02 Oct 2017

Contra Krugman: You Have Homework

Contra Krugman 17 Comments

All right, I must insist that if you are a regular reader of this blog, you should listen to the latest Contra Krugman. It’s on the short side and is pretty focused on economics. (If you don’t normally listen, you’re probably thinking, “Isn’t that what every episode is like?” Eh, yes and no.)

Tell me if you think I am right in the comments, or if you think I’m misunderstanding Krugman / leaving out something important.

Then tomorrow, I’m going to bring up something else. But I think it’s best if you just focus narrowly on Krugman’s blog post and my response in the episode, and then consider the subsequent thing that I will bring up.

17 Responses to “Contra Krugman: You Have Homework”

  1. Giovanni P says:

    I believe you’ve put too much emphasis on the “first approximation” thing, agreeing with Krugman that it makes no difference. Derivation is a math concept, not an object of the real worl, nor of economics. In the real world and in economics, each new employee _necessarily_ makes a difference to a business (or a new individual supplier necessarily makes a difference to a market), because it performs a trade and there are always gains from trade. In no situation there is a trade that “to a first approximation makes no difference”.

    Am I right here?

    • Bob Murphy says:

      Well that’s interesting Giovanni, you took it the other way.

      So would you say that free market fans should stop saying, “Workers are paid their marginal product”?

      (I’m not trying to trap you, I’m genuinely asking.)

      • Giovanni P says:

        Well, I hadn’t thought of that, but indeed I never liked that phrase, specially when austrians use it, so yes.

        (Now you can reveal your trap.)

    • Rick Hull says:

      Giovanni > Derivation is a math concept, not an object of the real world, nor of economics. In the real world and in economics, each new employee _necessarily_ makes a difference to a business (or a new individual supplier necessarily makes a difference to a market), because it performs a trade and there are always gains from trade.

      Hi Giovanni, none of this seems worth following. Derivation is indeed a math concept; it may or may be relevant to the real world or economics; I wouldn’t bet against it. Derivation says that if we zoom in on simple curves, they look linear and we can approximate them as such without too much error. So when each new employee _necessarily_ makes a difference to the business, we can both graph that difference and we can also graph the derivation of that difference. This helps us make business decisions as we understand how the dependent variable relates to the independent.

    • Stephen Dedalus says:

      Bob, you’re going to let this one go: “because it performs a trade and there are always gains from trade.”

      Say what? We’re going to forget “There’s many a slip tween cup and lip”?

      Prospectively, parties to a trade *believe* they will gain from it. Retrospectively, both parties may find it to be a disaster, and deeply regret having made it.

      • Stephen Dedalus says:

        Oh, I think Mises quoted “twixt” not “tween.”

    • Stephen Dedalus says:

      Furthermore, taking derivatives for discrete quantities is an unproblematic procedure (so long as you don’t forget what you’ve done). Population biologists, for instance, do it all the time.

  2. Giovanni P says:

    Also, on your comment box’s HTML there is a line that reads “. That’s the server URL to which comments are sent.

    When the site is loaded through HTTPS instead of HTTP and then the visitor tries to submit a comment, the browser complains about “submitting through an insecure connection” (because the form’s “action” is pointing to an HTTP URL) and then fails to submit.

    The solution is simple and harmless: just change the “http://” into “https://” at the line I’ve pointed.

    I’m using the latest Firefox, v58 (but I have just tried that in Chromium and saw the same error).

    (I’ve actually only managed to submit this comment by changing the HTML of the page manually through the browser’s Developer Tools.)

    • Giovanni P says:

      The HTML line I’ve tried to quote above was swallowed probably by some anti-HTML-injection code from the server. Anyway, I’m posting it again here without the brackets:

      form method=”post” id=”commentform” action=”http://consultingbyrpm.com/wp-comments-post.php”

    • Bob Murphy says:

      Think we fixed the comment form, thanks.

  3. Jan Masek says:

    Could it be that Krugman only meant people on the margin and not the inframarginal workers? I.e. higher taxes will only induce the marginal workers to quit but that’s ok because they weren’t creating any consumer/producer surplus anyway. It’d be bad if folks across the board were quiting but higher taxes won’t do that.
    If you’re right, then Krugman is really either a dumb person or a shameless lier. That’s btw the biggest (imo) and yet unaddressed question of the podcast.

    • Jan Masek says:

      At least we have settled the question of who the dumb person is…

  4. Tel says:

    I read the Krugman article first (without double-checking his links, and without listening to the podcast yet).

    Krugman’s basic assumption is the only thing that ever benefits “society” is government tax collection. In other words the basic “Progressive” belief: government = society in every possible way.

    Once you start with that belief, you are going to inevitably come to the conclusion that Krugman states: “the optimal top tax rate is the one that maximizes revenue: aside from the taxes they pay, increased effort by the very rich to a first approximation makes no difference to everyone else…” This doesn’t only apply to the rich of course, a true believer in big government always sees people as either tax donkeys or needy welfare causes, and once they see it that way, there’s nothing much else to say about it.

    The other crazy assumption here is that Bill Gates must be consuming billions of dollars worth of rich meals and expensive champagne. Even Krugman’s readers would scratch their heads over this if Krugman spelled it out in as many words. Even weirder when you think about how Bill Gates has gone out of his way to put money into public charitable campaigns. Regardless of how you feel about his choice of causes, it doesn’t matter because to the “Progressive” mindset none of that exists at all. You cannot do anything to impress such people, because deep down they are not looking for a better quality of life, nor helping people, they are looking for power and everything is a means to get there.

    Krugman himself, I don’t think he is trying all that hard anymore.

  5. Capt. J Parker says:

    I don’t think it’s valid to claim Krugman is arguing that large parts of the workforce could stop showing up for work and you shouldn’t care so long as they stop consuming what they once produced. The tax code changes are expected to affect behavior at the margin. If only the workers who contribute the last increment of output stopped showing up and as a consequence those workers stopped consuming that last increment that they produced the rest of the economy wouldn’t see much difference. If large numbers of workers beyond those contributing that last increment of output also stopped showing up then that would be a big problem but, that’s not the argument Krugman is making.

    I think increases in producer and consumer surplus are the better reasons why you should care how much other people work. The other thing Krugman ignores is that the fat cats will use their tax breaks to consume capital goods. More capital goods means higher productivity and that benefits everyone.

  6. Darien says:

    I can’t see any other interpreration of what Krugman said that doesn’t involve inserting a whole bunch of conditions and modifications he never even alluded to. Near as I can tell, he quite plainly stated that, since everything produced is consumed, the amount of production is irrelevant. It boggles the mind, but it’s what he said.

  7. Uffe says:

    Hi Bob, I think you did a good job in the podcast spending much time explaining the inframarginal concept.

    When I listened to the episode in the car I thought there was something wrong with the argument that Krugman made which didn’t get covered. It seems that Krugman is only concerned about prices and not with value. Concepts as others alluded to (e.g. Capt. J. Parker) such as consumer surplus and producer surplus by production seems lost on Krugman in this post.

    Krugman is also quite confused on his own circular flow theory in this case. If I don’t misunderstand the Keynesian framework, one of their cornerstones is that consumption drives the economy. So in Krugmans post he just said that consumtion doesn’t matter because it just equals production. I don’t get that position, especially not when it’s coming from a Keynesian. Of course it can be explained that this is totally in sync with original Keynesianism, since there is no framework which is conceptually solid and internally consistent. Thus inconsistencies are part of the Keynesian system, and thus Krugman is correct in the Keynesian framework that consumption doesn’t mean anything when the rich are engaged in it, while consumption by “the average person” is a highly important driver in the economy.

    Another thing which didn’t get covered is not so much the loss of individual welfare by taxation, but also the government spending which cause problems. If Krugman was consistent, he could extend his argument and say that what government spends creates value equal to that of the value taxed away. Therefore government spending is 100pct efficient, there’s no loss involved. The value lost by the taxed individual is reaped completely by the recepient of government spending.

    To an austrian this means exactly that you can tear down all of the government with no loss to the economy because we don’t believe in trade unless there is unequal valuation involved. Unless it can be proven that the money spent in government is more efficient, than merely 1 to 1, then the cost of abolishing the whole government apparatus is essentially nothing. You only lose output of equal value to what value you gain in reduced taxation from cutting down government. Under this assumption government activity is a meaningless pastime for bureaucracts and politicians. Of course this is not the case in the real world, government is much less efficient than 1 to 1, but even on the terms stated by Krugman, you may argue, as an austrian, that the government doesn’t produce anything of value, since the cost of stopping its production is zero.

    The extension of this argument is to go all-out Rothbardian and claim that government production is chaotic and doesn’t maximize economic welfare, so every tax imposed should be abolished because it leads to chaotic production as compared with orderly and efficient production (even in the absurd case that taxation doesn’t have any direct impact on the private production). This is my own position on any government program, since there is no demonstrated preference by recepients or consumers of government production and handouts, they can’t be shown to be efficient. Combined with the pareto-superior theory ala Rothbard this leads to loss of welfare when government uses any resource.

  8. trent steel says:

    Krugman: “Making the rich richer without trickle down does the rest of *us* no good.”

    Krugman is just one of the little guys hoping for some trickle down to help him get by.

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