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”.

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.
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  • Yes, I have to agree there. Any­thing to lighten the load from neo­clas­si­cals who do take them­selves seri­ously.

    I was also partly react­ing after hav­ing read Krugman’s attempt to under­stand Min­sky in his recent paper–something I’ll also tackle in the book.

  • Robert K

    To whom it may con­cern: IMHO the most seri­ous prob­lem with inter­stel­lar com­merce
    is the req­ui­site let­ters of credit for goods shipped. Should a par­tic­u­lar ship­ment of
    mat­ter acci­den­tally encounter its’ anti­mat­ter coun­ter­part, there would be noth­ing left
    but gamma radi­a­tion, for which no mar­ket value presently exists. The inter­est rates
    on the let­ters of credit would there­fore have to be astro­nom­i­cal, or as Feyn­man would
    have pre­ferred, eco­nom­i­cal.

  • Not every­one works for the man. What about the self-employed in your print-up-wages solu­tion? The fairest “jubilee” I have come up with so far is print­ing an amount equal to total debts and giv­ing an equal amount to each house­hold. This doesn’t guar­an­tee that all debt are wiped but the only way that doesn’t overly reward the impru­dent (or com­pletely reck­less). You see, abol­ish­ing debts does not abol­ish tenacy agree­ments. Also, some have recently taken on debt and oth­ers have almost fin­ished pay­ing.

  • I agree Steven. That is part of my pre­ferred solu­tion too. It also has to go with a rede­f­i­n­i­tion of cap­i­tal assets to stop another Ponzi Scheme com­menc­ing as a result.

  • @ Robert K
    “gamma radi­a­tion, for which no mar­ket value presently exists. ”

    Sorry to dis­agree but:
    c. The main player for “gamma radi­a­tion” is Gold­man Sacks (sp?)
    r. The Player is called “Face­book”
    a. Said to be val­ued at 50T instits (inter-stel­lar units)
    p. Heavy

  • Blot

    I don’t think you can go back­wards in time, I will google your idea though.

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  • samh

    Krug­man is one of the best neo­clas­si­cals in general–mainly because his core human­ity over­rides his unfor­tu­nate train­ing in eco­nom­ics”

    How is this pos­si­ble ? Would this work in physics ? “He is one of the best string the­o­rists because his core love of peo­ple over­rides his .…”

    Eco­nom­ics should explain how economies work, not have social agen­das.

    Sorry to say this is where Steve and I always part com­pany, the analy­sis is great, then there is this big leap to a pro­posed solu­tion that involves gov­ern­ment action.

    Econ­o­mists have enough trou­ble explain­ing how things work and should not worry about using their “core human­ity” to inform their pre­scrip­tions.

  • bob

    I look for­ward to read­ing the book.

    I did not wish label you as naive, une­d­u­cated or uncouth. But was attempt­ing try­ing to show how use­less gen­er­al­i­sa­tions can be.

  • mahaish

    under sec­toral bal­ances samh,

    gov­ern­ment action is unavoid­able, and essen­tial

  • Fair enough Bob, but I wasn’t gen­er­al­iz­ing about Krug­man. He is very specif­i­cally a neo­clas­si­cal, as are the vast major­ity of those who self-describe as Keynesian–as I tried to indi­cate using the quotes from Lucas and Solow.

    The only econ­o­mists who are likely to actu­ally under­stand what Keynes’s eco­nom­ics should be self-describe as Post-Key­ne­sian.

    I’ll elab­o­rate sub­stan­tially on this in the book.

  • Blot

    Cool, I looked at kerr black holes.

    I am no expert though, but from what I could glean… If you could travel per­fectly down the cen­tre (with our magic machine) you can’t travel back before the time that you enter in our ref­er­ence frame. You may exit some­where else in space in the past, but then you have to fly back or go back through. No mat­ter how you come back you end up in the future.

    Freaky though, maybe we could escape the end of the uni­verse by fly­ing through black holes as some form of advanced com­puter chip. The “Intel Holey Bridge”.

  • Some­thing cer­tainly has to be done to pre­vent another ponzi econ­omy.

    I’d love to have you out­line a plan for a jubilee. I won­der if it needs to be a world­wide one? Do only pri­vate debts need to be wiped or pub­lic ones too?

  • BrightSpark1


    Doesn’t the gov­ern­ment have respon­si­bil­ity for the sys­tem sta­bil­ity?

    If the sys­tem stuffs up isn’t it the gov­ern­ments fault?

    Isn’t that the rea­son that we have democ­racy and we vote for gov­ern­ments?

    If the gov­ern­ment should not do any­thing who should? 

    Sorry samh I see you social agenda shin­ing through!

  • Lyon­wiss

    In my view, the paper is dri­vel dressed up in math­e­mat­ics, like most eco­nomic papers and books I’ve read. Instead of “rep­re­sen­ta­tive-agent mod­els in which every­one is alike”, the model has “impa­tient” agents bor­row­ing from “patient” agents. Wow, debt comes from impa­tience.

    The paper makes many ad-hoc assump­tions about a pure endow­ment or pro­duc­tion econ­omy, with debt lim­its, risk-free bonds, assumed util­ity func­tions, the cen­tral bank fol­low­ing a Tay­lor rule, lin­earized Euler con­sump­tion etc., none of them the­o­ret­i­cally or empir­i­cally jus­ti­fied. The gen­eral equi­lib­rium model, with ad-hoc lin­eariza­tion of the equa­tions, pro­duce slop­ing sup­ply and demand curves inter­sect­ing at equi­lib­rium points.

    The counter-intu­itive com­par­a­tive sta­tic equi­lib­ria, are dig­ni­fied as “para­dox of toil” or “para­dox of flex­i­bil­ity”. The model made no con­tact with any empir­i­cal data. What is the con­clu­sion of the paper? “One thing that is espe­cially clear from the analy­sis is the like­li­hood that pol­icy dis­cus­sion in the after­math of a delever­ag­ing shock will be even more con­fused than usual, at least viewed through the lens of the model.”

    Too many eco­nomic papers are dri­vel: pub­li­ca­tion for the sake of pub­li­ca­tion, con­tribut­ing to con­fu­sion.

  • I agree Lyonwiss–the sad­dest thing about it is that it wasn’t pub­lished as a joke!

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