Paul Krugman won the Nobel Prize in Economics today. Tyler Cowen at Marginal Revolution has a very nice write-up about Krugman here, along with links.
In the past, I have often taken the opportunity of the Nobel Prize announcement to critically reflect on the progress of economics. Most notably, in 2005, when the Nobel Prize was won by two game theorists, I attacked the usefulness of game theory in a piece entitled “A Nobel Letdown in Economics.” In that piece I wrote “game theory represents an evolutionary dead-end in the development of economics.” (for a related entry on Marginal Revolution, see here).
But instead of criticizing either Krugman or trade theory, I’m going to do the opposite here: Engage in some self-criticism and a mea culpa. Krugman and I (and more generally BusinessWeek) were at loggerheads during the 1990s about growth and productivity. In 1997 he wrote a piece on Slate.com dissing BusinessWeek and the New Economy.
The conventional view that the economy has a “speed limit” of around 2-percent to 2.5-percent growth does not come out of thin air…the reason I can’t buy into the New Economy is actually very simple: Despite all the incentives, I can’t bring myself to endorse a doctrine that I know to be just plain dumb.
In 1998, Krugman wrote in Red Herring:
The truth is that we live in an age not of extraordinary progress but of technological disappointment. And that’s why the future is not what it used to be.
Classic Krugman, for sure, reflecting his skepticism about technology. Krugman was wrong about the New Economy, at least in 1997 and 1998, when these pieces were written.
However, I should have paid more heed to his skepticism about rapid technology-driven growth. Innovation-driven growth is absolutely essential, but it’s much harder to sustain than I realized. In part, the current financial crisis occurred because we saw the U.S. economy expanding in recent years, and assumed that it was solid, innovation-driven growth. Instead, it turned out to be temporary, credit-driven growth, which is now melting away.
And now the mea culpa. Because of his skepticism about technology, I named Krugman an “enemy of growth” in my 2004 book, Rational Exuberance:Silencing the Enemies of Growth and Why the Future is Better than You Think . I shouldn’t have done that—I disagree with Krugman on many points, but calling him an “enemy of growth” was simply a mistake. (I’ve been thinking about this for quite a while, and the Nobel Prize is just the trigger). For good measure, I also regret applying the term to the other economists on the “enemies of growth list” from the book (Greg Mankiw, Martin Feldstein, Alan Blinder, and the late Milton Friedman). That kind of nonsense is not my style—a belated apology to all.