Written in an accessible style, and appearing at the beginning of a new University and American college term, it should provide teachers of Eco 101 with some lively questions as they present the usual malarkey about how rational individuals (economic men, ouch) buying and selling in a perfectly competitive market, produce optimum outcomes for production and employment, if only left to their own devices (i.e. without government interference).
Krugman points out that "macro" or big picture economists (he takes economists to be synonymous with American or older British economists) can be divided into two main groups: saltwater and freshwater. What distinguishes them is that the freshwater group (think American mid-West) believes depressions cannot occur unless governments produce them, and the saltwater bunch (mainly Eastern seaboard) thinks government monetary policy is sufficient to prevent depressions. Krugman concludes gleefully that what they have in common is that both are wrong, and circumstances surrounding the current depression prove it.
Krugman thinks economists mistook the beauty of the mathematical formalism used in their economic models for truth. If accurate, this means economists may have committed the ultimate sin: they have misapplied the scientific method by not testing their theories.
Krugman actually shows that much testing was done of theorems related to corporate finance, the woefully wrong efficient market theories. These models were acted upon by Wall St. and got the world economy into major trouble. Trillions of dollars were bet on the assumption that they were true. The problems with the models resided in the assumptions underlying them. Efficiency was assumed, not proven, for example.
Krugman points out that one economist got it right, John Maynard Keynes , who died in 1946. Keynes famous 1936 book, widely known as The General Theory, explained that depressions were caused by a fall in demand. If private sources of spending dried up, and low interest rates could not persuade people to borrow and spend, then governments had a role: pick up the slack with deficit expenditures.
Krugman, a self-declared liberal (his blog is entitled Conscience of a Liberal after his book with the same title) points out graciously that Keynes (himself a liberal) considered his anti-depression medicine to be mildly conservative. In other words nothing to get to upset about, a program to rescue capitalism, get it away from its dependency on the casino of high finance.
Economists "got it wrong" because they rejected Keynes, starting with Milton Friedman and his Chicago school who denied that fiscal policy (spending deficits) was necessary. So long as monetary policy gradually increased the supply of money, nothing much could go wrong. The 1930s Great Depression occurred because the American central bank, the Federal Reserve Board, contracted the money supply, when it should have expanded it.
What Krugman writes deserves to be well known, but he misses the main problem, which is with economics itself. As taught in the U.S., and, unhelpfully, widely in Canada, the discipline is ahistorical. The great thinkers of the past were wonderfully captured by Robert Heilbroner with his book title as The Worldly Philosophers, for good reason: they were in the world, visiting factories, going down mineshafts, or like the great Canadian Harold Adams Innis, canoeing the routes of the fur traders. Today, conventional economists are so little in the world they have again been well depicted as creators of autistic economics .
Economic history is the basis of social science, but is not taught in economics departments. There is no place either for the history of economic thought. If you believe there is only one economics, then you only have to know about its latest ideas.
In fact there are many economics, it is a pluralist discipline. Krugman could have talked about the economics of Marx, or the marvelous Karl Polanyi. Development economists, including Canadians such as Kari Levitt were never taken in by conventional neo-classical economics.
What economics has to offer is rich and varied. What has to be avoided at all costs is what did in the American profession, and is always a threat to any academic pursuits: conformity to prevailing norms. To get along, you go along, following the lead of others, and not questioning the big picture. As Heilbroner, pointed out, deliciously, mathematics gave economics rigor, but also, alas, mortis.
The problem with economics is that the most prized of academic qualities, independent thought was not allowed to roam freely. The free market was fine, except in ideas.
Duncan Cameron writes from Quebec City.