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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