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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43 Responses to What has Krugman been smoking?

  1. Blot says:

    In practice they would use a rail gun to shoot goods slowly from one place to another and another reverse rail gun to catch the goods. Four guns. The catching rail gun device would charge the sending gun.

    The real problem is if someone put $xxx in the bank, traveled close to the speed of light in two directions to return to origin, they would be rich. They would probably need more than the money to pay for the fuel bill or technology though, because the faster you go the heavier you (and your goods if you had them) become.

  2. It’s good to know PK is ahead of the curve what with Peak Oil in the rear view and the old economic ideas literally ‘out of gas’.

    Then again, PK may be publicly going insane:


    Just scroll down a bit …

  3. scarmani says:

    Come now, Mr. Keen… this is not exactly breaking news

    “On a lighter note, in 1978, Krugman wrote The Theory of Interstellar Trade, a tongue-in-cheek essay on computing interest rates on goods in transit near the speed of light. He says he wrote it to cheer himself up when he was “an oppressed assistant professor”.[24]”


  4. Steve Keen says:

    Thanks Scarmani,

    I’m not a close enough follower of Krugman’s career to know of this prior to seeing the notice from the WEA.

    But the question remains–what was Krugman smoking when he wrote it? And what does it say about economic journals that crap like this can get published when serious non-neoclassical analyses of economic issues are rejected without refereeing?

  5. hirnic says:

    Hi Steve,

    Slightly off-topic question for you.

    With the housing market bubble due to burst, the over valuation of the Australian dollar and the threat of hyperinflation in various countries – what do you predict will be a safe asset over the next 10-15 years?

    (note: I’m not seeking investment advice – just curious what you think will be a stable sector).

  6. Reading through your paper, the question arises as to what the modelling indicates about getting out of a ‘great recession’; what are the changes that need to be made to recover once you get to / approach the resultant collapsed state?

    I noted previously you showed using the model that an injection of money to the consumer (Australian response) worked more effectively than an injection of money to the bank (American response). I suspect though, that you can keep injecting into the banking system for far longer before running into problems; simply because what is being done is basically hidden from perception. Longer term though, you can’t keep doing either of those without running into problems of monetary faith.

    How does one best ‘reset’ the system?

  7. mahaish says:

    “The real problem is if someone put $xxx in the bank, traveled close to the speed of light in two directions to return to origin, they would be rich. They would probably need more than the money to pay for the fuel bill or technology though, because the faster you go the heavier you (and your goods if you had them) become”

    thats why you need to time travel blot,

    invent a time machine that manipulates kerr black holes and exploit the rotational differential between them , turn the machine on and use atomic clocks to count forwards about 600 million seconds , turn the machine off, making sure you have you local gravitational field monitoring system so you dont materialise in the middle of the ocean

    find out whats been hot investment wise over the 30 years you have travelled forward in time, then go back to 2011 and buy buy buy.

    only one catch though, and thats probability,

    because the future you were in was a probable future, so it might be slightly different the next time you take the trip, and you might end up losing the lot. 😉

  8. peterjbolton says:

    The differences between the Official unemployment figures and those of John Williams Shadowstats needs to rationalized. I have read many opinions in this regards and none are satisfactory.

    Some fundamental problems that I see as relevant: (from the “burning-bush” via Skype encrypted)
    1. “Economic-theory” is fatally flawed, or, there is no body that can tell you with any level of certainty, what the “economics” of tomorrow will bring.
    2. “Weather theory” cannot predict 24 hours in advance with a 50% probability.
    3. MSM news and weather has degraded to “entertainment.
    4. Children are continually being produced.
    5. The underlaying drive of applied political economics is consumption.
    6. Cheaper Wages are the prime driver of industry and hence the prime consideration of the financial industries that allocate the necessary debt.
    7. “leadership” are digging in as their vision has become their heads in a noose, IOW fear rules.
    8. The socio-economic landscape is completely out of control.
    9. Despite the quoted great advances in medicine a greater part of civilization can’t survive without constant treatment.
    10. Paul Krugman is a jerk, IMO, (I have crosses swords with him)


  9. Steve Keen says:

    I’d be in cash hirnic, and awaiting vulture buys. Gold works well in these circumstances, though I stick with what one blogger here once wrote, that “if you think you need gold, you need lead more”.

  10. Steve Keen says:

    My resets involve debt abolition, putting the banks in receivership, and then starting the slow task of rebuilding American industry. They’re hardly standard fare; if I were looking for a “printing press” approach, then I’d substantially increase money wages–this would cause inflation and devalue outstanding debt. But this would work far better for Japan with its self-contained economic problems than for the USA.

  11. kevintxu says:

    Why do you describe Paul Krudman as neo-classical? Can you elaborate?

    He seems to think that he’s Keynesian. Which of his views do you think is not in line with true Keynes-Fisher-Minsky?

    From Wikipedia:
    Krugman identifies as a Keynesian[119] and a saltwater economist,[1] and he has criticized the freshwater school on macroeconomics.[2][120]
    In the wake of the 2007-2009 financial crisis he has remarked that he is “gravitating towards a Keynes-Fisher-Minsky view of macroeconomics.”[121] Post-Keynesian observers cite commonalities between Krugman’s views and those of the Post-Keynesian school.[122][123] [124]

  12. Steve Keen says:

    Krugman is so far removed from Keynes in his analysis that I suspect he may have already time-travelled to a different universe. The American economists who call themselves Keynesian could be sued for libel were Keynes alive. I go into this in excruciating detail in the next edition of Debunking Economics, but here’s a taste of just how “Keynesian” American neoclassicals are (here I’m quoting from a card-carrying “New Classical” [Robert Lucas], but his attitude of what it meant to be Keynesian in America is par for the course there):

    When Lucas delivered the keynote address to the 2003 History of Political Economy conference, he began by asserting stridently, that he was once a Keynesian:

    My credentials? Was I a Keynesian myself? Absolutely. And does my Chicago training disqualify me for that? No, not at all… Our Keynesian credentials, if we wanted to claim them, were as good as could be obtained in any graduate school in the country in 1963.
    Then he continued:
    I thought when I was trying to prepare some notes for this talk that people attending the conference might be arguing about Axel Leijonhufvud’s thesis that IS-LM was a distortion of Keynes, but I didn’t really hear any of this in the discussions this afternoon. So I’m going to think about IS-LM and Keynesian eco-nomics as being synonyms.
    I remember when Leijonhufvud’s book came out and I asked my colleague Gary Becker if he thought Hicks had got the General Theory right with his IS-LM diagram. Gary said, “Well, I don’t know, but I hope he did, because if it wasn’t for Hicks I never would have made any sense out of that damn book.” That’s kind of the way I feel, too, so I’m hoping Hicks got it right. (Lucas 2004, pp. 13-14; emphases added).

    This was over twenty years after Hicks himself said that he had got it wrong! And he had the hide to call himself a Keynesian, when he admits that “if it wasn’t for Hicks I never would have made any sense out of that damn book”? This is one reason I rile when I hear the comment that “Keynesian economics has failed”; what most self-described Keynesians in economics mean by the word “Keynesian” is the economics of Hicks and Samuelson, not Keynes.

  13. ak says:

    This is a good response to the deficit hysteria
    So why do the neoconservatives want a “balanced budget”? Because another New Deal would reduce the rate of profits. Because if USD is no longer the global reserve currency, free lunches (poisoning the productive sector and enriching the oligarchy) will stop arriving from China.

  14. peterjbolton says:

    Thanks for the link
    What appears to me as the main items today (as I have mentioned above):
    1. The Recursive political /”economic” scam continues unabated, but it is fatally corrupted and will self-destruct eventually and hence the elements of Law are now a threat to its continuity do to “free lunches” galore – see Rollingstone.com “Why Isn’t Wall Street in jail” and it is threatened by “reform” as the war against Merv King heat up – his recent US speech (Oct 2010) –
    start here and you see even the British want to hang him out to dry.

    2. As I say above the financial industries want lower wages and this drives industry to off-shore, where a few million / billion to a “good friend” ugly regime – represents huge savings in costs and hence huge profits for “money”. This means all these youth will not get jobs unless they live in an “under-developed” country. Right stage Assange and Wikileaks, the big threat in x3 ways:
    First, the exposure of the “recursive game” of governments and their lying incompetence and,
    Second, the rising skills of youth are unmatched by those in government employ; big threat.
    Third, Youth are a trend and this trend is rising. ‘Time to kill the kids’.

    3. Running a socio-economic agenda for the sake of population consumption is just plain dumb! And it parallels have Laws and huge financial budgets, manpower and approved killings to support Laws against, of all things, trees and bushes! Of course, there is nothing today more ludicrous and absolutely insane than the Laws against Hemp, marijuana and the like. But booze and tobacco (a bush) is plugged and fully supported. Just insane.

    IOW, the whole socio-economic purpose is nothing more than “death and taxes” – not for tomorrow but for today.

    As I say (repeatedly) this crisis is a “leadership” crisis as we are being led to grave by idiots, morons and false pretenders, who want to keep it that way.

    Laws against plants? Shrieks of laughter where insanity laughs loudest. Are we all mad?

    P.S. I am with the Youth.

  15. peterjbolton says:

    @ ak

    the link is at Yves Smith – Naked Capitalism for the war against Merv King also at London Banker

    (for some reason they sometimes don’t reproduce here)

  16. JesseFrederik says:

    Would much rather like to hear your thoughts on Krugman’s Fisher-Minsky-Koh paper: http://www.princeton.edu/~pkrugman/debt_deleveraging_ge_pk.pdf

  17. peterjbolton says:

    @ ak

    In the previous thread you said ” I certainly agree that we need to be careful when it comes to certain types of public debt.”

    This is/was my only point.

    But, Glen Stevens propensity to be heavy handed and hot jerkish with interest rates and the incompetences of the successions of Australian governments including current, quite frankly, scares the hell out of me.

    Their priorities are obviously not our priorities, not the demands of their mandates from the Australian peoples.

  18. bob says:

    “par for the course” — I could also say Australians are so laid back and naive they can’t see how uneducated and uncouth they really are.

    Please do give some reference as to why Krugman’s analysis is “so far removed from Keynes” or provide an update to your original post admitting that you are “not a close enough follower of Krugman’s career” and have made a mistake.

  19. Hacktuary says:

    Hey Steve,you’re working to hard. Relax. Live a little.

    This article is funny enough now, for the reasons you mention, post-GFC. For 1978 it was remarkable prescience.

    I remember coming across a monograph of the typewritten copy some years ago, crooked hand-drawn diagrams and all. It made me laugh even then. Actually I found it in Google – it’s here:

  20. ak says:


    Unfortunately I have to agree (as I lived in Poland when it defaulted on the foreign debt) but I am mostly concerned with the level of private debt in Australia and the composition of the liability side of the balance sheets of our banks.


    There are a few things which can go wrong if the so-called “overseas investors” start withdrawing their deposits from the Australian banking system – especially if the Treasury and the Reserve Bank do not handle that situation properly. (We can pause for a while to think about the fate of Ireland, the fact that they do not have their own currency only made things worse but the trigger of the crisis was the collapse of the banking sector). I am not concerned about the individual banks not being hedged but the financial system as a whole may one day be in a trouble in Australia if we stick to the current logic. We may imagine the RBA raising interest rates to stop an outflow of foreign investment (and defend the exchange rate) what would toast the economy. This is what was advocated by IMF during the Asian crisis.

    It is not difficult to imagine that weaker export of commodities can trigger a reversal in the recent trend:
    “The most profitable carry trade in 2010 was borrowing in the U.S. and investing in Australia, which returned 19.1 percent, according to data compiled by Bloomberg.”
    (see: http://www.bloomberg.com/news/2011-01-04/russell-2000-doubling-s-p-500-return-signals-economy-will-drive-2011-rally.html )

    The so-called “overseas funding” of Australian banks is an artefact of persistent current account deficit (related to trade deficit) as the amount of public debt held by the foreigners is limited and the AUD owned by our creditors somewhere be stored. While foreign equity in firms may to some extent correspond to investment in production (mostly “digging out dirt”), foreign deposits in the banking system offset a significant amount of the mortgage debt.

  21. Dragunov says:

    The paper is filled with puns and neoclassical cliches, including:

    “physicists are not as tolerant as economists of the practice of assuming difficulties away”

    “consider a special case. Suppose that the transportation costs other than interest on goods in transit are negligible; and suppose further that the interstellar shipping industry is competitive, so that profits are driven to zero”

    “This proof has been made for a special case; but the proposition is in fact relatively general. (The reader must, of course, be careful not to confuse relative generality with general relativity)”

    Lighten up, Steve. Don’t go loopy on us before you finish writing that book.

  22. peterjbolton says:


    And Yes, it is as you say, that – indeed scares the hell out of me. Australia has no where to go when the crunch hits and by this I mean, there will be a major shift as imports will need to drop, and there will be few exports, so it gets back to what:

    1. RBA does with the interests rates (I disagree here with Steve here as I think GS [he isn’t as independent as we are led to believe] will hike to keep the Banks alive and well) ,
    2. What “leadership” promotes as regards to housing and foreclosures in terms of “homes” as opposed to “houses”.
    3. What becomes the first Prime” priority for decision making.

    Being an avid reader all my life, history tells me that “leadership” will make all the right decisions to ensure a total no-risk failure for the whole Nation.

    But on the bright side, it is sure going to be interesting to experience.

  23. Steve Keen says:

    Oh, I agree; I had a visceral reaction when I saw the title. Then I realised that most of it was a joke.

    My favourite joke paper remains “Life Amongst the Econ” by Leijonhifvud.

    But Krugman still uses the concepts that he apparently satirized in that paper…

  24. Steve Keen says:

    Uncouth perhaps Bob, but not uneducated. I stand by my description of Krugman’s work as in a different universe to Keynes’s, and I’ll substantiate in the book.

    A typical instance of what has passed for scholarship on Keynes amongst American neoclassicals was given by Solow’s reaction to his growth theory becoming the basis of real business cycle trade theory.

    “For a while the dominant framework for thinking about the short run was roughly ‘Keynesian’. I use that label for convenience; I have absolutely no interest in ‘what Keynes really meant’. To be more specific, the framework I mean is what is sometimes called ‘American Keynesianism’ as taught to many thousands of students by Paul Samuelson’s textbook and a long line of fol-lowers.” (Solow 2001, p. 21)

    Solow, R. M. (2001). From Neoclassical Growth Theory to New Classical Macroeconomics. Advances in Macroeconomic Theory. J. H. Drèze. New York, Palgrave.

    That, to me, is uneducated, and I’m quite willing to be uncouth in saying so.

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