Posts Tagged ‘Krugman’


Paul Krugman is right: it’s extraordinary that, in this day and age—in the midst of the Second Great Depression—there are still many economists who invoke something akin to Say’s Law to describe what is going on in the economy.

To those not familiar with the term, the idea, attributed to Jean-Baptiste Say, is that there can never be overproduction or a general glut of commodities—and therefore a crisis of capitalism—because supply creates its own demand. That is, the presumption goes, no one produces except with the intention of either consuming what they produce or purchasing what other people produce. And, as long as free markets are allowed to operate, the result will be full employment.

Anyone who has studied even a bit of Keynesian economics knows such a view makes no sense.

But anyone who has studied even a bit of the history of economic thought knows that Marx criticized Say’s Law long before Keynes wrote the General Theory. It’s right there, in volume 1 of Capital—and, even before that, in Part 2 of Theories of Surplus-Value. In fact, Marx chides David Ricardo for relying on the “childish babble of a Say,” which he considered not “worthy of Ricardo.”

Marx develops his critique of Say’s Law almost at the very beginning, even before introducing capitalist production per se. All he needs is commodity production and the “metamorphosis” of the commodity into money. It’s precisely the introduction of money that, in Marx’s view, both expands and destabilizes exchange, because it is now possible to sell without purchasing (and thus to hold onto the money until the time is right to turn around and make another purchase).

Therefore, the only world in which Say’s Law might hold is nonmonetary or barter exchange: when, in fact, a sale (on the part of one producer) is also necessarily a purchase (by someone else).* Once money is introduced, Say’s Law no longer holds—and the possibility of crises exists.

What this means is that anyone who, today, holds to Say’s Law must be presuming a world of barter, and thus an economy without money. It’s no wonder, then, that neoclassical economics, based on the “childish babble of a Say,” has nothing to offer in terms of either imagining the possibility of economic crises or suggesting policies that might get us out of the current mess.


* And even then Say’s Law might not hold, if someone goes to market with the goods they’ve produced and doesn’t find someone who has what they want and wants what they have.

Krugman is no communist

Posted: 11 September 2012 in Uncategorized
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Back in 2008, I responded to accusations that Obama is a socialist.

Permit me a similar response now to CNBC host Joe Kernen’s accusation that Paul Krugman is a communist. Paraphrasing one of the most memorable lines from an earlier presidential campaign, “I have served with communists; I know communists; communists are friends of mine. Paul Krugman is no communist.”*

Nor is the bailout of Wall Street by the Bush and Obama administrations. Communism is not about more government regulation and spending, and thus attempting to save capitalism from the capitalists, but expanding the possibilities of a different, more just economy and society. It means creating the conditions—political, cultural, and economic—in which the workers who produce the surplus that makes society possible determine how much surplus there will be and what to do with it. That’s the aim of communism, to make the kinds of changes in the existing economy and society that move us in the direction of economic and social justice, that create more democratic ways of producing and distributing the goods and services we need to live on.

To call Paul Krugman (or, for that matter, Dean Baker) a communist is the worst kind of red-baiting reminiscent of McCarthyism and J. Edgar Hoover’s FBI. It’s the sign of a desperate political and economic campaign, which refuses to recognize that the United States now suffers from the worst levels of economic and social inequality since the Gilded Age. There is no communism in the economic theories of Krugman or in the plans and campaign promises of the Obama-Biden ticket. Communists welcome the calls for looser monetary policy and more stimulus spending proposed by Krugman and the promises to put people back to work of the Obama campaign, because they are much better than the policies of both right-wing neoclassical economists and the Romney-Ryan campaign, but they’re not enough. Communists don’t want just to fix the current economic and social system; they want to work with others to challenge the injustices of capitalism and create a fundamentally different economic and social system.

*For younger readers, here’s the reference.


Is there a real conundrum concerning Federal Reserve Chairman Ben Bernanke aka Helicopter Ben?

Paul Krugman thinks so, because there’s an apparent “divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.

Pavlina R. Tcherneva think so, too—although she sees a different conundrum:

I have been asking myself the same question: why isn’t Bernanke following his own advice? But the answer I give is that it’s because he cannot, literally. Whatever policy options he believes to be genuinely effective actually depend on Congress and not on him. . .

Bernanke understands well that for monetary policy to be effective, fiscal policy must be aggressive (which the Fed always finances). Without bold Congressional action and a large fiscal stimulus package to boost demand and employment, nominal GDP cannot and will not rise to desired levels, no matter what the Fed does. Bernanke knows that despite his commitment to low interest rates and alternative OMOs, what he really needs is big fiscal components, but those can only come from Congress, not the Fed. Bernanke also knows that the US has infinite ability to finance these fiscal components, that there is no solvency issue and that the policy rate and both ends of the yield curve are under the direct control of the Fed. All of this is clear both from his academic writings and policy actions.

William Greider offers a complement to Tcherneva’s view, that Bernanke is actually dissenting from the conventional wisdom and turning toward the Left.

The central bank declines to participate in the happy talk about recovery or in the righteous sermons attacking the deficit. In its muted manner, the Fed keeps explaining why the house is still on fire, why more aggressive action is needed, and is gently nudging the politicians who decide fiscal policy to step up. But its message is ignored by Congress and the president and viciously attacked by right-wing Republicans who say, Butt out.

It’s a pretty extraordinary divergence in interpretations of Bernanke’s monetary policy, and that’s just from within the liberal/left wing of the political-economic spectrum.

Another interpretation is that Fed Chairman Bernanke has done exactly what Professor Bernanke believed could be and needed to be done in terms of monetary policy. The goal throughout has been to avoid deflation and to cap inflation at 2 percent.

And that makes sense once you consider the distributional consequences of monetary policy. The Fed doesn’t do more because, as Bernanke himself explained, it’s already “doing a great deal” and it has no interest in actively seeking a higher inflation rate “in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate.”

As Tim Duy explains,

changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth.  And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.

In the distributional battle of creditors versus debtors, and of capital versus labor, Bernanke has decided to favor creditors and capital, with the promise that—eventually, someday, without rocking the distributional boat—debtors and labor will benefit.

From this perspective, there’s no Bernanke conundrum. And there’s no left-wing tilt on the part of Bernanke and the Fed. There may be a lingering worry about deflation in the housing market (as expressed in the famous January white paper [pdf]), but that’s only because the persistently high level of foreclosures and continuing household deleveraging pose an ongoing threat to bank finances—and therefore to creditors and capital.

I won’t pretend to have a full-blown analysis of Bernanke and the Fed. But I do think, if we want to understand what’s going on, we’re going to have to take seriously the class conditions and consequences of monetary policy.

I have only one problem with Paul Krugman’s presidential address: the fault is not with “the profession” but with the mainstream wing of the profession.

Krugman is mostly right. It’s hard to fault economists for not predicting the exact nature and timing of the crisis (prediction is not the name of the game anyway) but certainly they can be blamed for not understanding the possibility of a crisis and for not knowing what to do once it happened.

as Yogi Berra said, it’s tough to make predictions, especially about the future. There are so many things going on in the world, many of them off any modeler’s radar, that the profession’s failure to see this crisis coming is not, in my mind, anything close to its biggest sin.

One can make excuses for the failure of the economics profession to foresee that the 2008 financial crisis would happen. It’s much harder to make such excuses for much of the profession’s failure to realize that such a thing could happen. . .

Yet the profession’s worst failure wasn’t what it failed to see before the crisis. It was what happened after crisis struck.

OK. But Krugman’s indictment of the profession (or at least the macroeconomists of the profession) actually only pertains to mainstream macroeconomists. There are plenty of heterodox economists—Marxists, Post Keynesians, New Monetary Theorists, feminists, radicals, and so on—who understood that a crisis was in the making and offered plenty of useful suggestions about what to do after it happened. Krugman and his mainstream colleagues may not know such economists exist or they simply deny that heterodox economists are part of the “profession” too, but that’s just a matter of willful ignorance.

The fault lies not with the profession as a whole but with the mainstream economists who are hegemonic within the discipline. That’s the message Krugman should have delivered in his presidential address.

Poor Paul

Posted: 4 October 2010 in Uncategorized
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Paul Krugman and his Keynesian friends are battling mightily against the FCRR (fiscal conservatives, Republicans, and the rich) over deficit spending as a way of getting out of the current crises. As is well known, the Krugman-Keynesian view is that the recession could be ended with a larger, deficit-financed fiscal stimulus. Otherwise, we risk a replay of 1937. The FCRR went along with that view back in 2008-09, when the financial system was on the brink of collapse, but not now.

Why have the FCRR changed their tune? Rick Wolff’s explanation is that

FCRR don’t like big, long deficits because of the risks they pose.  First, FCRR worry that Washington, engorged with borrowed money, will be tempted — politically pressured — to hire unemployed workers directly to produce goods and services competing with private outputs.  Second, FCRR worry that state-run enterprises might operate unlike private capitalist enterprises — more democratically with more worker inputs into basic decisions — leading private sector workers to demand similar conditions.  Third, FCRR, as lenders financing government deficits, worry that rising debt service burdens in government budgets will provoke popular demands to stretch out, cut, or default on those burdens.  Fourth, FCRR worry that greater government borrowing will “crowd out” private borrowers and/or impose higher interest costs on them.  Fifth, FCRR doubt that today’s budget deficits will be reduced by future surpluses.

But mostly FCRR don’t like Keynesian deficit spending because they think it postpones the basic economic adjustments needed to end recessions and renew economic growth, employment, and income.  They argue that deficit spending — by reducing unemployment — slows or stops the fall in wages and salaries needed to revive the business profitability that alone will generate rising investment and growth.  Likewise, by slowing the contraction of output, deficit spending slows or stops the fall in material input costs needed to revive profitability.  In short, FCRR think that deficit spending beyond quick, short injections to offset extreme downturns is an ineffective, self-defeating policy for reviving capitalism in a crisis.  It risks stretching out and thereby worsening the cycles of capitalism rather than allowing them to perform “creative destruction” — eliminating what FCRR view as “inefficient” jobs and businesses.

Wolff views the current debate between Krugman and the FCRR as a form of “political theater about ‘overcoming the economic crisis’.”

All the while, below the surface of these debates, the actual economy proceeds through its cycle in typical capitalist fashion.  Enduring high unemployment, home foreclosures, and stagnant production have kept downward pressure on wages, benefits, and the non-human costs of private business (falling costs of second-hand equipment, rents, etc.).  Eventually, these will fall far enough to project possibilities for profit sufficiently attractive to coax new investments from capitalists.  Then the usual upswing may take hold.  However, the amount of time, suffering, and criticism of the economy involved in that “eventually” may generate social tensions and movements that need to be contained.  This will then require renewing Keynesian interventions.  Then FCRR perspectives will resume the status of loyal opposition and wait again for “recovery” to regroup its forces and return to power.

It is not one side or the other that optimally secures the underlying capitalist system against its instabilities.  It is rather the public oscillation between them that best performs that task.  Similarly, it is neither Republicans nor Democrats that best protect the government’s subordination to the capitalist organization of the economy.  That task is rather achieved above all by oscillations between them, by making each the only available political antidote for the failings of the other.

While Krugman and the FCRR battle it out over deficit spending and the best way to keep capitalism alive, there’s another debate emerging, about the possibility of creating real alternatives to capitalism.


neoclassical macro model

Lawrence Summers and Paul Krugman are in substantial agreement about how labor markets can and should operate in the normal workings of capitalism: supply and demand determine wages and the amount of employment.

As Krugman writes,

in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.

The only difference between them is right now, when capitalism is in crisis and unemployment is growing. Krugman suggests the desirability of a New-Deal-style employment program (like the W.P.A. and the Civilian Conservation Corps) and/or “policies that support private-sector employment” (such as labor rules that discourage firing to financial incentives for companies that either add workers or reduce hours to avoid layoffs). Summers, for his part,  said in a recent interview that the stimulus package is working just fine and workers can just go screw themselves:

It may be desirable to have a given amount of work shared among more people. But that’s not as desirable as expanding the total amount of work.