G. Branden's Reviews > Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations

Peddling Prosperity by Paul Krugman
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Jan 05, 2009

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Read in January, 2009

Krugman's Peddling Prosperity is a lucid deconstruction of supply-side economics; a strident (and sensible, as far as I can tell) defense of Keynesian theory after its purported demolition by Milton Friedman in the 1970s; an acknowledgment of what conservative economists got right in the 1960s and 1970s; a case against the assertion that Ronald Reagan's economic policies were catastrophic, as opposed to merely harmful; a plea for economic policy to be better informed by actual economists as opposed to pop econ policy entrepreneurs, such as Robert Bartley, Arthur Laffer, and George Gilder on the Right, and Robert Reich and Ira Magaziner on the Left.

Long-standing animosity between Reich and Krugman (see p. 254ff.) probably explains why as Reich's star rose in the Clinton administration and now again in Obama's, Krugman is not allowed at the grown-ups table. That Krugman's credentials have lately been burnished with a Nobel Prize and his economic prognostications, once mocked with knee-slapping derision by the Bush-fellating Right, have proven prescient, makes me wonder just how far President Obama's conciliatory, "team of rivals" approach really extends.

*****

Favorite quotes:

An Indian-born economist once explained his personal theory of reincarnation to his graduate economics class. "If you are a good economist, a virtuous economist," he said, "you are reborn as a physicist. But if you are an evil, wicked economist, you are reborn as a sociologist." (p. xi)

***

When Keynes published his theory of the business cycle, some conservative economists argued there was no need for government policy to combat recessions because recessions would be self-correcting. Their argument went as follows: In the face of high unemployment, wages and prices will tend to fall. This fall in wages and prices will increase the real supply of money--that is, the given stock of money in circulation will have steadily rising purchasing power. And this expansion in the real supply of money will in turn lead to an economic expansion.

Keynes did not deny the logic of this so-called classical argument; he was willing to concede that in the long run economic slumps would be self-correcting. But he regarded this self-correcting process as very slow, and as he pointed out in a widely quoted but rarely understood remark, "In the long run we are all dead." What he meant was: Recessions may eventually cure themselves. But that's no more reason to ignore policies that can end them quickly than the fact of eventual mortality is a reason to give up on living. (p. 47)

***

A trade war in which countries restrict each other's exports in pursuit of some illusory advantage is not much like a real war. On one hand, nobody gets killed. On the other, unlike real wars, it is almost impossible for anyone to win, since the main losers when a country imposes barriers to trade are not foreign exporters but domestic residents. In effect, a trade war is a conflict in which each country uses most of its ammunition to shoot itself in the foot. (p. 287)
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01/05/2009 page 272
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Comments (showing 1-10 of 10) (10 new)

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message 1: by Susan (new) - added it

Susan This looks to me like exactly the sort of reading I want to be doing in economics. I've recently been exploring the role of government, and that almost inevitably draws me to the role of government policy in economics. And there I start to hang up. I can quote a lot of the conservative economic ideology chapter and verse -- my father is an economic conservative with a Masters in Economics, and he makes his case in a very clear and persuasive way when I can get him talking. Even without him, though, I find that I can understand most of the conservative economic assertions fairly well with my entry-level, suppy-and-demand economics classes in undergrad. And yet when we get to the macroscope, we still seem to be governed by chaos. I've started to quote myself, "Macroeconomics is black magic."

But, having explored the implications of conservative theory deeply enough that I think I can make some intelligent judgements on government policy, I find that I have no idea what the other side has to say or even where to begin educating myself. If someone knows only addition and subtraction, it will do her no good to pick up a text in calculus and think that the truth will unfurl if she just starts reading. So I am on the hunt for good books to bring myself up to speed, hopefully ones with decently clear writing style to convey complex ideas.



message 2: by G. Branden (last edited Jan 22, 2009 01:26PM) (new) - rated it 4 stars

G. Branden Susan wrote: "This looks to me like exactly the sort of reading I want to be doing in economics. I've recently been exploring the role of government, and that almost inevitably draws me to the role of governmen..."

The good news--as far as I have been able to discern in my dilletantish dabblings--is that one needs command of precious little mathematics to grasp and discuss broad macroeconomic policy. The trickiest math in Peddling Prosperity is in the appendix to chapter 10, in a section called "Lagging Productivity Growth". In it, you are asked to manipulate sets of three integers, applying the plus and minus operators. Pretty tough!

On Krugman's blog, the "hardest" stuff I can remember seeing is expressions like 1/(1-c(1-t))--hardly esoteric. High school algebra will suffice.

The bad news? One needs command of precious little mathematics to grasp and discuss broad macroeconomic policy. The leading light of Austrian School economics in the second half of the 20th century, anarcho-capitalist Murray N. Rothbard, was suspicious of applying differential calculus to supply and demand curves, on principle (see Bryan Caplan, "Why I Am Not an Austrian Economist").

This isn't to say that economists are innumerate (as John Allen Paulos might put it); academic economists probably do as much applied math as anyone outside the hard sciences, and my impression is that econometricians are particularly hard-core.

What I am saying is that the world's wars over economic policy are won and lost at the level of basic arithmetic, not second- and third-order terms in a Fourier series. Sadder still is that the arena in which the wars are fought isn't actually mathematical at all.

I don't know what's most mortifying: that George H. W. Bush was right about supply-side economics being "voodoo"; that he went along with it anyway (being cheaply bought with a Vice-Presidency); or that voodoo is the norm, not the exception, in economic discussions among policy entrepreneurs.


message 3: by Terran (new) - added it

Terran I don't know about the mathematics arguments. It probably depends on what slice of economics you're looking at and whether you're reading primary literature or not. But as soon as you touch anything relating to game theory, it gets very hairy very fast. I've tried to read a couple of papers in that direction and, while I understand the general formulation and the basics of the argument and notation, I find that I don't want to bang my head against it long enough to decipher the crunchy bits.

That said, I also have not read anything in formal macroeconomics and policy economics. So I really don't know what tools they're using there. The one thing I can say from having read a bit of pop development economics (see my reviews of Jeffrey D. Sachs and William Easterly) is that there's less data than I would like and very little math that I can infer. (And I think that Easterly, in particular, is making naive inferences from data because of using simplistic statistical models.)


message 4: by G. Branden (last edited Jan 22, 2009 01:27PM) (new) - rated it 4 stars

G. Branden Terran wrote: "That said, I also have not read anything in formal macroeconomics and policy economics. So I really don't know what tools they're using there..."

Well, formal macro for journals has, I expect, nothing to apologize for in terms of the sophistication of its models. One of Krugman's theses, in this book as well as in more recent work of his, is that actual economic policy documents from real governments are terribly shallow mathematically--sometimes so much so that they're impervious to analysis, because so much is left unquantified.

Here's one example of Krugman doing policy econ math on his blog.



G. Branden Just as an idle thought--and if it hasn't already happened--I wish the vendors/operators of MMORPGs would work with professors of economics to perform experiments. The more successful MMORPGs have tremendous numbers of subscribers and, more to the point, active members, and can probably put to shame any simulation that can be constructed with a small group of motivated grad students or a larger set of half-interested undergrads.

As you note, game theory is complex (and I realize it's reckless to speak of game theory and actual entertainment software in the same breath). I'm wondering if we can get a look at emergent properties in unconventional markets that are large and complex enough to inform us about the "real thing".

I don't think we can accuse MMORPG economies of being unserious--there's a real-world market for World of Warcraft gold, and Blizzard has had to crack down on its covertibility to the dollar...not just because it may distort gameplay from the designers' perspective, but because if they don't, they risk running afoul of banking regulations!


message 6: by Terran (new) - added it

Terran G. Branden wrote: "Just as an idle thought--and if it hasn't already happened--I wish the vendors/operators of MMORPGs would work with professors of economics to perform experiments. The more successful MMORPGs have..."

Totally. I believe that there are academic economists, at the least, working on this. It's certainly a natural and compelling idea. The really attractive part is that MMOs offer the possibility of actually running quantifiable, repeatable economic experiments, where you can actually control variables and do interventions and everything. How cool is that? If only we can harness that potential...



message 7: by Terran (new) - added it

Terran G. Branden wrote: "Here's one example of Krugman doing policy econ math on his blog.
"


Bloody linear models...




message 8: by David (new) - added it

David There are, and there have been a number of articles published about it. Scary when you've got MMORPGs with greater GNP than some countries!



message 9: by Terran (new) - added it

Terran David wrote: "There are, and there have been a number of articles published about it. Scary when you've got MMORPGs with greater GNP than some countries!
"


Heh. Some countries have smaller GNPs than many towns in the US. :-)

Do you have a citation to articles about serious, academic studies of the economics of MMORPGs? I am curious about this area.



message 10: by David (new) - added it

David Let me see what I can do - they've always been mentioned in context of news articles.




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