What has Krugman been smoking?

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I have almost fin­ished writ­ing the sec­ond edi­tion of Debunk­ing Eco­nom­ics (to be pub­lished by Zed Books in Sep­tem­ber 2011), which (a) makes me par­tic­u­lar­ly sen­si­tive to the dri­v­el neo­clas­si­cal econ­o­mists write and (b) in need of the occa­sion­al diver­sion when read­ing non­sense dressed up as sci­ence gets all too much.

So I have to thank Paul Krug­man for feed­ing both needs at once, with a paper that has been just brought to my atten­tion via the West­ern Eco­nom­ic Asso­ci­a­tion 2011 con­fer­ence newslet­ter (I’m pre­sent­ing a paper at the con­fer­ence, and being a dis­cus­sant on two oth­ers).

The con­fer­ence is being held in Bris­bane this year–which, one has to admit, is pret­ty far west when the con­ti­nen­tal US is  your frame of reference–but it’s appar­ent­ly not far enough out for Paul Krug­man, who has just pub­lished a paper in the WEA’s jour­nal Eco­nom­ic Inquiry on (drum roll please…):


Krug­man is one of the best neo­clas­si­cals in general–mainly because his core human­i­ty over­rides his unfor­tu­nate train­ing in economics–but this one is full bore neo­clas­si­cal. I hope he’s pulling neo­clas­si­cal legs here–pointing out the non­sense that one can get pub­lished in a main­stream jour­nal if one makes neo­clas­si­cal assumptions–and this is implied by the final line I quote below: “This arti­cle, then, is a seri­ous analy­sis of a ridicu­lous sub­ject, which is of course the oppo­site of what is usu­al in eco­nom­ics”.

I won­der how many neo­clas­si­cal econ­o­mists are going to bite before Paul reveals that they’ve been had?

So Paul, please tell me you were send­ing up neo­clas­si­cals when you put this one togeth­er and then sub­mit­ted it to a journal–that it’s your ver­sion of a Alan Sokal hoax on  neo­clas­si­cal eco­nom­ics. Oth­er­wise, expect a call from Char­lie Sheen, because what­ev­er you were tak­ing when you penned this stuff makes Char­lie’s drugs of choice look utter­ly tame (the emphases below are my own to point out where I think Krug­man was sig­nalling that this is a hoax):

Many crit­ics of con­ven­tion­al eco­nom­ics have argued, with con­sid­er­able jus­ti­fi­ca­tion, that the assump­tions under­ly­ing neo­clas­si­cal the­o­ry bear lit­tle resem­blance to the world we know. These crit­ics have, how­ev­er, been too quick to assert that this shows that main­stream eco­nom­ics can nev­er be of any use. Recent progress in the tech­nol­o­gy of space trav­el as well as the prospects of the use of space for ener­gy pro­duc­tion and col­o­niza­tion (O’Neill 1976) make this asser­tion doubt­ful; for they raise the dis­tinct pos­si­bil­i­ty that we may even­tu­al­ly dis­cov­er or con­struct a world to which ortho­dox eco­nom­ic the­o­ry applies. It is obvi­ous, then, that econ­o­mists have a spe­cial inter­est in under­stand­ing and, indeed, in pro­mot­ing the devel­op­ment of an inter­stel­lar econ­o­my. One may even hope that for­mu­la­tion of ade­quate the­o­ries of inter­stel­lar eco­nom­ic rela­tions will help accel­er­ate the emer­gence of such rela­tions. Is it too much to sug­gest that cur­rent work might prove as influ­en­tial in this devel­op­ment as the work of Adam Smith was in the ini­tial set­tle­ment of Mass­a­chu­setts and Vir­ginia?

This arti­cle rep­re­sents one small step for an econ­o­mist in the direc­tion of a the­o­ry of inter­stel­lar trade. It goes direct­ly to the prob­lem of trade over stel­lar dis­tances, leav­ing aside the analy­sis of trade with­in the Solar Sys­tem. Inter­plan­e­tary trade, while of con­sid­er­able empir­i­cal inter­est (Frankel 1975), rais­es no major the­o­ret­i­cal prob­lems since it can be treat­ed in the same frame­work as inter­re­gion­al and inter­na­tion­al trade. Among the authors who have not point­ed this out are Ohlin (1933) and Samuel­son (1947). Inter­stel­lar trade, by con­trast, involves whol­ly nov­el con­sid­er­a­tions. The most impor­tant of these are the prob­lem of eval­u­at­ing cap­i­tal costs on goods in tran­sit when the time tak­en to ship them depends on the observer’s ref­er­ence frame; and the prop­er mod­el­ing of arbi­trage in inter­stel­lar cap­i­tal mar­kets where—or when (which comes to the same thing)—simultaneity ceas­es to have an unam­bigu­ous mean­ing.

These com­pli­ca­tions make the the­o­ry of inter­stel­lar trade appear at first quite alien to our usu­al trade mod­els; pre­sum­ably, it seems equal­ly human to alien trade the­o­rists. But the basic prin­ci­ples of max­i­miza­tion and oppor­tu­ni­ty cost will be seen to give clear answers to these ques­tions. I do not pre­tend to devel­op here a the­o­ry that is uni­ver­sal­ly valid, but it may at least have some galac­tic rel­e­vance.

The remain­der of this arti­cle is, will be, or has been, depend­ing on the read­er’s iner­tial frame, divid­ed into three sec­tions. Sec­tion II devel­ops the basic Ein­stein­ian frame­work of the analy­sis. In Sec­tion III, this frame­work is used to ana­lyze inter­stel­lar trade in goods.Sec­tion IV then con­sid­ers the role of inter­stel­lar cap­i­tal move­ments. It should be not­ed that, while the sub­ject of this arti­cle is sil­ly, the analy­sis actu­al­ly does make sense. This arti­cle, then, is a seri­ous analy­sis of a ridicu­lous sub­ject, which is of course the oppo­site of what is usu­al in eco­nom­ics.

As my part­ner often says, “That’s out there Mul­der”.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.