Paul Krugman wins the Nobel Prize

Posted by: Michael Mandel on October 13

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.

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Reader Comments

Ray

October 13, 2008 02:05 PM

Hey, good for you. You set a good example. Thanks.

Kartik

October 13, 2008 02:11 PM

I don't agree that technology-driven growth is unsustainable. What has happened post-2000 is that most the the growth is flowing into developing countries like China and India.

The US is still experiencing growth, but as most growth is not due to brand-new bleeding edge technologies, but rather the commoditization of existing mature technologies, such growth is serving to narrow the gap between China/India and the West, rather than move the West to new heights.

Kartik

October 13, 2008 02:30 PM

So Michael, are you officially backing away from the optimism of your 2004 book? Do you no longer think that the future is 'better than you think'?

Eric

October 13, 2008 03:50 PM

Question: If the prize was awarded to him for his work on trade theory and economic growth, why is it that jeffrey sachs was overlooked?

I respect Krugman as a man of intelligence, but I feel Sachs got jibbed

Lord

October 13, 2008 05:45 PM

Even if the future isn't what it used to be, at least it will always be more than what may be feared. (This isn't about technological growth being unsustainable, it is about it being self-limiting, like the governor on an engine.)

Joe Cushing

October 13, 2008 06:20 PM

Computers are no different than steam power, electricity, or internal combustion engines. They are one invention that can be applied in a thousand ways all across the economy to create wealth for all. This has happened many times over the last 200 years. There is no new economy. There never will be a new economy. These new inventions do create massive waves of productivity though. If you live in a time when one comes of age, you can expect great new wealth--just as we had in the 1990s. It always seems to take decades of development, then a snowball forms.

That means that the next wave of productivity will come from something that is already in development or won't come for 30 or more years. I think the next wave will be energy related. It almost has to be.

On a side note: the reason we grow so slowly and places like China grow so quickly is because we have to invent new stuff to get ahead, where China only has to implement stuff we already invented.

Brandon W

October 14, 2008 11:38 AM

I agree with Joe completely. (gasp)

I think that "in the moment" people think that the current innovation is "the most important ever in history", but the reality is that on the big scale, they're just another blip in human development. I personally think the big gains of computing technology peaked 5 years ago or so. Just like the invention of the engine, or mass production, the big gains are gone and from here out they will be small and incremental. We already see the signs of information technology being a commodity and I suspect it will be completely so inside 5 more years.

I also agree that the next big gains have to be in renewable energy ... or none of it will matter.

LAO

October 14, 2008 04:24 PM

Now if we could just get an apology from the investment banks, the rating agencies, and the government. Oh well.

Dr.Dan

October 15, 2008 11:42 PM

Kartik,

Forget abt Mikes book

What happened to your SP500 entry point calls. They are under water now.

Still sticking by your BSD ? LOL

CB

October 16, 2008 12:29 PM

Relax. We take ourselves and inevitably our theories way to seriously. Once upon a time longer ago than I care to admit " word on the street was" an economist, to be good, only had to be right thirty percent of the time. Just wished my math teacher held that view of those of us who sat before her in those well carved upon desks.

But, then there is the matter of the big prize. The pulitzer. All those books sales. The fantasy of a manageable world. Keep theorizing.

LAO

October 27, 2008 12:07 AM

Would that the likes of Alan Greenspan could have exhibited the same thoughtfulness and evolution of learning as you, Michael.

Greenspan tells us that he was wrong, that he is in a state of shock over the failure of market participants to protect their own self-interests (i.e. self-regulate), but does he apologize? No. Does he have any idea how leaders of every political pursuasion allowed him to color their view of the world? No, apparently he can not imagine what sway he had or does not care what harm he invited.

It is possibly wonderful that he has essentially offered himself as the sacrificial lamb, the scapegoat that we desparately need, since he is technically without party affiliation. I can only hope that villianization of Greenspan can emerge as the lynchpin of fresh, new economic thought that can save us all and at the same time put an end to destructive divisiveness.

If only I could decide whether this positions us at a turning point, or at the beginning of a painfully slow shift over too many generations. Too bad that timing is everything.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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