29 Nov 2013

Blowback: Krugman Endorses Summers’ Critique of Freshwater Economists on Financial Infrastructure

Krugman 76 Comments

We were all distracted by the stuff about never ending bubbles and whatnot, but Larry Summers in his recent IMF speech had a pretty funny bit where he said:

Now think about the period after the financial crisis. You know, I always like to think of these crises as analogous to a power failure, or analogous to what would happen if all the telephones were shut off for a time. The network would collapse, the connections would go away, and output would of course drop very rapidly. There’d be a set of economists who’d sit around explaining that electricity was only four percent of the economy, and so if you lost eighty percent of electricity you couldn’t possibly have lost more than three percent of the economy, and there’d be people in Minnesota and Chicago and stuff who’d be writing that paper… but it would be stupid. It would be stupid.

In context, Summers is poking fun at the “freshwater macro” guys, who were arguing in 2008 that the shock to the financial sector shouldn’t affect real GDP too much. In this post, Krugman explains the broader argument, and of course endorses Summers’ critique of this silly guys.

It’s a great critique. It reminds me of the time I busted a different economist, a saltwater one it just so happens, who had made the same mistake in the context of international trade (rather than the financial sector). This economist (whose identity for the moment I will keep a mystery) had argued:

There are a lot of good things you can say about international trade. But it does not, repeat not, do anything to alleviate a shortage of overall demand. Yes, if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X−M, it’s a wash, because X and M rise equally.

Which makes this WaPo editorial on things Obama should be doing about jobs truly bizarre. Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren’t — they wouldn’t be job creation measures.

To show how silly this was, I explained:

Imagine a small but productive island nation, similar to Hong Kong, which has an enormous export sector. Its Keynesian parameters have the following values:

C = $74 billion
I = $10 billion
G = $15 billion
X = $100 billion (exports)
M = $99 billion (imports)

Thus the GDP of our island nation is $100 billion, which is consumption plus investment plus government spending, plus the $1 billion in net exports.

Y = C + I + G + (X − M)
100 = 74 + 10 + 15 + (100 − 99)

Now suppose that a rival nation surrounds the island with warships and completely seals it off from international trade. According to [the mystery economist's] logic, we should expect GDP to fall 1 percent, down to $99 billion. Now some of the islanders might say, “Huh?! How the heck are we supposed to even eat if we lose our access to the world economy? We have no oil or other natural resources, and we import most of our food. If we can’t trade, our cars and trains will come to a standstill and everyone will have to cut meat out of his diet.”

[The mystery economist] would laugh at such medieval, verbal reasoning. He would patiently explain to the frightened islanders that the numbers don’t lie. Yes the economy would lose $100 billion in exports, throwing all those people out of work, but domestic consumers would have to switch their demands away from the $99 billion they previously spent on foreign goods. Net exports only contributed $1 billion to GDP before the blockade, so the complete cessation of trade wouldn’t have much of an impact. Right?

No, of course that’s not right. After the blockade is put into place, we ask macroeconomists (before they starve) to tabulate the national accounting identity one last time. This is what they report:

C = $15 billion
I = $0 billion
G = $5 billion
X = $0 billion (exports)
M = $0 billion (imports)

Rather than the 1 percent drop [the mystery economist] had forecasted, GDP actually fell a shocking 80 percent, down to $20 billion. No businessperson in his right mind is investing in this environment; the government has had to slash its spending because of the collapse in revenues; and consumers have scaled back their purchases to an extreme austerity budget. The island is devastated by the naval blockade. Duh! Of course it is: that’s why warring countries blockade each other.

So you see, our mystery economist had committed the exact same fallacy as the freshwater guys–a mistake that Summers called “stupid” (a label Krugman endorsed) by deploying their argument in the context of electricity. I instead made the point with a small island that imports a lot of its food, but it was the same critique, and the underlying “stupid” mistake was the same.

At this point, I’m sure no one needs to click the link to learn the identity of my mystery economist.

76 Responses to “Blowback: Krugman Endorses Summers’ Critique of Freshwater Economists on Financial Infrastructure”

  1. Gamble says:

    Statist(liberals) make no sense. They don’t care if they make sense. This is what makes them statist (liberals).

    You can use all the tact and reason you want, things only get worse.

    Sometimes the only thing that wakes a nonsensical person, is the smell of hot lead, at least this is what the American Revolutionist believed.

  2. BobFan says:

    I agree with Gamble’s comment. Statists don’t care if they make sense.

    They are not motivated by economic reasons. They are motivated by their fundamental MORAL beliefs. This is why 8 of the 10 richest counties in the US voted for Obama. People don’t vote their pocket books. They vote their morality.

    I highly recommend watching Yaron Brook’s numerous speeches on YouTube. A brilliant speaker and he gets at the moral issue that economists (including the Austrian school economists) sadly seem to miss and never mention.

    Here is a great one to get you started:

    https://www.youtube.com/watch?v=48I9HZe2Vx4

    • Gamble says:

      I am not sure statist have morals nor economic understanding.

      • BobFan says:

        They have a wrong moral code, which causes them to be blind to the economic arguments they otherwise would clearly see.

        Krugman is a Keynesian not because of economics. He starts with his underlying moral code (the morality of altruism) and from that follows his “economics”.

        I wasn’t aware of this a few months ago. I was only aware of the economics aspect of the equation. Then I came across this 4 minute clip and I was hooked:

        https://www.youtube.com/watch?v=vYJQoZrhRug

        Now I find it far more effective to attack people’s moral code rather than argue about economics. It completely pisses them off, but at least it does something. Economic arguments don’t have any effect on them because it is secondary to doing what feels “right” to them.

        • Gamble says:

          But altruism is not moral. Trade is moral.

          • Gamble says:

            Go to 1:38:50 of that video. It is the only thing Yaron said that makes any sense even though he contradicts himself regarding anarchism and competing guns of government.

          • Anonymous says:

            BobFan claim was that Krugman starts his ‘reasoning’ not from rationality but from premise of moral nature. That goes exactly in line with Molyneux argument about the strenght of moral arguments i.e. they trump all others.
            He said that explicite slavery wasn’t eneded with reasoning people into abandoning it but by making people uncomfortable with moral arguments.
            That is: I don’t care who’ll pick the cotton, slavery is immoral.
            I don’t care how roads (long places Larken Rose calls them) will be built, state is immoral. Sure you can make argument from effect, provide evidence that state mythology makes no sense. State is immoral trumps all of that.

  3. Major_Freedom says:

    Is it me or has the quality of these Kontradiction posts been reaching new heights? They’re getting better and better it seems.

    Or is it that Krugman is just having a bit of a meltdown lately, thus making it easier to point out Kontradictions?

  4. Tel says:

    Yes, if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X−M, it’s a wash, because X and M rise equally.

    The mystery economist is strictly correct though… from the precise perspective of: C+I+G+X−M it is a wash.

    This makes a good example of where Austrian analysis has something to offer that mainstream macro economists generally don’t even bother looking at. The “X – M” term in the equation presumes that “X” is some stuff, and “M” is some stuff, and stuff gets exchanged for stuff so when you subtract it out you can see what’s left over. The problem being that the whole reason people export and import at all is the exports are NOT the same stuff as the imports, thus the idea of subtracting one from the other to get a gain is kind of ridiculous.

    Rather than criticize this mystery mainstream economist, might as well admit that C+I+G+X−M gives you at best a crude indicator of what an economy is doing, and don’t be in any way surprised where there are situations in which GDP can be outright misleading (like breaking windows, etc).

    • Ken B says:

      Right, in Counterfactopia Krugman waves his magic ceteris wand in a paribis motion, the identity rules, you can see its neon brightness for miles, and he wins the argument to the applause of MF and Bala.

      • Major_Freedom says:

        Try waiting to see if your throwing around ceteris paribus willy nilly is grounded on good reasoning first, before you respond to every poster with such snark.

        • Tel says:

          In a feedback loop, ceteris paribus never works.

          I don’t think that’s the key problem in this situation though. The problem is that “X – M” does not really imply any sort of nett gain. The whole presumption of the GDP equation is weak.

          • Major_Freedom says:

            Humans aren’t circuitboards.

            • Tel says:

              Feedback is a universal concept, and yeah it applies to humans as well. The social sciences tend to call it “reflexivity” but the idea of feedback in economics is fairly mainstream… especially negative feedback that helps provide stability.

              • Major_Freedom says:

                “A” feedback mechanism implies a constancy Tel. There are no constants in human action.

              • Joseph Fetz says:

                MF, the seeking of utility is a constant, is it not? I think that it would be more accurate to say that there are no mathematical constants in human action.

              • Major_Freedom says:

                I mean constants.

                The seeking of utility is a constant, yes, but seeking of utility is another way of saying human action.

                So when you say seeking of utility is a constant, you’re really just saying that human action is a constant of human action.

              • Lord Keynes says:

                “I mean constants.

                The seeking of utility is a constant, yes, but seeking of utility is another way of saying human action.

                So when you say seeking of utility is a constant, you’re really just saying that human action is a constant of human action.

                The most brilliant M_F comment of all time.

                The number of violations of logic here demonstrate his sheer stupidity.

                Seeking of utility is simply one form/type of conscious human action amongst countless forms/types all classified inside the set of kinds of conscious human action, but M_F seems to imply that it is identical.

                If it were identical, then that would imply that this is the only form of human behaviour, but that be cannot true.

                And even if we put that aside, M_F says there are no constants of human action in his original comment, except seeking of utility — he now says — which is a constant of human behaviour.

                This is violation of the law of non-contradiction: M_F is asserting p and ~p at the same time.

                All in all, proof of mind devoid of basic standards of logic.

              • Anonymous says:

                “A” feedback mechanism implies a constancy Tel.

                It only requires one feedback loop to render ceteris paribus useless. If you happen to have multiple feedback loops the result is still that ceteris paribus has been rendered useless. If some of those feedbacks change from time to time, you still have not improved your ability to apply a ceteris paribus analysis.

              • Joseph Fetz says:

                I swear, the both of you (MF and LK) are completely ridiculous. Even with that said, don’t look to me to ridicule you, I’m far too enamored with each of your own’s apparent attraction to one another.

                It’s almost like porn.

              • Major_Freedom says:

                LK:

                “Seeking of utility is simply one form/type of conscious human action amongst countless forms/types all classified inside the set of kinds of conscious human action”

                No, that’s wrong. Human action is purposeful behavior. Purposeful behavior is the conscious seeking of subjectively desired ends, using, of course, scarce means.

                There is no other human action than utility seeking.

                Utility seeking is just the neoclassical verbiage of what praxeologists call action.

                “but M_F seems to imply that it is identical.”

                They are identical.

                “If it were identical, then that would imply that this is the only form of human behaviour, but that be cannot true.”

                Utility seeking is not a “form” of action. It is human action.

                “And even if we put that aside, M_F says there are no constants of human action in his original comment, except seeking of utility — he now says — which is a constant of human behaviour.”

                You misunderstand. If you propose human action as a concept, then it is a “constant” in the sense that when praxeologists refer to human action, they are referring to the same concept that they referred to yesterday, and the day before.

                It’s not an exclusion to a rule form of argument. Utility seeking is constant in the same sense that human action is constant, that is, they are concepts that are the same in form today as they were yesterday.

                The argument that there are no constants of human action is an argument that refers to the content of action.

                “This is violation of the law of non-contradiction: M_F is asserting p and ~p at the same time.”

                No LK, you’re just confused because you don’t understand the meaning of action. I am shocked and surprised you are still confused.

    • Bob Murphy says:

      Tel, maybe you should click the link and read my whole article. I stress that the accounting identity is an identity; it’s “correct.” The problem is in how Krugman deployed it.

      Also, he might be right that a particular trade deal that the WaPo had in mind, wouldn’t do much. But the way Krugman tried to “prove” that, was wrong, since it could just as easily prove that Hong Kong’s employment would be unaffected by a blockade.

      • Tel says:

        The identity is only strictly correct in terms of arithmetic. That does not make the answer meaningful, and even if it is somewhat of a useful answer it doesn’t make it universally applicable.

        I can add my shoe size to my house number (both unitless quantities) and multiply by the length of my driveway in feet and get a Zingbat identity (measured in feet, strangely, feet without shoes). All mathematically correct. Zingbat might even correlate to something, if you search hard enough.

        So putting this another way, suppose I have a lemon tree that produces 100 lemons a year and I write an equation where 10 lemons turn out rotten, I give 20 lemons away to my neighbours, 40 lemons get turned into lemonade and I have 30 lemons left over. That would be the lemon balance equation, and since every term in the equation is a lemon, we have a solid physical relationship with real lemons. I honestly do have 30 lemons in my hands at the end of the season.

        Let’s go a step further and say I swap those 30 extra lemons with the guy down the road who keeps chickens and he gives me a bag of chicken poo to fertilize the lemon tree. What does my lemon balance equation look like? I have:

        X = 30 lemons
        M = 1 bag fertilizer

        So what does X-M equal? How do I subtract one bag of fertilizer from one bag of lemons? Let’s say we have a market rate of fertilizer at $3 per bag from the hardware store, and we also have a market rate of lemons at $5 per bag at the fruit market (I’m making these numbers up). So does the “X – M” term imply I’m losing $2 here?

        In an accounting sense the swapping of lemons for fertilizer does not affect my bank account in any way, so how exactly have I lost the $2 in the lemon balance equation? At no stage did I see $2 vanish.

        You see what I’m getting at here? The “X – M” sure enough subtracts some dollar value from another dollar value but the goods themselves are entirely different, so what you are attempting to do is subtract lemons from fertilizer and get an answer in dollars. You can make the numbers work, I’m not disputing that, but I do question whether you get a useful result out of that.

        • Tel says:

          So does the “X – M” term imply I’m losing $2 here?

          Wait, the X-M should imply I’m gaining $2 which is even more difficult to understand in the context.

          • Philippe says:

            yes your X-M means you gain $2 in money (or some other financial claim).

            You give your neighbour the $5 worth of lemons, and he gives you $3 worth of fertilizer + $2 in money.

            (or else he goes $2 into debt to you, for example, meaning that you have $3 worth of fertilizer + a $2 bond).

            • Tel says:

              But even if he doesn’t give me the $2 it’s still a good deal for me. In order to sell my lemons elsewhere I would need a shop (which I don’t have) and in order to buy the fertilizer elsewhere I would need to earn money from some other job, which would involve a bunch of overheads.

              In a way I’m selling below “market price” but I don’t care because I don’t have access to other markets.

              It’s the same when Germany “lends money” to Greece so they can buy BMW’s. We all know the Greeks will never pay it back, but just to keep some accountants happy they pretend a bond exists to make up the difference. A floating exchange rate would eat that up, but eventually it will be eaten anyhow and Germany will give up trying to get paid on the debt.

              At least with me swapping the lemons I accept that the $2 never existed in the first place. It’s imaginary.

              • Philippe says:

                “But even if he doesn’t give me the $2 it’s still a good deal for me”

                You could just give him $3 worth of lemons and keep the rest.

                If you give him $5 worth of lemons and he only gives you $3 worth of fertilizer, you’re giving him a gift (which in national accounting would be a transfer like foreign aid). Is there any particular reason why you might want to do that?

                The $2 bond is an IOU – you give him more goods than he gives you and he promises to give you something in the future.

                “It’s the same when Germany “lends money” to Greece so they can buy BMW’s.”

                That’s a private arrangement set up between German banks and Greek banks, with the ultimate borrower being a Greek consumer.

                “At least with me swapping the lemons I accept that the $2 never existed in the first place. It’s imaginary.”

                If you give your neighbour $5 worth of lemons and he only gives you $3 worth of fertilizer, the $2 difference exists no matter what. You can either account for it as a gift from you to him, or as a debt owed by him to you, or you can settle the difference with a payment of money from him to you.

              • Anonymous says:

                You could just give him $3 worth of lemons and keep the rest.

                I have no need for the extra lemons.

                That’s the whole point of the Austrian analysis, the concept of a “market price” for lemons does not automatically mean I’m going to personally value them at the same rate. If everyone valued everything at the same price we wouldn’t have a market at all.

                If you give him $5 worth of lemons and he only gives you $3 worth of fertilizer, you’re giving him a gift (which in national accounting would be a transfer like foreign aid). Is there any particular reason why you might want to do that?

                Whether I’m giving a gift or not has no objective answer. If the parties to the exchange are both happy with the outcome, then that’s the end of the matter. A lot of people end up working a bit of unpaid overtime here and there, so where are the accountants worrying themselves over that one? It just happens, and everyone shrugs and moves on.

                I’ve always wondered why we do give foreign aid, mostly it’s earmarked so I don’t think that’s quite the same, more of a hidden way for governments to feed money to their chosen clients.

                That’s a private arrangement set up between German banks and Greek banks, with the ultimate borrower being a Greek consumer.

                The Greek consumer is only a borrower on the presumption there’s a serious chance the IOU will get paid back. Personally, I can’t imagine how that’s ever going to happen.

                … the $2 difference exists no matter what.

                Since no actual $2 ever physically existed in anyone’s hand, I’d argue you are imagining it. If everyone believes that it exists then it exists, but for my part I’ll just shrug and get on with my life. I got what I wanted so why should I care?

              • Philippe says:

                “I have no need for the extra lemons. That’s the whole point of the Austrian analysis, the concept of a “market price” for lemons does not automatically mean I’m going to personally value them at the same rate.”

                Ok, so if you choose to exchange all your lemons for your neighbour’s fertilizer (i.e. you value your lemons as being equal in value to your neighbour’s fertilizer), then you won’t have a trade surplus, you’ll just have balanced trade. Your X = M.

                People wouldn’t normally choose to do this, given the market prices you gave above, because they usually try to gain the most profit they can from their trade, but in your case you’re apparently happy to pay more than you necessarily have to for the fertilizer.

                National accounts just record what happens, so they will only register a trade surplus if people’s transactions add up to a trade surplus. In your case there would be no trade surplus.

              • Tel says:

                You can see it that way if you like, I made no surplus because “X-M” is zero. However, this would rather ignore the fact that I’m better off by making the trade than I would be without. I think that pretty much explains my point… the “X-M” calculation gives a number, but it does not reveal the value of the trade.

                Indeed you can take this a step further and see every barter transaction as exactly balanced, therefore no profit, and no return on the trade.

                So let’s think about an economy where no one trades at all. GDP is zero right? The only economy that exists is people doing stuff for themselves.

                Now suppose those same people trade by barter they end up better off (hence the reason to trade at all) and yet GDP still remains exactly zero. None of those barter trades return a profit, and yet all the people making those trades feel like they are better off. Accounting weirdness. Mathematically correct, but nonsensical.

                The only thing that gets you out of this problem is Austrian theory and subjective valuation. Once you go that way, barter does return a profit, but a strict “market price” for goods no longer exists.

              • Philippe says:

                “Indeed you can take this a step further and see every barter transaction as exactly balanced, therefore no profit, and no return on the trade.”

                A trade surplus is not the same thing as profit. You can have profit with balanced trade.

                “Now suppose those same people trade by barter they end up better off (hence the reason to trade at all) and yet GDP still remains exactly zero.”

                Gross Domestic Product would not be zero, but I’m not sure how you could calculate or estimate it.

                “None of those barter trades return a profit”

                You can make a profit through barter.

                “The only thing that gets you out of this problem is Austrian theory and subjective valuation”

                I agree that people value things differently, but this doesn’t invalidate basic accounting. If you sell a product for $5 and then buy a product for $3 the difference is $2. It doesn’t make any difference that you subjectively decided to pay $3 or that someone else subjectively decided to pay you $5. The basic accounting doesn’t change.

                You’re just getting everything mixed up.

                “Accounting weirdness. Mathematically correct, but nonsensical”

                You sound like the kid in school who says he can’t be bothered to learn mathematics because its all just a load of nonsense anyway.

                The problem is not that accounting is wrong, the problem is that you don’t really understand what you are talking about.

              • Tel says:

                A trade surplus is not the same thing as profit. You can have profit with balanced trade.

                Sure, let’s go with that.

                So profits are the thing that shows successful economic activity (in particular, when both sides make a profit) and the “X-M” balance of trade term does not deliver this information.

                That’s basically my original point. So we have this GDP equation, containing (X-M) tacked on the end, but getting a big GDP does not necessarily mean a booming economy. That’s exactly what I’m trying to get across here.

              • Tel says:

                “None of those barter trades return a profit”

                You can make a profit through barter.

                OK, I probably should not have said it like that. You can make a personal gain through barter.

                What I mean is, none of those barter trades will produce an accounting surplus calculated by taking the total exports of any given entity (e.g. a person, a family, a town, whatever) and subtracting total imports of said entity.

                If you simply calculate X-M you either get the intractable problem of subtracting a pile of shit from a pile of lemons, or you get some nominal imaginary profit calculated from a “market value” that may not be relevant, or you get a zero, but in no case do you actually account for what motivates the people to trade amongst themselves.

                Austrian theory… subjective value. There’s just no way to avoid running into that.

              • Philippe says:

                The fact that people can value things differently doesn’t invalidate accounting.

                National accounting may not tell you everything, but it is an extremely useful tool which gives you an important insight into what is going on.

                Equations like Y=C+I+G+(X-M) show the logic of how things fit together overall. This is why economists use these things – to try to get a better understanding and insight.

                Saying that you can’t use these things to gain a better knowledge or understanding of anything because of subjective value, is just subscribing to a philosophy of willful ignorance.

    • Lucy in the sky w Dimon says:

      Where PK is coming from wrt his enthusiasm for broken windows is that the spending to replace the windows will create employment, which a lack of breakage may not have created counterfactually (and in current dire straits, *would* not have created, since we are tottering on a deflationary brink, being held back by QE and zirp). That is why he is always in favour of spending, productive or not.

      Before I get a lecture on capital theory and/or wealth-creation, I just wanna say that I agree that he is wrong. PK’s understanding of money is incorrect. And he has no concept of wealth-creation (healthy balance sheets). Re the latter, I think most academics do not.

      Relevant link re PK’s theory of money: http://www.pkarchive.org/theory/baby.html

      • Tel says:

        I once ran an agent based simulation of PK’s babysitter economy (it’s an excellent practice exercise, Mises should teach a course on agent simulations) anyhow with fairly reasonable presumptions about the behaviour of the agents you end up with a very stable economy and no it does not mysteriously grind to a halt in a liquidity trap.

        If you include a factor for summer/winter where more people want to go out in summer, and less in winter then all that happens is some slightly larger percentage of people just can’t find a babysitter in summer so they don’t go out. I don’t think any market economy can claim to being 100% perfect (i.e. everyone gets exactly what they want all the time) but overall it does run pretty smoothly.

        Before MF pops up to bash technology, I well understand that programmed agents don’t behave the same as people. Krugman describes people hoarding babysitter tokens, and quite likely since it was Washington they probably had a background ledger of political favours and this sort of behaviour is difficult to code for… but then again, this sort of behaviour is also difficult for Keynesian stimulus to compensate for. Come to think of it, Krugman’s description of the problem does not fully describe all the personal motives the participants might have had, so if those things are important in the simulation, then we have to say that the description is incomplete.

        • Tel says:

          Just talking to myself here… and following up with the summer/winter thing.

          The theory of the Babysitter Economy is that you only have one commodity: babysitting hours. Because everything is measured in hours, there’s no exchange rate. The total number of tokens in the system represent the total debt that participants can owe each other from day to day (e.g. Mrs Green does 5 hours work this night, and in exchange Mr Brown does 5 hours work some other night, thus a temporary debt exists between them).

          However, introducing a summer/winter cycle should in theory also create an exchange rate, because hours of work are intrinsically more valuable during summer. Because of the hard-locked exchange rate of all debt denominated in hours you always end up with some inefficiency trying to account for a cyclic situation. Krugman would probably be very happy to learn that the answer to his babysitting problem is floating exchange rates, rather than government interference.

          • Lucy in the sky w Dimon says:

            Right, the hard-lock from a token to the amt of service it buys is a major flaw if one is saying that a token is the same as a dollar bill… What is reveals is that PK the Nobel Laureate has a scarily incorrect concept of money. Keynes himself had a more accurate view of money, though not of balance sheets. Since even hardcore keynesian-keynesians will disagree with this metaphysical account of money, I hereby declare PK a “konfused keynesian”. If one is gonna follow Keynes lock stock and barrel, one should grasp his monetary theory, such as it was.

            But this is not the only flaw in PK’s grasp of money, but it is enough to get some kind of petition going to get that Nobel back, sack him from his NYT column and his tenure ended. Jeez, I know his salary creates AD, but give it to me. I will stimulate AD like no one’s business, without hopelessly confusing NYT readers and students.

            Doctors take the “first do no harm” oath. Anyone care/able to quantify the damage done to the productive capacity of economies due to leaders actually listening to PK? Yes, it creates jobs when one boosts AD willy-nilly, but dear keynesians, AD is not the *cause* of a healthy economy, it is one of the effects. By directly effecting the effect, one is actually harming the future ability of the economy to organically cause said effect. An error in epistemology 101, but then avoiding this error requires a correct understanding of money!

            Tel, what do you think of this: unqualified-reservations.blogspot.com/2009/07/urs-crash-course-in-sound-economics.html

  5. Ken B says:

    No no no Bob, you thousand times no you can just misread Krugman again! Look he is not saying

    Kidding. Hope you’re taking your blood pressure meds.
    :)

    Yes Krugman’s argument is ridiculous. Summers wins again.
    :)

    I know a lot of folks here think they can just say ceteris paribis and it’s all over, but in this case you simply cannot keep the ceteris paribis. Except in counterfactuals; does that make Krugman right after all?

    • Major_Freedom says:

      Not sure how you can keep consumption as fixed in the face of a collapse in imports. I don’t think it’s even a valid ceteris paribus argument, because C is not independent from M (unless the island is importing only capital goods, used to produce only exported goods, but that would be ridiculous, because there would be no gain to the islanders in doing so).

      To me saying that M is decreasing is the same thing as saying you’re reducing C, to at least some positive degree.

      Ceteris paribus arguments can’t be thrown around willy nilly Ken B, despite the fact that it might look that way to you.

      • Ken B says:

        No they can’t. But I’m not the one doing it.

        • Bala says:

          They were thrown in where they were relevant and the only response you had was dropping the context and pretending to answer key questions while completely avoiding a direct answer.

        • Major_Freedom says:

          I don’t think anyone is doing it on this blog, as far as I can tell.

          • Ken B says:

            We agree! As far as you can tell? No-one!

            • Major_Freedom says:

              Should I be able to tell as someone other than me?

              I don’t get what you are saying. Show me where ceteris paribus is being improperly used.

              I notice you have a pretty strong habit of making accusations without justification. As if merely being snarky is sufficient to make your point. Children do that, not intellectuals.

            • Ken B says:

              I thought Bob did when he demolished Krugman in this post.

              You started this topic MF with your comment to me that cp can’t just be thrown around.

              • Bala says:

                You started this topic MF with your comment to me that cp can’t just be thrown around.

                I really don’t know if you are joking or lying. Not that it’s a serious issue but just thought I’ll point it out.

              • Ken B says:

                Bala do you even bother to read, or do you just go with your spleen?

                “Ceteris paribus arguments can’t be thrown around willy nilly Ken B, despite the fact that it might look that way to you.”

              • Bala says:

                Hmmm…. interesting. I thought it was in response to this little bit you said….

                I know a lot of folks here think they can just say ceteris paribis and it’s all over, but in this case you simply cannot keep the ceteris paribis. Except in counterfactuals; does that make Krugman right after all?

                Spelling mistakes apart, it appears to me as a lay reader that you cited ceteris paribus first, that too mockingly. MF responded. I knew that you have trouble comprehending what others say. Now I see that you don’t even comprehend what you say.

              • Ken B says:

                Do you understand the difference between making a cp argument that is irrelevant and one that is impossible or incorrect? An example of the second is talking about changing the perimeter of a circle keeping its area constant. An example of the latter is, well, most of yours.

              • Ken B says:

                Because Bala I was talking about irrelevant ones but, read it, MF’s comment was about ones like the area example –lack of independence.

              • Ken B says:

                Bala, before this gets all Roddis-LK, let’s just agree we each think the other is a doorknob. The less we twist each other the better.

                Note to Bob: sorry, Bala got the last of these offers.
                :)

              • Bala says:

                Ha Ha Ha!!

                An example of the latter is, well, most of yours.

                Nothing could be more nonsensical than this statement. Saying that ceteris paribus cannot be applied to a change in the quantity of money is as silly as it gets. In fact, it is one of the most standard cases of ceteris paribus that one can ever think of.

                It is, as I understand it, the proper use of ceteris paribus. In fact, the fact that I gave the 100-90-80 framework IN RESPONSE TO Philippe’s citing of Mises’ definition of inflation makes it all the more appropriate.

                But then how is a doorknob to comprehend this, especially when it has severe comprehension problems? Read MF’s response again to know how bad your comprehension problems are. Doesn’t it look like he is saying that your snark is misplaced and that the earlier case was a proper use of ceteris paribus? No? Why would that not surprise me….

              • Bala says:

                OMG! I’ve been extremely remiss. I missed THIS!!!!!

                An example of the second is talking about changing the perimeter of a circle keeping its area constant.

                You are using this to refer to me approach of saying ceteris paribus while dealing with change in the quantity of money, are you?

                If so, it is absolutely priceless. So according to you, it is not possible to change quantity of money without influencing the demand for money, is it? Do you even understand the difference between demand and quantity demanded? Would I be unfair to you in expecting the answer to be no? I suspect not.

              • Major_Freedom says:

                Ken B:

                “I thought Bob did when he demolished Krugman in this post.”

                Where exactly did Murphy throw around ceteris paribus willy nilly?

              • Ken B says:

                MF you misunderstand. You asked me to show you a willy nilly cp argument. I said Bob already did that, when he demolished Krugman’s cp argument.

                Your misreading looks deliberate frankly. I said Bob demolished PK. And you take that as calling Bob,s argument bogus? No, you are willfully misreading.

              • Major_Freedom says:

                Ken B:

                I did not misunderstand.

                I asked me to show you a willy nilly cp argument.

                You said Bob already did that, when he demolished Krugman’s cp argument.

                I said show me exactly where “Bob already did that.”

                It’s a simple question. You said he threw it around willy nilly, so show where he did throw it around willy nilly!

              • Major_Freedom says:

                Copied and pasted and forgot to change a word:

                I asked you to show ME a willy nilly cp argument.

                It seems like you are deliberately avoiding backing up what you assert.

              • Ken B says:

                Wow MF.

                Me: Bob caught Krugman boiling puppies.
                MF: show me where Bob boiled puppies.
                Me: you misunderstand. I said PK did it not Bob.
                MF: I understand perfectly but youstill didn’t show me where Bob boiled puppies. Like you accused him of.

                Don’t let LK see this subthread!

  6. Bala says:

    Bob,

    Does your illustration with the island nation by any chance advance the case for GDE as a better measure of economic output than GDP? Would it help avoid Krugman’s error because it wouldn’t square off exports against imports? Just thinking aloud.

  7. Ken B says:

    If we can have unnamed economists why not unnamed presidents?

    “I… appreciate your concern about the toxic political environment right now. I do have to challenge you, though, on the notion that any citizen that disagrees with me has been ‘targeted and ridiculed’ or that I have ‘made fun’ of tea-baggers.”

    Which unnamed president wrote this to a grade school teacher?

    • Yancey Ward says:

      Valerie Jarrett.

      • Gamble says:

        Chicago lawyer community organizer. Birds of a feather…

  8. Philippe says:

    Bob Murphy,

    I think a problem with your argument is that you’re not really comparing like with like.

    In his article Krugman says that liberalizing international trade will not solve the problem when the problem is a shortage of overall demand.

    You try to disprove his argument by creating an example in which the problem is a shortage in supply.

    But Krugman isn’t talking about a situation in which the problem is a shortage in supply. He’s talking about a situation in which the problem is a shortage of demand.

    Perhaps he would agree with your argument if he thought that the problem was a shortage in supply. But he doesn’t think that’s the problem.

    • Ken B says:

      Not really. PK says next “Which makes this WaPo editorial on things Obama should be doing about jobs truly bizarre. ”
      What happens to employment in HK in Bob’s example? Krugman has widened the discussion and denies that more trade would create jobs.

      • Philippe says:

        In Bob’s example the problem is a shortage in supply. HK can’t import the food and other resources it needs because of the blockade, nor can it supply its exports to its trading partners.

        The problem is not that there is an overall lack of demand for goods or services, but that the demand can not be satisfied because the supply has been destroyed by the blockade.

        In contrast Krugman is arguing that in the context he is talking about, i.e. a recession in the US with high unemployment, the problem is not that there is a lack of supply to satisfy the demand, the problem is that there is an overall lack of demand.

        As I said, Krugman might agree with Bob if he thought the problem was a shortage in supply.

        • Ken B says:

          I think Bob’s point is subtly different, and broader: that you cannot simply argue from accounting identities.

          • Philippe says:

            But Krugman isn’t just arguing from an accounting identity. He says very plainly that the problem is “a shortage of overall demand”. Given this, he argues that an increase in X and M will not increase overall demand.

            • Philippe says:

              btw in Bob’s example there would probably be a hyperinflation in price of essential goods like food, as the supply collapsed.

              • Ken B says:

                I double!

                Hyper inflation involves escalating fantastic multiples., like increases on the order of a million fold or more. That cannot happen unless new money is printed as there simply isn’t that much money. And it won’t just be the food equivalent of money, but all non foods will crash in value. A mercedes for an olive. So again, not hyperinflation, just food prices rising.

              • Ken B says:

                Hyperinflation is the collapse of the price of money wrt everything else. Famine does not cause that, it makes food scarce and valuable. The price of money collapse only wrt food, as does the price of rubies and houses.

            • Gamble says:

              “a shortage of overall demand”

              Lower your prices or stop taxing so much or increase the value of the dollar( stop decreasing value of dollar).

              • Philippe says:

                ok, but those are different sorts of changes to the ones Krugman was saying would be largely ineffectual.

    • Bob Murphy says:

      Philippe wrote;

      I think a problem with your argument is that you’re not really comparing like with like.
      In his article Krugman says that liberalizing international trade will not solve the problem when the problem is a shortage of overall demand.
      You try to disprove his argument by creating an example in which the problem is a shortage in supply.
      But Krugman isn’t talking about a situation in which the problem is a shortage in supply. He’s talking about a situation in which the problem is a shortage of demand.

      Philippe, in reference to the same Great Recession, Krugman has endorsed Summers’ analogy of an electrical failure. So would you say that’s a supply side or a demand side problem?

      Also, demand would be a lot lower in Hong Kong 6 months after a blockade were installed. That’s the point.

  9. Philippe says:

    “in reference to the same Great Recession, Krugman has endorsed Summers’ analogy of an electrical failure. So would you say that’s a supply side or a demand side problem?”

    I think the “electrical failure” refers to the seizing-up of credit markets during the financial crisis, as seen in this graph: http://krugman.blogs.nytimes.com/2013/11/26/musings-on-minnesota-macro/

    Suddenly no one wanted to lend, and the supply of credit dried up. So in that sense it was a supply side problem – a supply of credit problem. But then the Fed stepped in to accommodate the demand for credit, which Summers describes as “getting the lights back on”.

    Summers’ point is that after the “electrical failure” of a financial crisis, you might normally expect general demand to pick up again and for the economy to bounce back. But instead demand has remained relatively subdued overall, growth is still low, unemployment still high etc, several years after the crisis. And this is despite the fact that nominal ‘risk-free’ interest rates are at historic lows:

    “But… imagine my experiment, where for three months, or two months, eighty percent of the electricity went off. GDP would collapse. But then ask yourself, what do you think would happen to the GDP afterwards? You’d kind of expect that there’d be a lot of catch-up: that all the stuff where inventories got run down would get produced much faster, so you’d actually kind of expect that once things normalized, you’d get more GDP than you otherwise would have had — not that four years later, you’d still be having substantially less than you had before. So there’s something odd about financial normalization, if that was what the whole problem was, and then continued slow growth.”

    Krugman identifies the continued slow growth after the crisis as a problem of insufficient demand, and Summers seems to as well, and they both think this has something to do with the supposed ‘natural’ real rate of interest being negative.

    • Major_Freedom says:

      It would be a supply side problem, namely, supply of credit?

      Good idea. Let’s turn the entire economy into a demand side problem, and redefine supply to include demand. That way we never have to actually address supply side problems. We can turn to the central bank to solve every single conceivable problem.

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