23 Mar 2016

Two Incidental Observations on Krugman’s 1990s Trade Essays

Krugman 9 Comments

I am going to have a bunch of trade stuff coming out shortly, but here on the personal blog let me note two things from my recent (re?)-reading of some of Krugman’s 1990s stuff.

(1) In this essay on trade negotiations I’m pretty sure in these throw-away remarks he’s talking about the tax interaction effect, which I have virtually singlehandedly been trying to bring up in the carbon tax debates:

The general theory of the second best tells us that if incentives are distorted in some markets, and for some reason these distortions cannot be directly addressed, policies in other markets should in principle take the distortions into account. For example, environmental economists have become sensitized to the likely interactions between pollution fees – designed to correct one distortion of incentives – with other taxes, which have nothing to do with environmental issues but which, because they distort incentives to work, save, and invest may crucially affect the welfare evaluation of any given environmental policy.

It’s amazing. Krugman knows all about the tax interaction effect and yet I don’t recall him mentioning it in the last 10 years when talking about carbon taxes… Odd…

(2) The other thing I want to note is just how smart Krugman is. The following (from his famous “Ricardo’s Difficult Idea”) shows his familiarity with classical mechanics (and this funny article showed he knows relativity):

In sum, while the concept of comparative advantage may seem utterly simple to economists, in order to achieve that simplicity one must invoke a number of principles and useful simplifying assumptions that seem natural and reasonable only to someone familiar with economic analysis in general. (“What do you mean, objects fall at the same rate regardless of how heavy they are — if I drop a cannonball and a feather … you’re assuming away air resistance? Why would you do that?”) Those principles and simplifying assumptions are indeed reasonable, but they are not obvious.

If you know both economics and physics, the above analogy is simply awesome. He is exactly right: If a physicist told someone that gravity accelerates heavy and light objects the same, and the person brought up obvious counterexamples, and then the physicist said, “Well that’s because of air friction, which I’m assuming away to isolate the real way gravity works, suppose we were on the moon and dropped your feather and cannonball…” then the critic would think he was a charlatan. But of course, that is *exactly* how you proceed, in order to teach Newtonian physics. If you started out worrying about air friction, you’d get all screwed up.

And by the same token, when it comes to understanding the logic of international trade, it makes perfect sense to make unrealistic assumptions to generate simple thought experiments, to isolate particular forces. For example, to really “see” comparative advantage, you use simple examples of either two people or two countries, producing two different goods. And yet, in the real world, “there are more than two goods you charlatan!!”

9 Responses to “Two Incidental Observations on Krugman’s 1990s Trade Essays”

  1. E. Harding says:

    By whom or what were you inspired to begin this noble task, Bob?

    • guest says:

      I think he’s going all out to win over Conservatives. Finally, someone is doing it.

      In a recent post, he talks about winning certain people back.

      And consider all the Austrian articles about how Trump doesn’t understand Comparative Advantage.

      Trump is probably going to be President, and Conservatives will need a defense of the free market when the Left blames it for the failure of Trump’s protectionist (read: Left Wing), crony policies.

      • Andrew_FL says:

        One must always be prepared to be the mischief maker to either autocrat or demagogue that assumes the throne next. I’m ready to defend the free market against either Trump or Hillary.

        Or Bernie Sanders for that matter, not that he’s going to be President.

  2. Daniel Kuehn says:

    This (the simplifying assumptions) reminds me of the crap you were getting from your own side for the OLG models.

  3. Patrick Szar says:

    Is this not the entire point of praxeology vs the empirical method? Of course there’s the possibility of the logic not playing out in real life. There’s infinite variables! Doesn’t make the logic any less sound in describing real causal mechanisms. I’m sure LK has an explanation for why this is a straw-man or simply vulgar, though.

    • Major.Freedom says:

      Hey now, obviously economics theories must be tested, like the theory that all actions have costs. We have to test it or else we’re dogmatists in the pejorative sense.

    • Bob Roddis says:

      Since LK does not understand praxeology, human action or economic calculation (which one can observe as ubiquitous within and preceding ALL economic activity), he is unable and unwilling to differentiate those phenomena from truly empirical phenomena, just as he and the rest of the Keynesians are unwilling to differentiate voluntary activities from those influenced and induced by violent intervention. One would need to do the latter to properly blame the Great Depression upon “the market” (voluntary exchange with firm private property and contract rights) as opposed to the well-known central bank shenanigans going back to the WWI. Further, the term “aggregate demand” is just a garbage term meant to smudge up the difference between the property one properly owns and controls with temporary subsidies in the form of funny money loans and gifts and government spending.

  4. Josiah says:

    Good point.

  5. Tel says:

    In terms of Galileo supposedly dropping balls off the Tower of Pisa, his actual argument was that Aristotle was necessarily wrong regardless of air friction. Since Aristotle believed heavier objects would fall faster, Galileo asked what would happen if you had two unequal weight objects tied with string? Would they fall at the speed of the combined mass (according to Aristotle, this would be faster than each individual mass) or would they operate independently and the small mass retard the fall of the larger? You can’t have it both ways, yet there’s no particular reason to decide one or the other.

    But then maybe a cannon ball would really be a bunch of very lightweight iron particles that each happens to be falling independently to all the others.

    Pretty soon you see the inconsistency in Aristotle’s position and that is irrespective of air friction… it just logically doesn’t make sense for heavy objects to fall faster than light objects based only on their intrinsic mass. You don’t even need to do the experiment.

    But of course, that is *exactly* how you proceed, in order to teach Newtonian physics. If you started out worrying about air friction, you’d get all screwed up.

    When we learned it in school were were just told, “Do it this way, memorize these equations and pass your exams.” In the exam of course they aren’t going to demand you correctly calculate a trajectory with air friction because no one would pass that exam. Besides, Newton did his key work on gravity by calculating orbits and one of his realizations what that the same gravity that tugs on the cannon ball also tugs on the Moon and the Earth… thus he went looking for a universal rule. Fortunately there isn’t much air friction in outer space, so Netwon got away with ignoring it (the orbits provided a real and empirical example to test the theory without needing simplifying assumptions).

    Proper handling of air friction only came after Newton when one of his students Benjamin Robins developed the method of numerical integration that is still the basis for most physics calculations today, and his book was “New Principles of Gunnery” which gets surprisingly little mention in modern physics courses.

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