25169-2003Jan21.html

The Liberals who run the major academic institutions and the New York Times demand that a "succesful" economist beat up on Republicans. Krugman is only too happy to oblige.

Huh?

Not sure I follow what you are saying.

And that's the big difference between Krugman and Wolak, the latter pretty much keeps his eye on the ball. Krugman on the other hand, in the same article, jumps from "Nash Equilibrium" to billion dollar robbery (via Joe Conason). But you can't legitimately draw that conclusion.

From the Krugman article:

The really striking thing, of course, is that there is excess capacity in the system - yet the price goes sky-high. And with a little realistic friction added, you could easily imagine blackouts and brownouts as part of the picture. Let me also stress that this is a non-cooperative equilibrium - it doesn't involve collusion, let alone conspiracy, among the generators. You don't have to imagine Ken Lay and Dick Cheney sitting in a room, trading sneers, and chortling over the havoc they are wreaking (which isn't to say that this might not have happened!). All it takes is individual firms, acting in their individual self-interest.

The resemblance of this story to the actual crisis in California, with a record number of plants closed for "repair", with shortages and blackouts continuing through the low-demand winter months, is obvious. Yet the whole exercise may seem suspiciously quick. If it's so easy to have a crisis in which market manipulation produces very high prices, why doesn't it happen all the time? And why did the crisis suddenly end?

But that's the beauty of Wolak's model: the price-rigging equilibrium only happens if the numbers are right, and so it can collapse if the numbers change. In fact, Wolak offers a clear story both about why California plunged into crisis, and why it plunged back out again.

That Paul, nothing but hyperbolic accusations of criminality.....

If I remember correctly, Paul complained that the FERC refused to intervene with price caps, which would resolve the situation. And his link to Joe Conason was talking about the media coverage of the case, not Joe's economic analysis of it.

Once again I make the mistake of relying on my memory.

I take back what I said about Krugman and Enron.

Let's see, I read both Easterbrook's and Lynch's articles.

Easterbrook's article has good info on how CA got into the mess. Talks about the problems with partial deregulation. Acknowledges the withdrawal of power by producers.

But it completely misses the boat by not explaining what the solution was (one Krugman had talked about at least a month earlier) nor really detailing how the market worked.

Lynch's is even worse. There is lots of information on how the market was only partially deregulated. But very little on on how the pricing model worked. Lynch doesn't even recognize that market power was exercised! And he completely misses the point of what market power was. Lynch correctly points out that the market conditions were such that it was in the best interests of the companies (and legal!) to act as they did. Something Krugman had talked about months before. But he completely fails to understand that it is the FERC's responsibility to intervene, as Wolak explains so clearly in this interview.

What Lynch misses is that even though the power producers may not have been doing anything illegal or colluding in any way that does not mean that there weren't legal remedies. There were. It was up to FERC. And FERC did squat.

Because of this Lynch also misses the point of what the solution was (temporary price caps). Something Krugman talked about MONTHS before Lynch's article.

As for Krugman I looked at his columns and found about 10 that talked directly on the causes and solutions of the crisis. His first one (that I could find) on 1.7.01 laid out the problems with deregulation and the need for price caps. On 1.24.01 he starts talking about how power companies 'gamed' the system but without many details. On 2.18.01 explains more on how the market was not simply a bad design imposed by dumb politicians but the result of a lot of lobbying by the utilities. On 3.24.01 he first talks of how the market gaming worked. He is VERY clear that there was no need for collusion.

He has several others but these first 4 tell you more and better about what happened and what to do about it than anybody else.

He talks about Enron on a piece dated 5.10.02, more than a year later. It DOES NOT say that Enron's memos were proof that Enron was the main culprit. In fact he makes it clear that Enron was a side story and the bigger fish were the producers. he simply offered the Enron memos as direct proof of something that could only be shown previously through indirect means. And that's why I take back what I said.

Bottom line?

Once again the accusations by the Krugman bashers prove to be a combination of misrepresentations, misunderstandings, and outright lies.

"Huh?

Not sure I follow what you are saying."

Hmm, perhaps this will help you:

"He had written 16 books by the fall of 1999 when "out of the blue," says (Paul) Krugman, Howell Raines, then running the Times editorial page, called and offered him a twice-weekly column.

It wasn't long before Krugman started ripping the Republican presidential candidate, though he says Raines barred him from using the word "lying" for the duration of the campaign."

Let me put it this way: Paul Krugman knows which side of the bread is buttered. Howell Raines is a left wing screw ball who would have never hired Krugman unless he went along with the Liberal establishment. Are you getting a clearer picture?

I likewise found the following to be very funny:

"He (Paul Krugman) was quickly struck by "the low level at which most discussions are held. A lot of it is just sheer politics. A lot is prejudice. A (Ronald Reagan) Cabinet secretary's golfing partner probably has more influence on policy than a think tank that spent years studying the issues.""

Thank God that this was the case. Krugman and his fellow loopy liberal economic professors didn't have a clue. President Reagan defied them and slashed the tax rate. The United States then experienced a major economic boom. I am reminded of the old joke warning of the dangers of public sector bureaucrats: "We are from the government, and are here to help you." This is also often accurate concerning the academic community: "We are from the university, and are here to help you!" A little "anti-intellectualism” never hurt anybody.

David,

You really are full of conspiracy theories, arent you?

LOL

"David,

You really are full of conspiracy theories, arent you?

LOL"

Hey, what I can I tell you? It was those pictures of Howell Raines and Paul Krugman selling their souls to Satan that utterly convinced me. The New York Times apparently has human sacrifice rituals in the basement of its home office. Only the blood of Republicans is used.

I just LOVE this one:

" It is not an urban legend if it is widely accepted in the profession."

IOW, it doesn't matter what the truth is, but what we, THE ANNOINTED, think it is.

Of course, that raises the rather interesting questions of how GT knows what was "widely accepted", and how it came to be so. In an earlier post he was all about telling us how HE and his clan differed from those horrid high school econ teachers (even those with M.I.T. Phds); something about scientific methodology and lots and lots of math, iirc.

But, the history of the QWERTY story destroys such intellectual pretensions. In the WSJ article that achilles was able to locate we can read:

>> "In the early 1980s, standard neoclassical theory held that markets always chose the right technology," explains David A. Kirsch, of the UCLA business school. "It should have been impossible to have the persistence of an inferior technology."

But, according to GT and achilles, one little paper by a Stanford economic historian of minor (and uneven) reputation completely changed that almost overnight. Odd, that that happened, given that the facts about the Dvorak keyboard were published years earlier in the New York Times and other newspapers. And, that the largest (at that time) corporation in the world, AT&T, had tested the Dvorak keyboard (with the intention of replacing their teletype keyboards)and found no benefit to it.

Which all seems inconsistent with GT's claims about his profession's standards, and also leaves the puzzle of why the false story so quickly displaced the prior "conventional wisdom". And, why the true story (the one supported by the evidence) of L&M was later ignored by (according to GT's logic) that same profession.

I now see that L&M actually sent their working paper of what became The Fable of the Keys out to David in 1988, publishing it in the not exactly obscure Journal of Law and Economics in 1990. Krugman, who knew Paul David well, would have had SIX YEARS to get the facts before publishing his, "The Economics of QWERTY".

What is it about the academic profession that causes bad scholarship to drive out good, fellas?

I want to first point out that the Krugman apologists are shifting the grounds of the debate. I have not accused Krugman of academic fraud, nor suggested he issue a recall notice for Peddling Prosperity. And this thread is about Krugman v. Kling, not about the sins of Paul David (no matter how grievous they may be).

As to how honest Krugman is being about his use of the bogus example of market failure due to increasing returns from network effects in Peddling Prosperity, there is an instructive example in the Slate article Krugman wrote in January 1998: "The Legend of Arthur", and the follow-up letters and responses to that article.

First, there is no mention of QWERTY in the article at all (though one of Krugman's critics brings it up; with no acknowledgement at all from Krugman). Second, here's the great man himself detailing the responsibilities of JOURNALISTS, in reporting on economics:

>> How did this fantasy come to be so widely believed? I am glad to hear that you tried to tell a more balanced story, Mr. Waldrop, even if sloppy paperwork kept it from seeing the light of day. And I am glad that you talked to Ken Arrow. But Nobel laureates, who have wide responsibilities and much on their mind, are not necessarily on top of what has been going on in research outside their usual field. I happen to know of one laureate who, circa 1991, was quite unaware that anyone had thought about increasing returns in either growth or trade. Did you try talking to anyone else--say, to one of the economists who are the straight men in the stories you tell? For example, your book starts with the story of Arthur's meeting in 1987 with Al Fishlow at Berkeley, in which Fishlow supposedly said, "We know that increasing returns can't exist"--and Arthur went away in despair over the unwillingness of economists to think the unthinkable. Did you call Fishlow to ask whether he said it, and what he meant? Since by 1987 Paul Romer's 1986 papers on increasing returns and growth had started an avalanche of derivative work, he was certainly joking--what he probably meant was "Oh no, not you too." And let me say that I simply cannot believe that you could have talked about increasing returns with any significant number of economists outside Santa Fe without Romer's name popping up in the first 30 seconds of every conversation--unless you were very selective about whom you talked to. And oh, by the way, there are such things as libraries, where you can browse actual economics journals and see what they contain.

I hope that last sentence sinks in, guys. Had Krugman taken his own advice to: "browse actual economics journals", he would have found the Liebowitz-Margolis (1990) piece, The Fable of the Keys. I guess this is just another example of Krugman having one standard for himself, and another for everyone else. As one of those who came in for criticism by Krugman noted:

>> I might attach more weight to Krugman's criticisms if I hadn't recently reread his informative 1994 book Peddling Prosperity, in which he devotes a chapter to the rediscovery of increasing returns by contemporary economists. Who are the first scholars Krugman mentions in his account? Paul David, an economic historian who wrote a famous paper about how the QWERTYUIOP typewriter keyboard evolved and, you guessed it, Brian Arthur. "Why QWERTYUIOP?" Krugman wrote. "In the early 1980s, Paul David and his Stanford colleague Brian Arthur asked that question, and quickly realized that it led them into surprisingly deep waters. ... What Paul David, Brian Arthur, and a growing number of other economists began to realize in the late seventies and early eighties was that stories like that of the typewriter keyboard are, in fact, pervasive in the economy."

To which there is nary a peep by Krugman. No attempt to correct the record at all.

Intellectual honesty.

Without it no discussion is possible.

I'll repeat it once more.

In 1993, when Krugman, wrote the book the QWERTY example was widely accepted. So what did he do wrong then?

In ANY CASE it makes no difference. The chapter in question is 23 pages long. Of that, only 2 pages are dedicated to the QWERTY example and about 2/3! are dedicated to his strategic trade theory.

This just keeps getting more hilarious. GT, has now admitted that the "incomparable" contributions of Krugman are not much different from many others. Except that Krugman's "solutions" are better somehow. But that is debatable, say, the temporary price controls he called for; can anyone say: temporary war time rent control NYC?

(For a more comprehensive explanation of what solutions might look like, see Lynne Kiesling and Adrian Moore's paper at):

(http://www.rppi.org/041901.html)

For evidence, GT proffered an interview with Frank Wolak on Frontline, which only more sharply contrasts the difference between a serious and honest academic, and a bitter,partisan, political hack writing on the Op-ed page of the NY Times.

For instance, Krugman claimed the California fiasco, "is a warning about the dangers of placing blind faith in markets". But Wolak admits that the problem is that there wasn't enough faith in markets (in the interview provided by GT):

>> Much of the problem is not really, as I say, the fault of deregulation. It's the fault of the fact that we won't let the sort of things that are going to make the market work well actually work. ...

Krugman makes many accusations of "market manipulation", which he seems to use interchangeably with "market power". But Wolak more honestly says:

[WOLAK:] ... People will try to demonize the exercise of market power. Well, then you'll ask them the question, do you think firms should maximize profits? You'll get most people on that one.

[FRONTLINE:] Do you mean by that, that one person's gouging is another person's fair price?

[WOLAK:] I don't know about that. But I think it's more of one person's exercise of market power is another person's, perhaps, abuse of market power. And this is why we have antitrust laws; this is why we have courts. ... We usually have to go through a tremendous amount of due process to distinguish between the abuse of market power and simply the unilateral exercise of market power.

[FRONTLINE:] What is market power?

[WOLAK:] Market power, from the economist's perspective, is just simply the ability to raise prices by your own actions in a market. ... If there are a large number of suppliers and a large number of demanders, [and] one supplier attempts to raise his price, everyone will go buy from all the other suppliers, and hence we'd say he has no market power. On the other hand, if that firm has the ability to say, "I want $10 more for my product," and [then get that price], then we say he has market power. ...
------endquote--------->>

The distinction Wolak clearly is making in the above being entirely missing from Krugman. And there are no charges of "billion dollar robbery in broad daylight", nor "Republican bastards bribing Dick Cheney", in Wolak:

[FRONTLINE:] So you think really it's the Enrons and the generators and the major corporations involved that set this playing field up? And they are now basically using it to drain as much capital out of California as they can?

[WOLAK:] No. ... I have the fable of the lions and the zebras. Lions eat zebras. That's just what they do. Firms maximize profits. That's just what they do. And if you think zebras are the consumers, every now and then that's why we have game wardens, because game wardens will then say, "OK, lions, you've eaten enough. Now I'm going to put you on a diet for awhile so the zebras can come back to life and do what they need to do."

You can't blame the Enrons. That's what they do. They try to make as much money from the money that they get invested. You blame the regulators. It's the regulator who oversees the market, who sets up the incentive structures. ...
---------endquote-------->>

Btw, for almost all of the crisis the regulators were operating under the Clinton Administration, and I don't remember Krugman hammering them.

Wolak is also honest enough to take a little of the blame himself (a trait virtually non-existent in Krugman):

[FRONTLINE:] When we went out to talk with people and film at Enron ... and we compared that to the Department of Water Resources and their office, it looks like the little league versus the major leagues.

[WOLAK:] In the market surveillance committee, I remember the first meeting. ... The initial meeting was sort of friends of the bride and friends of the groom. The friends of the bride, being the investor-owned utilities, all sat on one side. And the new market participants sat on the other side. ... All the guys over here look like the students that take my undergraduate finance class. They understand options, derivatives, risk, etc., management.

[FRONTLINE:] These are the new guys?

[WOLAK:] These are the new guys. All the guys over here are the engineers with the pocket protectors, and they're all thinking about, "How do I cover my cost?" And I can assure you, these guys over here are not worried at all about covering their cost--they're worried about maximizing profits.

I just remember one time almost wanting to say, but suppressed in the public meeting, "You guys really should hire some of those guys--because if you don't, they're going take all your money." And, in hindsight, I should have said it.
-----------ENDQUOTE-------->.

Intellectual honesty.

Without it no discussion is possible.

I'll repeat it once more.

In 1993, when Krugman, wrote the book the QWERTY example was widely accepted. So what did he do wrong then?
-----------endquote------->.

Oh, you want to talk about intellectual honesty? Then why don't you address my point, that Krugman attacked other people in his Slate column for not doing their homework before publishing?

Specifically, for not going to the library and browsing the scholarly journals. And not acknowledging his error in 1998 in his piece attacking Arthur.

Where's your intellectual honesty, GT?

Achilles was right.

I should have learned weeks ago.

Wow. PK may be a great economist but as a columnist he is a Democratic talking points hit man. If I were ever in need of economic advice on international trade (God forbid), I would hire PK. As to his columns, I give them no more credence than I would columns by James Carville.

I've just received an e-mail from Stan Liebowitz pointing me to this exchange between him, Steve Margolis, and Krugman in "Regulation":

http://www.cato.org/pubs/regulation/regv18n4/reg18n4-letters.html

Stan drolly notes that Krugman appears not to have read any of their papers. Not being as polite, I'd say Krugman is either stunningly ignorant, or just doesn't give a damn what he says.

A little "anti-intellectualism” never hurt anybody.

The emperor's new wardrobe is beautiful! As are the "anti-intellectual" tariffs on Canadian lumber, and steel.....

I note that GT--the guy who loudly proclaims the failure of others to respond to HIS specific points--is reduced to an Appeal to HIS Authority:

>>Achilles was right.

>> I should have learned weeks ago.

"Intellectual Honesty. Without it no discussion is possible". Which reminds me, this from GT:

>> The chapter in question is 23 pages long. Of that, only 2 pages are dedicated to the QWERTY example.

Is, as GT has phrased it, "a flat out LIE". Krugman continually references QWERTY throughout the article. And he does it for ideological reasons, to, "undermine a conservative faith in the perfection of markets".

The above quote comes FOURTEEN PAGES into the chapter, and is in addition, not true. No one believes in "perfection", least of all conservatives.

Leonard writes: "Just plug in "tax" for "crime" and he makes the case against himself quite handily."

So a free and sovereign people that decide on a tax, either directly or through representatives, are on the same level as the 17 year old who loots jewelry from a store to pay for his crack habit?

That's probably true, Jason, although it's almost certainly raising the minimum employable IQ, but there are a large number of people out there who think it would be a boon to the poor if we just raised the minimum wage to $15.

So then the wife could go home and the husband would earn enough to support the whole family. Which is why, historically, these kinds of laws (family-wage) have had broad support.

The Republican party is a broad and diverse coalition which, like any large party, must hold together several factions who don't like each other very much. That they've managed to keep the Christian traditionalists together in the same party with the free-market capitalists is a feat that wins my admiration. The current Republican coalition is 23 years old and there is nothing inevitable about it. 103 years ago, when Byran ran for President, the fundamentalist Christians were the core support of the Democractic party.

Mike wrote: "The point here isn’t the minimum wage – I want to keep this as non-partisan as possible – the point is the look on his face as he reasoned through this. It was like watching someone try to figure out a rubik’s cube. It was a thought that had never occurred to him. More important, it was a thought that never would have occurred to him had someone not pointed it out."

I agree with this anecdote completely. I'm constantly having conversations with people who have opinions on economic matters but no nothing about economics. One thing I've learned this last past year is that most people treat economic issues as moral issues - that is one reason why the public is generally unwilling to embrace unrestricted free trade - they see it as immoral, and that is all they need to know about it.

The radical Left loves to claim that one has no right to speak about their intellectual darlings like Karl Marx, Jacques Derrida, Teilhard DeChardin, or Michael Foucault

Eve Tushnet is no liberal but she wants to see conservatives embrace Jacques Derrida.

Your point would be valid only if everybody’s wages were raised at the same time. In that case, though, there is no point in raising the minimum wage.

If everyone's wages rose at the same time there would be inflation but also a shift of income from those holding capital to those who work. As long as there are some people who don't work but live off the interest of their investments, this holds true.

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