Another example of why, though he occasionally says useful things, I do not entirely trust Paul Krugman. This article shows he can hit all the good liberal points about how an economic depression should not be ridden out, as our libertarian / Austrian economics crowd want us to do, without resort to a stimulus either as a restorative measure for the economy or as a response to human suffering. However, Krugman substantially misrepresents his opposition, as well as his own past, in doing so.
I felt I had to respond to this the minute I saw Joseph Schumpeter held up as a punching bag. I have a great deal of respect for Schumpeter’s work, though I admittedly do not agree with everything he ever said. Krugman quotes him as being an implacable opponent of stimulus spending and associates him with a belief that economic depressions, as natural events relating to supply and demand levels, should not be interfered with by government. To that effect, he quotes Schumpeter in this article as having said “artificial stimulus leaves part of the work of depressions undone.” That seems like a pretty damning sound bite, and as a fan of Schumpeter in numerous respects, I was a little shocked to see that the guy would have ever said something like that.
So I checked it out. It turns out Krugman is indeed presenting a sound bite – and the problem with sound bites is that they often misrepresent the greater context from which they are culled. Here is what Schumpeter said in a longer quote: “In all cases, not only in the two which we have analyzed, recovery came of itself. There is certainly this much of truth in the talk about the recuperative powers of our industrial system. But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another crisis ahead.”
That statement, taken in its entirety, I would not hesitate to agree with. I don’t feel particularly like an Austrian economist for agreeing with that. One of the reasons that “Keynesians” ended up having problems in the 1970s was that stimulus spending at a time when the economy is overheating is pointless and does, in fact, cause business “maladjustments” and “crises”. (I put “Keynesians” in quotes in the foregoing, because not anyone who supports a stimulus is therefore a Keynesian, a mythos only those captivated intellectually by right-wingers really believe. Keynes himself was horrified by the thought of stimulus spending during normal economic times, and doubly horrified by the thought of it occurring while the economy was whirring away very efficiently – as it was in the late 1960s and early 1970s, at the time when inflation problems began.) Injecting money into an economy in an artificial way doesn’t solve every problem, and not knowing when to _stop_ injecting money into an economy creates problems. It is quite difficult not to read the history of the 1970s as proof that Schumpeter was onto something…it is only unclear whether that really means Keynes was wrong. The problem with Keynesianism is that people who are not Keynes seem to want to have the power to define what it is. The historical Keynes was pretty clear, though. Stimulus spending doesn’t solve everything at any point in an economic cycle – not even Keynes thought so.
However, the Schumpeter essay being quoted also says this: “Finally, our cases teach unmistakably that, futile as it is to hope for miraculous cures, it is exactly as wrong to believe that the evils of depression are all of them inevitable and that the only sound policy consists in doing nothing.” If that were taken as a sound bite from the essay, it would sound as if Schumpeter were in broad agreement with Krugman, instead of diametrically opposed to one another. Frankly, it also sounds to me like Schumpeter’s broadly in agreement with Keynes.
Need any further proof of this? The essay also says this: “Especially if a country has steadily improved its public finances during prosperity as the United States did during the decade which preceded the present crisis, enough means are available, and other means can be procured, for an expenditure which will blot out the worst things without injury to the economic organism, provided only that action on this line is taken promptly and followed up by equally sound fiscal habits as soon as recovery gets underway.”
I would not disagree with this statement, nor, it is clear, would Keynes. The statement calls for an “expenditure” to mitigate economic depressions – but it’s obvious from the context that does mean a stimulus. The only real point of contention is how quick the anticipated return to economics-as-usual should be, according to these rival political economists. Keynes probably would have argued for a longer time period, Schumpeter was clearly more comfortable with a shorter time period. But both favoured stimulus spending during a crisis, and both thought it should end when the recovery had begun. It’s really more that the more liberal Keynes would look for more signs of recovery being underway, while the more conservative / economist-from-Austria-if-not-fully-an-Austrian-economist Schumpeter would hand the keys back to Adam Smith’s invisible hand to drive the economy much more quickly. I tend to think that at the moment we need more stimulus, but that hardly means I just love racking up debt. At some point, we are going to need more to follow Schumpeter.
It’s ironic that Krugman, who is taking Schumpeter to task as some kind of a hectoring moralist, should misrepresent what Schumpeter said in such a way as to invite angry moral disapprobation of Schumpeter. It’s doubly ironic that much of the moral hectoring which seems to upset him so much today troubled him very little in the 1990s, when the hectoring was done in the name of accommodating globalisation, the one economic reality from which there is, to hear him tell it, no alternative. How about this for a sound bite? “We seem to have concluded that growth in the Third World has almost no adverse effects on the First World.”
I’m sorry, what?! So those who think that’s not the case are what, just sad losers who deserve getting swatted by the global economy? The preponderance of the evidence now, of course, suggests that outsourcing does send jobs to the Third World at a signficant expense to First World workers. Basically, Krugman just got that flat out wrong.
Of course, there is more to what Krugman argued in the article where he uncorked that chestnut, and it reflects a little better on him: “Moreover, even to the extent that North-South trade may explain some of the growing inequality of earnings, it has nothing to do with the disappointing performance of average wages. Before 1973, average compensation in the United States rose at an annual rate of more than 2%; since then it has risen at a rate of only 0.3%. This decline is at the heart of our economic malaise, and Third World exports have nothing to do with it.” It’s certainly true that compensation for America’s working class has stagnated – provisionally during the “Whip Inflation Now” days of the 1970s, but then permanently after the post-Reagan free market fundamentalism ideological shift. It is good that Krugman did notice that.
But that sound bite should dog him at least a little bit, particularly if he’s willing to slag Schumpeter for having said something without there being additional context added to his words.
Additional context is a dangerous thing. It might make a supposed worshipper of Andrew Mellon sound more like he has a heart and a brain. It might also remind people that a certain fire-breathing liberal was a Third Way cheerleader back in the 1990s.