Should Krugman leave macro and go back to international trade theory?

G.R Steele of Lancaster University writes this strongly worded paper saying:

In 2008, the Nobel Prize was awarded to Paul Krugman for research showing „the effects of  economies of scale on trade patterns and on the location of economic activity‟ (Royal Swedish Academy of Sciences, 2008). We might wish him a speedy return to his profession.

He says this at the end. The start of the paper deals with how first Keynes got recession economics wrong. And this has been further advocadte really strongly.

Steele picks up key thoughts from General Theory and how Krugman has worked on them. But it is all wrong as govt intervention just worsens the price signals. Sample this:

It is in chapter 17 (overlooked by Krugman) of The General Theory that Keynes‟s  engagement with microeconomics delivers crucial insights into interest as an inter-temporal price:

Let us suppose that the spot price of wheat is £100 per 100 quarters, that the price of the “future” contract for wheat for delivery a year hence is £107 per 100 quarters, and that the money rate of interest is 5 per cent.; what is the wheat-rate of interest? £100 spot price will buy £105 for forward delivery, and £105 for forward delivery will buy 105/107.100 (= 98) quarters for forward delivery. Alternatively £100 spot will buy 100 quarters of wheat for spot delivery. Thus 100 quarters of wheat for spot delivery will buy 98 quarters for forward delivery. It follows that the wheat-rate of interest is minus 2 per cent. per annum (Keynes, 1936, p. 223).

A forward discount on the price of wheat indicates that too much was produced for the current period and not enough for the future. Entrepreneurial readjustments to price signals such as these are ubiquitous, occurring continuously across the widest spectrum of commodities. By Keynes‟s presentation of commodity rates as inter-temporal prices, it follows that any manipulation of interest rates by a monetary authority chasing after macroeconomic ends can only corrupt inter-temporal price signals. The inevitable consequence is that capital investments are allocated inefficiently: soaring US house prices driven by sub-prime lending was but the most recent example. 

He points to more such examples to show where Krugman is partly right and where is just plain wrong.

His abstract says:

Short courses in economics come with an implicit warning: superficial analysis leads to simplistic conclusions. Where textbooks might be forgiven, a Nobel-Prize-winning economist who builds upon that superficiality deserves a reprimand.

Read the paper even if you are a pro-Krugman/Keynes person as it gives a different perspective. I have  not understood the paper fully though and need to read it again…



2 Responses to “Should Krugman leave macro and go back to international trade theory?”

  1. populareconomicsblog Says:

    Wow, can’t believe Dr. Steele wants to relive Hayek-Keynes debate during Great Depression, which Hayek lost. A liquidity trap means that govt. spending isn’t crowding out private investment, for simple reason that private sector is hoarding cash ($2T+ U.S. corporate cash, and $1T excess U.S. bank reserves). Keynes’ point was that govt. investment needs to replace private investment during such times. Doesn’t Steele realize we barely avoided another Great Depression, if it wasn’t for Obama and Bernanke fiscal and monetary easing policies?? Dr. Krugman has also been making same point.

  2. G R Steele Says:

    Maybe Hayek did lose the argument? Maybe not. Best to remember always: one man and the truth is a majority.

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