Paul Krugman on "The Incredulity Problem"

[KingOrfeo]

Krugman writes in his NYT "Conscience of a Liberal" column:

I’ve written about this before, it turns out, but doing some of the media rounds I found myself thinking once again about a favorite phrase of Richard Dawkin’s: the “argument from personal incredulity”.

Dawkins uses it to refer to people who say “I just can’t believe that something as intricate as an eye can evolve through random changes.” The point, of course, is that our intuition has a hard time dealing both with the idea of selection and the sheer length of time evolution has to do its work, so your personal feeling that something isn’t plausible is a very bad guide.

In macroeconomics, the equivalent would be people who “just can’t believe” that borrowing more can help the economy, or that a fall in wages would actually reduce employment. What are they missing?

Mainly, I think, the closed-loop nature of macro. Our intuitions about how business-y stuff works come from businesses or households selling their goods or labor to an external market. In such situations spending less is a sure-fire way to reduce debt, cutting your price or your wage demand is a sure-fire way to sell more.

But in the economy as a whole, your spending is my income and vice versa; my wage matters only in comparison to your wage; and so on. This changes everything, which is why we have paradoxes of thrift and flexibility.

Of course, that’s why we do economic modeling: precisely to scope out the areas where personal incredulity is a very bad guide to affairs.

I get a lot of mail from people who are more or less blind with rage at the mere thought that anyone could say the things I do. I’m a witch-doctor, they cry; I must be deliberately lying; nobody could possibly believe the things I say. Actually, though, I’m just an economist who is willing to take it seriously when hard thinking suggests that the usual intuition is wrong under current conditions.

And the past few years have been a triumph for that kind of hard thinking! Lots of people declared that they “just couldn’t believe” that huge budget deficits wouldn’t drive up interest rates, that “printing” lots of money wouldn’t cause runaway inflation, that slashing government spending wouldn’t have a positive effect on confidence. We know how that has turned out.

All of which makes it even worse when economists themselves seem to give up on hard thinking and, as Noah Smith says, substitute conservative harrumph-ing for economic analysis.

 

[renard_ruse]

The more that idiot writes, the more people realize he's an idiot.

 

[renard_ruse]

Krugman is so stupid he doesn't know the difference between hard sciences like biology and soft sciences like economics.

 

[mercury14]

Krugman is so stupid he doesn't know the difference between hard sciences like biology and soft sciences like economics.

You're just making that up though. You have no proof. Nothing he's said suggests that what you say is true.

He's doing a good job calling conservatives on their bullshit though. Just listen to the right wing economic narrative - it's all about what feels right. Economic analysis rarely plays a major role. It's all about your emotional thinking. "The stimulus didn't work because we're not back to an economic boom already". That kind of thing.

The government should be run like a business because that feels right to say. But as soon as someone suggests that the government borrow money and spend it to stimulate growth and productivity just like a business does, conservative logic implodes. It feels right to say that government should be run like a business... and you can stick to that position - as long as you don't think about it too hard (or at all). Thus it's illustrated how conservativism rejects thinking.

Conservatives tend to reject hard thinking when it comes to economics. Listen to them in the media, on the news, and on Lit. No hard thinking allowed.

It wasn't always that way though, was it?

 

[KingOrfeo]

The more that idiot writes, the more people realize he's an idiot.

One could say that with better justice about Rush Limbaugh, but it never seems to affect his book sales. Nor Krugman's.

 

[The_Trouvere]

The more that idiot writes, the more people realize he's an idiot.

If you think you are being profound you are wrong.

 

[njlauren]

It is like the idiots when we have a cold winter say "where is global warming" or a cooler then normal summer as 'proof' it is a lie *sigh*. Likewise, with the last financial crisis when the banks needed to be bailed out, and all these middle america types were 'just let them fail, if the owner of a hardware store fails,they fail" without realizing that the hardware store failing might affect 10 people, a major bank fails and it tripwires the whole economy. My favorite is the hard right who demonize FDR and the new deal, who say that the new deal didn't bring us out of the depression, WWII did (all of which is true)....yet they are proving my point, the government spent close to 1 trillion dollars on WWII in 1940's dollars (most of the debt until the early 80's was from WWII era spending that was refinanced over the years), it was the ultimate stimulus package, it did exactly what Keynesian economics said it would do..but government spending doesn't work *lol*. I wonder if the tea party types, with their claim that cutting federal spending is going to stimulate the economy, ever picked up a history book. In 1937 FDR in response to calls from fiscally conservative members of congress and within his own administration, cut federal spending to try and balance the budget, and the US slipped back into recession. In Europe, where austerity budgets are slashing government spending, the economies are slipping into recession.

Yes, budget deficits need to be addressed, this can't go on, especially since so much of our debt is financed by foreign nations like China, but the idea that cutting government spending is going to cause the government to grow on its own is hogwash, because government spending is a significant mechanism in our economy, pure and simple and simplistic ideas that we can cut the governments budget and it not only won't hurt the economy, but cause it to thrive, is idiotic.

I work in the financial industry, and I'll give you a piece of proof why the tea party types are guilty of what Krugman talks about. During the height of the financial crisis the Bush administration, when Lehman brothers failed, basically decided to let it go under, there was no attempt of a bailout unlike they did for Bear Stearns.....and it damn nearly wiped out the commercial credit market that companies use to finance short term borrowing. There is a key rate, called the Libor spread (I can just see the tea party types, "what's that, some sort of margarine?") that is the difference in commercial credit what the banks pay to borrow and what they lend out at..normally it is roughly 40 or 50 basis points (i.e if they borrow at 2, they will lend at 2.5%)...during this mess, the Libor spread went to 7.5 (750 basis points) and commercial paper was literally at a standstill, and it depressed business. The fed and other central banks went into action on this and eventually some of Lehman's issues were fixed via subsidy (Barclays bought portions of Lehman) and eventually they unlocked it, but conservative estimates are it caused a rise of at least 1% in the unemployment rate and cause the recession to last 6 months to a year longer.....

 

[The_Trouvere]

One of John Maynard Keynes' insights is that during periods of high unemployment behavior that is considered virtuous among individuals prolongs the problem. You need to get money into circulation. When people save money and live frugally the money does not get into circulation. That is why government spending and hiring needs to increase. Unfortunately, the GOP wants to reduce government spending, and lay off government employees.

During the Great Depression conditions were worse, but Roosevelt does not seem to have had to contend with a populist opposition the way Obama does.

 

[KingOrfeo]

During the Great Depression conditions were worse, but Roosevelt does not seem to have had to contend with a populist opposition the way Obama does.

No, FDR . . . sorry, "That Man" . . . had elitist opposition, and plenty of it.

 

[Liar]

I've seen three basic Tea Party style arguments against Keynesian spending bursts to boost the economy.

1. It doesn't work.
2. The worst thing we can do for future generations, is leave them with a high national debt.
3. It doesn't matter if it works or not, a large government role is morally wrong. A.k.a the "because Socialism" argument.

#1 is of course bupkus, it does and has worked.
#2 is a discussion worth having, (but only if the issue of #1 is settled first on the side of reality). Is it worse to leave them a higher debt or a weaker economy? I'm on the fence. Both alternatives sort of suck. But it's the hole we have dug for ourselves. What sort of bread do we want for our inevitable shit sandwich?
And lastly #3. Not much to say about it. I can respect this argument because it's at least upfront about what it is, pure emotion and ideologic belief. It's rare to see it expessed honestly though, but it happens.

 

[JAMESBJOHNSON]

I've seen three basic Tea Party style arguments against Keynesian spending bursts to boost the economy.

1. It doesn't work.
2. The worst thing we can do for future generations, is leave them with a high national debt.
3. It doesn't matter if it works or not, a large government role is morally wrong. A.k.a the "because Socialism" argument.

#1 is of course bupkus, it does and has worked.
#2 is a discussion worth having, (but only if the issue of #1 is settled first on the side of reality). Is it worse to leave them a higher debt or a weaker economy? I'm on the fence. Both alternatives sort of suck. But it's the hole we have dug for ourselves. What sort of bread do we want for our inevitable shit sandwich?
And lastly #3. Not much to say about it. I can respect this argument because it's at least upfront about what it is, pure emotion and ideologic belief. It's rare to see it expessed honestly though, but it happens.

Uh, no.

The essential Tea Party orthodoxy is, NO ONE LOOKS OUT FOR ME LIKE ME OR MY MOMMA. ALL OTHERS TRY AND USE ME FOR A PAYDAY.

 

[rosco rathbone]

People also think government has to tax and borrow in order to spend.

 

[Liar]

Uh, no.

The essential Tea Party orthodoxy is, NO ONE LOOKS OUT FOR ME LIKE ME OR MY MOMMA. ALL OTHERS TRY AND USE ME FOR A PAYDAY.

That's the broader philosophy not specifically Keynes related. Sort of. And sort of translated to #3.

 

[4est_4est_Gump]

But Krugman has a Nobel Prize in economics! He's famous !

Milton Friedman got the same prize and he always said the opposite.

Who is right? There is no agreement among economists. The economy is way too complicated. Like the climate.

Economics isn't physics. Not even close. The Econ "Nobel" prize is a ripoff from the real prize, not even given by the Nobel Foundation but the Swedish Central Bank. Like Obama's ridiculous Nobel Peace Prize, awarded for running while black -- the faux-Nobel in Economics is also a spinoff.

The financial crisis of 2007-2012 was triggered in part by economists who wrote "the formula that killed Wall Street" -- based on work by mathematician David X. Li.

"With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

"His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched-and was making people so much money-that warnings about its limitations were largely ignored.

"Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008-when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril."

Oops.

Today the traders are blaming the professors and vice versa. The fact is, however, that eye-popping sums of money were bet on a mathematical formula that didn't work. The madness of crowds prevailed over common sense and very basic history.

So the New York Times hired Dr. K to peddle his faith from their agit-prop page. Why did they pick Dr. K? It wasn't based on facts, because they don't have the facts either. No, Dr. K had the answer they wanted to hear. Paul Krugman's "scientific certainties" are like global warming -- agit-prop dogma parading as science.

Liberalism is the blind faith of the ignorant. Obama is playing God (temporarily), and Krugman is his prophet.

http://www.americanthinker.com/2012/05/dr_krugmans_magic_dogma.html

A friend of mine a decade ago was looking to do doctoral work in economics, and one of the places where he inquired was his state's flagship university. But he decided not to seek his doctorate at that particular place after he spoke to someone who was just about to defend his economics dissertation there.

This soon-to-be PhD, it seems, was not familiar with the term "opportunity cost." (He was specializing in so-called macroeconomics, which tends to embrace every Keynesian fallacy and a few extras, so perhaps it should surprise no one that this person was not familiar with concepts of scarcity: Keynesians believe that governments create wealth by fiat.)

I recount this story after reading a recent post by Paul Krugman on his New York Times blog, in which he claims that free markets are responsible for the bad food in Great Britain and the lack of central heating in Mexico City. He writes,

Felix Salmon marvels at the absence of central heating in Mexico City, and suggests that the city is trapped in a bad equilibrium: nobody has heat because nobody has heat.
This reminds me of a piece I had fun with many years ago, on the stubborn persistence of bad food in England. My hypothesis was that too-early urbanization, taking place before it was possible to bring lots of fresh food in from the countryside, established dismal dietary habits that were hard to break.

Of course, if you take such things seriously, they are bad news for the notion that markets maximize utility, even in fairly trivial matters. Or maybe not so trivial: it's hard to overstate just how bad English food was in the early 80s. (emphasis added)

Like the economics graduate student who could not comprehend the economic equivalent of 1 + 1 = 2, Krugman has not so much debunked free markets as he has demonstrated his own economic ignorance. If there is a failure here, it is not with free markets as such, but rather with what is taught in modern academic economics, which has managed to replace a logical system of thought with mathematical mishmash that claims its own "market test."

First, and most important, I have never read anywhere (at least in the Austrian literature) that "markets maximize utility." What Krugman is saying — and what Austrians debunk — is that one's "utility" can be subjected to cardinal measurements, and that it is theoretically possible to compare one person's "utility function" with that of another person.

While Krugman's point is consistent with the claims of Jeremy Bentham, nonetheless the notion of "cardinal utility" was long ago rejected by thinking economists. That does not prevent academic economists from creating "utility functions" and Lagrange multipliers using goods, their given prices, and an income restraint as the mechanisms for measuring such "utility maximization." (Technically, one is supposed to maximize the "optimal" combination of goods as opposed to actual utility, but often that point gets lost in the translation.)

Second, Krugman is claiming that markets actually foster a "path dependency" in which people are led via market mechanisms to an "equilibrium" in which people could be made better off if only they could shake off the chains with which free markets have bound them. The claim is that people already "know" what would be a better product and also the path to going there, but free markets won't permit them that option.

This is curious logic, but nonetheless it is part of the current curriculum at "elite" academic economics programs. There is no end to "market failures" if one employs such thinking. For example, I would love for a high-speed railway to stop right in front of my house in rural Garrett County, but I doubt such a railway would come to fruition.

Heck, I would like for one of the telephone companies to be willing to run a high-speed Internet cable past my house so that I could do away with the satellite Internet system I currently have, and no doubt Krugman would claim that this situation is another example of market failure. (I am not willing to pay Comcast or Verizon the $2,000 or more in up-front costs to string a line to my house.) The problem, however, is not the nature of markets per se, but rather how Krugman and modern academic economists define them.

Typical college economics textbooks do not explain markets so much as they set up straw men that supposedly represent markets. After setting up their straw man, the textbook authors (usually well-known academic economists such as Krugman) then tear down the example by showing how the "perfect competition" hypothesis "fails" if an individual firm faces anything close to a downward-sloping demand curve.

These might be clever academic exercises, but they tell us nothing about markets and even less about the concept of "market failure." I will give an alternative example, but I won't go to Mexico City. In fact, I won't even leave my house.

My family and I live on a rural road in Garrett County, Maryland. Because we are located on the Allegheny Plateau (the average elevation of Garrett County is about 2,300 feet, making it one of the highest counties in the Eastern United States), we tend to have cool summers and cold, snowy winters.

Few homes in Garrett County have central heating and air conditioning, except for the "McMansions" that are built by very wealthy people near Deep Creek Lake in the western portion of the county. Many new houses here (including mine) are modular, which means they were built in a factory and then shipped here in large, ready-to-assemble pieces.

If I wanted to install a heat pump (given that there are no natural-gas lines out here and I have not opted for propane-gas heat), I could do so, but I believe it would be a waste of time and resources. First, we don't really need it in the winter; we already have good heat with small electric heaters and a wood stove. Second, we don't really need it in the summer; our average high then is 78 degrees.

We do have air-conditioning window units, but during the past two summers we have run our unit only once. That is correct: we have turned the AC on only once in two summers, electing to use window fans instead on those days when temperatures creep above 80.

Furthermore, we are hardly alone in this matter. Some people in Garrett County have less heat tolerance than do we, but nonetheless very few people are willing to opt for a central, forced-air system that would cost considerably more to create and maintain than what we currently choose.

To put it another way, the heating and cooling systems used by people in Garrett County are adapted to the climate of the area. Likewise, we see the same thing in Mexico City, which has average monthly high (in orange) and low (in blue) temperatures as follows, according to Weather.com:

From this data, it is obvious that few people would find a need for central heating (or cooling) in Mexico City, given that it has highly consistent year-round temperatures. (That also is the case in other Latin American cities that are located at high altitudes and have consistent — and comfortable — temperatures.)

I am not sure how one can fashion a "market-failure" interpretation out of Mexico City's lack of central heat any more than one could declare that the dearth of heat-pump systems in Garrett County is the result of a "failure" of the market system. In fact, one can better argue that markets have created a wonderful system of alternatives to the forced-air central systems that Krugman apparently believes are the only acceptable means of heating and cooling.

During cold winter days, we burn wood that I can purchase from a neighbor who can cut, deliver, and stack a cord much less expensively than it would be for me to do the same, given my own opportunity costs. When summer temperatures move into the high 80s (once in a very long while, the mercury hits or goes above 90 here), we can use our window units, which we purchased much more cheaply than we could a central system, or we can tough out a very temporary situation with just our window fans.

Our modular house not only is well insulated but also has energy-efficient, double-pane windows that keep out the cold and wind (especially the wind, given that we are regularly hit with big blasts from November to March). In other words, the market has created wonderful ways for my family and me to reside in a lovely rural setting and yet mitigate the higher opportunity costs that come as a result of living away from a town or city.

I am not surprised that these things are lost on someone like Krugman, or most mainstream academic economists. Once one chases down the rabbit trails of "utility maximization" and the esoteric notions of "market failure," it is doubtful that one is going to understand simple opportunity cost.

Krugman's foray into British cuisine is even more bizarre than his claim that market failure is responsible for the lack of central heat in Mexico City. As a number of people have commented on his post, Great Britain has a wealth of ethnic-food restaurants that offer a wonderful alternative to the more bland fare of traditional British eating.

Again, this is lost on "economists" who insist on seeing the world in a highly stylized, mechanistic way. While Austrians see how individuals working through free markets have bettered their life situations, Krugman and his colleagues see only chaos, failure, and bad food.

http://mises.org/daily/4951/

 

[4est_4est_Gump]

I've seen three basic Tea Party style arguments against Keynesian spending bursts to boost the economy.

1. It doesn't work.
2. The worst thing we can do for future generations, is leave them with a high national debt.
3. It doesn't matter if it works or not, a large government role is morally wrong. A.k.a the "because Socialism" argument.

#1 is of course bupkus, it does and has worked.
#2 is a discussion worth having, (but only if the issue of #1 is settled first on the side of reality). Is it worse to leave them a higher debt or a weaker economy? I'm on the fence. Both alternatives sort of suck. But it's the hole we have dug for ourselves. What sort of bread do we want for our inevitable shit sandwich?
And lastly #3. Not much to say about it. I can respect this argument because it's at least upfront about what it is, pure emotion and ideologic belief. It's rare to see it expessed honestly though, but it happens.

#1. Of course it works, short term and in the beginning, as Bastiat would point out, that is the seen. All you do however is attempt to import the future into the present. This is done at the cost to the future, which then, in turn needs "stimulus." In the beginning the theory is, you loosen the money supply, you increase business activity and then you pull the money supply in gently putting on the brakes to keep the economy from "Overheating." It leads to the death spiral that we have to day where the stimulus does not "stimulate" (and we now see that fact embodied in the claim, well maybe the recovery wasn't that strong, but we were "saved!") and the money supply cannot be contracted (again, witness the Fed's open-ended free money policy) without causing recession, so the inflation grows, again, slowly, at first, allowing the Keynesians to say that talking of inflation and Weimar is just right-wing fear mongering, what it is, in fact, an established, and repetitive phenomena of managed economies.

You might enjoy this blast from the past (eine kleine Mises):
http://mises.org/daily/6034/Currency-Debasement-and-Social-Collapse

As for you contention about #2, #1 will never be settled as long as some people still believe in Socialism and the ability of central planning to more smartly manage the markets. Bubbles, crashes and recoveries are not something to be fought with government to prevent pain, but they are their own mechanism to keep the market fair and competitive without over-enthusiastic speculation.

The Tea Party's lay economics may be crudely expressed (even more so when James speaks for them), but they are on target. When you begin to create a Welfare State, no matter how miniscule, eventually, politics and altruism being what they are, it tends to expansion, and endless parade of victims and emotional calls to their rescue and the destruction of Capital and it is in this destruction where the decay and rot begin to set into every society that seeks to legislate "fairness."

 

[4est_4est_Gump]

In addition to being both an anti-Semite and a pedophile, John Maynard Keynes, whose work popularized government-directed planning, was an endorser of eugenics and the centralized control of the world's population. According to classical liberal historian Ralph Raico:

The state, according to Keynes, will even decide on the optimal level of population. Regarding eugenics, Keynes at times gave the appearance of indecision: "the time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members."

Shortly before his death, Keynes would call eugenics "the most important and significant branch of sociology." Additionally, he served on the governing council of the Eugenics Society from 1937 to 1944. Needless to say, his fascination with central planning went far beyond the "socialization of investment."

Despite clothing itself in the garb of egalitarianism and tolerance, the progressive movement, which draws much of its influence from Keynes, has a nasty history of fostering the perfect society through government dictum. As Austrian economist Larry White points out in his new book The Clash of Economic Ideas:

Many of the Progressive economists favored alcohol and drug prohibition, and even eugenics (immigration barriers against and sterilization of "inferior races" to prevent "race suicide"), as scientific means to social betterment.

Rather than embrace the diversity of character and ability which man embodies, the world, in the eyes of progressives, is soiled and in dire need of iron-fisted management.

The paradox these confused dictators often run up against is that if man if flawed and incapable of functioning under his own judgment, then what gives a select few, just as flawed, individuals the ability the run a society? How can it possibly be determined what is the proper money supply or amount of employment? Taken further, how can a select number of schemers even begin to know the appropriate population size or best state of mental functionality?

Economist Friedrich Hayek defined these presumptions as the pretense of knowledge which he also named his Nobel acceptance speech after. Hayek closed his speech with perhaps one of the most imperative pieces of advice to be suggested to planners and their ilk:

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Keynes didn't regard authoritarian control as the most adequate method by which to ensure general prosperousness; he deemed it utterly necessary when considering the common man's ineptness at taking care of himself.

Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these[.]

For a man who wrote in the preface to the German edition of his General Theory that "the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state," the idea of a dominant ruling class guiding the masses through their miserable lives must have enchanted Keynes. His championing of counter-cyclical monetary and fiscal policy carried out by the state and its central banking system were extensions of his preference for despotic planning. This is why he considered that resolutions to economic downturns "will involve intellectual and scientific elements which must be above the heads of the vast mass of more or less illiterate voters."

Read more: http://www.americanthinker.com/2012..._and_totalitarian_eugenics.html#ixzz1u5ZjNKFd

 

[KingOrfeo]

Uh, no.

The essential Tea Party orthodoxy is, NO ONE LOOKS OUT FOR ME LIKE ME OR MY MOMMA. ALL OTHERS TRY AND USE ME FOR A PAYDAY.

That sounds a whole lot stupider than the way Liar put it.