Nobel-prize winning economist Paul Krugman is popularly known for the New York Times columns he writes, using his economics knowledge to lambast spending cuts and attempts to decrease the government’s share in the economy. As such, his writings have become a favorite tool of authoritarians and statists.
However, as of late, Krugman hasn’t been making many friends in the economics community. The supply-side economists who dominate the field today have long-since abandoned the Keynesian theories that Krugman seeks to resurrect. And they don’t take too kindly to his less-than-intellectual dismissal of empirical arguments as “fraud.”
Perplexed by Krugman’s deviation from empirical economics, I decided to do a little research to try to figure out what, exactly, leads him to adhere so passionately to theoretical arguments that are so maligned by his opponents. Here is what I found:
Paul Krugman won his Nobel Prize in 2008 “for his analysis of trade patterns and location of economic activity,” particularly pertaining to the increasing returns to scale and its effect on trade. Basically, he [re]discovered the idea that countries specialize their industries (exporting one thing and importing everything else) primarily because one big entity can provide a product more efficiently than lots of independent small entities. Essentially, he likes monopolies, because they’re efficient.
Krugman has taken his economic theory and allowed it to shape his entire belief system, favoring the government-monopoly systems that are capable of greater efficiency of production than any free-market system. And he’s entirely correct- government monopolies are capable of far more efficiency than free, decentralized markets. But to say so is like saying a gas is “capable” of localizing all in one corner of the room without any force guiding it. Technically true- but it will never happen.
Like the physicist who disregards entropy, Paul Krugman’s entire belief system ignores the eternally disruptive force of human incentive. You see, monopolies have the potential to be efficient, but never are, because all incentive to do what’s good for the customer is lifted. In market economies, that generally means prices rise as customers cannot turn to competitors for a better deal. In government economies, that means costs rise and economies stagnate, as there is no incentive to improve services. Efficiency is thrown out the window, because, even though it’s achievable, there’s no reason to invest the time and effort into pursuing it on a fundamental level. In government, this means greater corruption, higher debts, and failed services resulting in extensive squalor.
In this context, it really makes sense why Krugman would toss out any empiricism that his opponents try to bring into discussions. The effects of human incentive are inherent in every economics experiment. This is why economists (and the governments that rely on them) are so bad at prediction- you need to know something about human psychology (and have a good feel for it) before you can understand how a market will react to an impulse. This is something which Krugman’s machine-like theories just don’t address.