Scott Sumner  

Two ways of thinking about economics

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In a paper I wrote back in 2008 I speculated that what I called "economistic" thinking led to classical liberal (i.e. free market) views on economics. By 'economistic' I meant thinking that takes economic theory very seriously. The belief that people are strongly affected by incentives, that regulations have lots of unexpected side effects, and that problems occur when you interfere with markets. In contrast, liberals are more likely to think that government programs and regulations can have lots of good effects, with only modest undesirable side effects. (I made similar comparisons earlier this year in an Econ Journal Watch paper.)

Over the years, I've seen people complain that Paul Krugman used to believe X in the 1990s, and now he believes Y. His textbook says X, but his recent blog posts say Y. I've done that a few times, but I find it increasingly uninteresting. Textbook writers are almost required to overlook certain nuances. New studies occur and people change their minds. So I don't find it very interesting that Paul Krugman has changed his views on the minimum wage.

However commenter Patrick Sullivan pointed me to something much more interesting. It appears that Krugman has not just changed his mind, he's changed his mind. I.e., he's changed the way he thinks. He used to think like a slightly right-of-center economist who takes economic theory very seriously, and now he thinks like a left-of-center economist who is dismissive of much of economic theory. A recent David Henderson post on this topic suggested to me that his new views on the minimum wage do not seem to reflect any new information about its effects, but rather growing doubts as to whether economic theory is useful, whether we should take our models seriously. Here's Krugman a few days ago:

Some background: Conservatives -- with the backing, I have to admit, of many economists -- normally argue that the market for labor is like the market for anything else. The law of supply and demand, they say, determines the level of wages, and the invisible hand of the market will punish anyone who tries to defy this law.

Specifically, this view implies that any attempt to push up wages will either fail or have bad consequences. Setting a minimum wage, it's claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains, wine lakes and so on. Pressuring employers to pay more, or encouraging workers to organize into unions, will have the same effect.

But labor economists have long questioned this view. Soylent Green -- I mean, the labor force -- is people. And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

What's the evidence? First, there is what actually happens when minimum wages are increased. Many states set minimum wages above the federal level, and we can look at what happens when a state raises its minimum while neighboring states do not. Does the wage-hiking state lose a large number of jobs? No -- the overwhelming conclusion from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment.


However back in 1998 things looked very different:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages "do," in fact, reduce employment, but that the effects are small and swamped by other forces.

What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda--for arguing that living wages "can play an important role in reversing the 25-year decline in wages experienced by most working people in America" (as this book's back cover has it).

Clearly these advocates very much want to believe that the price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.


Back then the Card-Krueger study was an "iffy result" not an "overwhelming conclusion." Back then he mocked people who didn't think the supply and demand model applied to labor markets, people who used fuzzy headed thinking about "justice," not hard headed thinking about the consequences of interfering with market equilibrium. There is almost a contempt for people who have a "will to believe" that government can wave a magic wand and overrule the cold hard logic of market forces.

It's worth reading Krugman's entire 1998 book review. He also uses terms like "wishful thinking" and "silly," and ends as follows:

In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price--determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.
As Krugman has steadily moved to the left, he hasn't just changed his mind in the sense of changing his opinions; he's changed his mind in the sense of changing the way he thinks.

Tyler Cowen has argued that Paul Krugman is the Milton Friedman of the early 21st century, and in many ways that's true. Among all economists, he is clearly the most influential public intellectual. But an even better comparison might be John Kenneth Galbraith, who was the favorite economist of intellectuals who hated economics.

I've noticed that if you explain to intellectuals that a minimum wage will hurt the poor by increasing unemployment, or that rent controls hurt renters by creating shortages, or that unemployment insurance increases unemployment, or that taxes on investment income should be abolished, they'll give you this look like "I don't know whether this guy is evil or crazy." Non-economists strongly resent the implications of much of economic theory, as it punctures holes in all their pet theories. So when a Nobel Prize winner comes along that confirms all their political views, he's going to be extremely popular among intellectuals. Especially when he's as brilliant and witty as Paul Krugman.

I don't want this too sound too negative. Just to be clear, Krugman is 10 times the economist that Galbraith was. I often disagree with him on macroeconomics, but his views are defensible and brilliantly explained. He's a great writer, and a superb theoretician. Galbraith was a great writer and . . . and that's about it.

But today Krugman's appeal to intellectuals is quite similar to the appeal of Galbraith in the 1950s and 1960s---the economist for people who hate economics.

HT: Bob Murphy, Mark Perry


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COMMENTS (33 to date)

I think in 30 years people will ask "Who is the Milton Friedman of today?" and not "Who is the Paul Krugman of today?"

Becky Hargrove writes:

From the standpoint of someone who still believes the supply side is the place to find income solutions, I have to wonder if more economists have become convinced the supply side is not willing to do what it takes to generate the kinds of good deflation that were once expected of production in general, to reach a broader population. In other words, too many on the supply side have been using government to limit their supply, hence creating a higher price out of the reach of some income. If this be the case - meaning economists are "losing the supply side faith" - perhaps "living wages" represent an uneasy truce between economists and a supply side that reckons this is the only compromise it is really willing to consider.

Becky Hargrove writes:

Now that I think about it, encouraging bad deflation from the Fed, and the faulty reasoning that leads to "living wages", could be a lazy supply side means of not wanting to meaningfully deal with production reform.

Lee Waaks writes:

If Keynesianism is false (I think it is) and his views on the minimum wage are false, then it seems to me he simply writes well about false ideas.

Kenneth Duda writes:

I got my introduction to macro from Krugman, including IS/LM and ZLB thinking. He is so smart and articulate.

But lately I have become frustrated by the weasily way he minimizes the possible role for monetary policy at the ZLB. He will write over and over how "conventional monetary policy loses traction at the ZLB." Sure, if "conventional" means "interest rate targeting", then yes, that's true. What should one conclude? How about that inflation targeting is a bad idea, and we should try something else? Oh no, Krugman concludes that we need to fund his favorite fiscal policy ideas for the sake of the economy. It is almost as if he likes broken monetary policy because it creates room for his fiscal goals. He won't address level targeting directly except to point out that it has "no home" since neither the crazies on the left nor the crazies on the right are (yet) supporting it.

Very frustrating.

Kenneth Duda
Menlo Park, CA

Tiago writes:

Great post.

I agree with everything. The last part of the post made me wonder if the fact that Krugman is so accomplished as an economist and now encourages some really old fallacies (even if not stating them explicitly) is a major blow to economic thinking.
I wish someone with a Nobel Prize and liberal credentials would step up and defend basic economic reasoning in the New York Times.

J.V. Dubois writes:

To be honest I actually think that this may be an opinon that is at least implicitly expressed by other economists as well. I am reading Krugman for years, and now more then ever it seems that he just does not engage in any meaningful discussion. He keeps picking easy fights and does not respond to a well written critique.

I mean it is OK to write an post about VSPs, inflationists and austerians. But if you do it all the time it becomes stale. And my feeling is that in a sense Krugman stars losing credibility among economists although he may gain it with other intellectuals. If I want any good discussion now on that side I am better of reading Brad DeLong or Simon Wren-Lewis.

PS: Also even if you are skeptical about laissez-faire economics there are better ways of how to go about it. For instance how Noah Smith did it in this article and in some followups: http://qz.com/208402/economics-can-do-many-things-but-it-cannot-help-the-economy/

Mark Bahner writes:
So I don't find it very interesting that Paul Krugman has changed his views on the minimum wage.

I don't object at all to Paul Krugman changing his views on the minimum wage. I object to his using phrases like:

Conservatives -- with the backing, I have to admit, of many economists -...

...which, to me, implies that the economists he's "admitting" back "conservatives" are some sort of rogue's gallery that does not, and never did, include him.

He does a similar objectionable thing when he writes:

Setting a minimum wage, it's claimed, will reduce employment and create a labor surplus, the same way attempts to put floors under the prices of agricultural commodities used to lead to butter mountains,..."

...making it seem like he never had anything to do with such erroneous ideas.

That's what I find objectionable. It's the dishonesty of not making it clear that his own views have changed.

Which reminds me of his dishonesty on Social Security and the Social Security "Trust Fund." Which reminds me of something about which I've changed my own views. I used to say that Social Security was profoundly immoral, because it is a Ponzi scheme and I thought it would tremendously hurt the next generations. Now I think the next generations will be OK, due to the tremendous economic growth I expect from artificial intelligence:

Implications of high economic growth (from artificial intelligence)

Note: I expect this spectacular economic growth to begin appearing in the next 5-25 years, so if it doesn't show up, I need to change my opinion once again to Social Security being profoundly immoral (in addition to being a Ponzi scheme).

David R. Henderson writes:

Mark Bahner put his finger on what I found objectionable.If Krugman has changed his mind, then fine. He should say that. And say why he has changed his mind.

Meets writes:

It's in his self interest to move to the left on these issues, given his job.

Whether he has any self-awareness is a separate issue.

Roger writes:

I always assumed that sometime after writing this article on the plight of traditional economists to get published that Krugman had an epiphany and decided if you can't beat 'em, join 'em.

Here is the link and an excerpt. Do read the whole thing though. Krugman saw what it takes to be popular.

http://web.mit.edu/krugman/www/ricardo.htm


"I once had a very unpleasant, but ultimately useful, conversation with the editor of one of America's leading intellectual magazines. He was in the process of refusing to print a piece I had written at his request, and his dissatisfaction with what I had written was the main subject at hand. But along the way I somehow mentioned the need to represent economic ideas with carefully thought-out models, and he responded with a mixture of bafflement and asperity. Clearly the idea that economic ideas could benefit from being modeled was new to him, even though his journal frequently publishes articles on economic affairs; and he suggested to me that in future I would do well to explain why models are sometimes useful and why they usually are not.

At the time I was fairly flabbergasted: to question the usefulness of economic models at this late date seemed rather strange. But the economist's idea that economic theory for the most part consists of models has by no means been accepted by intellectuals outside our field. In fact, if one looks at the favorite economic writers of the non-economist intellectual -- Robert Reich, Lester Thurow, John Kenneth Galbraith -- one realizes that they have in common an aversion to or ignorance of modeling. There are model-oriented economists, like Alan Blinder, who also write for a broader audience, and they don't put their equations in their books and articles; but the skeleton of the models that structure their thought is visible under the surface to those who know how to look. By contrast, in the writings of Reich or Galbraith what you read is what you get -- there is no hidden mathematical structure to the argument, no diagram one might draw on a blackboard or simulation one might run on a computer to clarify the point."

Hazel Meade writes:

Krugman reminds me vaguely of one of those guys in Atlas Shrugged that Francisco D'Anconia pays to espouse views completely at odds with what they used to believe.

I half suspect that some evil billionare somewhere is blackmailing him.

Gordon writes:

The question I have regarding Krugman is whether he has an incentive to attract as many readers as possible to his column in the NY Times. If so, is the change in his views a change in the way he thinks or a response to an incentive? My guess is that he does have an incentive. Otherwise, he probably wouldn't last long as a columnist.

Michael Byrnes writes:

In this recent post on the 70s, Krugman wrote the following:

"So whence the impression that the 70s were completely horrible, while Reaganomics was a triumph? Part of the answer is inflation, which did feel out of control even if it was largely matched by wage increases."

To write the bolded, he had to have been wearing his "pundit hat" rather than his "economist hat". The inflation of the 70s would not have been possible absent wage increases, correct?

Lars P writes:

Seems to me that Krugman is only responding to incentives.

In his old career as academic economist, he was rewarded for one way of thinking and writing.

In his new career as liberal pundit, he is rewarded for thinking and writing in other ways.

zeke writes:

If we are being uncharitable, then I would say this is all about status elevation. Krugman cares less about printing the truth and more about receiving high status and praise.

John V writes:

As others have said, PK is merely responding to incentives.

There's a strange irony in watching him uphold economic theory through his own ACTIONS while he seeks to trivialize that same body of theory through his words.

PK's love of politics and of being a liberal pundit/polemicist is clearly stronger than his love of economics. It's all about partisan politics now. Nothing more. He's happier this way.

Yes, I am impugning his motives. Oh well. Shame on me. But I think it's accurate.

Unlearning writes:

Man, are economists arrogant...

I've noticed that if you explain to intellectuals that a minimum wage will hurt the poor by increasing unemployment...

You don't 'explain' it to them. You explain your theory to them, a theory which implies these things. Big difference.

Non-economists strongly resent the implications of much of economic theory, as it punctures holes in all their pet theories.

Just like economists strongly resent the complete lack of empirical evidence supporting all their pet theories?

Non economists tend to disagree with economists - that doesn't mean the former are right. Perhaps if the former spent more time rigorously testing their theories empirically, and less time lazily repeating them over and over, they'd gain more respect from the latter.

A writes:

I think that Krugman is playing a game of deliberately understated nuance, like when he used to mildly place "conventional" into a post about monetary inefficacy. The provided excerpts allow similar appeals to retrospective nuance. He could say that the post referred to economists who thought that "ANY" attempt to ... "will have bad consequences." Similarly, "simple supply and demand" may retroactively refer to ceteris paribus supply/demand models absent widespread capital owner rent.

mico writes:

Paul Krugman has worded his claim carefully:

"the overwhelming conclusion from studying these natural experiments is that moderate increases in the minimum wage have little or no negative effect on employment"

What is a moderate increase, or at what point does an increase become immoderate? Could it be when the magnitude of the disemployment effect exceeds measurement uncertainty?

I cannot disagree with the exact wording of Krugman's claim even though I wholly disagree with the impression of the state of scientific knowledge that he intends to leave the vast majority of his readers. It is probably true that very small increases in the minimum wage, very far from the median income, have only a small disemployment effect, and he accepts that as a strong possibility supported by the data. That's just not what most readers will take from the article.

I find reading Krugman's blog, let alone commenting on or critiquing it, a waste of time for this reason. He knows exactly what he is doing: telling a defined audience what it wants to hear in a way that is worded tightly enough to be defensible in court. The people who are taken in by this don't read EconLog or other sites that take a lot of interest in rebutting Krugman.

Shayne Cook writes:

Scott, I think you are being far too gracious when referring to the people that (the current) Krugman and folks like him appeal to as "intellectuals".

Scott Sumner writes:

Kenneth, That's the impression I get.

JV and Mark, Good points.

Roger, Excellent, worth a post.

Michael, Interesting quote.

Unlearning, You said:

"You don't 'explain' it to them. You explain your theory to them, a theory which implies these things. Big difference."

Whenever someone explains a concept they are explaining a theoretical explanation of the concept. If explain why an apple falls to earth after being dropped I'm explaining a theory. So your comment is a distinction without a difference.

I use the term "explain" because these noneconomists (who you seem to think so highly of) have never even heard of the economic theory that predicts that higher minimum wages cause unemployment. They are startled to hear that such a theory exists. Yeah, I'd say "explain" is the right term.

You said:

"Non economists tend to disagree with economists - that doesn't mean the former are right."

I agree. So what's the point?

Mico, You said:

"What is a moderate increase, or at what point does an increase become immoderate? Could it be when the magnitude of the disemployment effect exceeds measurement uncertainty?"

Good point. The minimum wage was just boosted by 40% during a period of low inflation. The Obama administration is calling for another huge increase. That would not be "moderate."

Floccina writes:

If you abandon economics as an explanation of the wealth of nations, what do you end up with?

Brian Donohue writes:

I think the key to understanding Krugman is understanding how he views himself.

He views himself as today's Friedman.

Friedman was of course an accomplished economist, but, more importantly, he was a brilliant communicator and popularizer of ideas.

Here's Krugman's view of Friedman's groundbreaking interpretation of the Great Depression "And over time Friedman’s presentation of the story grew cruder, not subtler, and eventually began to seem—there’s no other way to say this—intellectually dishonest." (I disagree, but that's not the point.)

Krugman has basically said over the past several years that it's a war out there, and all's fair.

He is embracing intellectual dishonesty in the hopes of attaining Friedman's rank as a public intellectual. Unfortunately, he's no Friedman. It's all right here:

http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/

AbsoluteZero writes:

Scott,
The link to the Econ Journal Watch paper is a local link.

ChrisA writes:

@Kenneth Duda - way up thread.

Finally we have a definition of unconventional monetary policy;

http://www.smbc-comics.com/comics/1425998222-20150310.png

Scott Sumners writes:

Floccina, Good question.

Brian, Interesting observation, but I doubt he sees himself as being intentionally dishonest.

Thanks Absolutezero, I'll fix it.

ChrisA, A solution to low velocity.

How I see it:

Minimum wage and rent control only hurt some of the people at the bottom of the scale.

Strike those and there are more unhoused and there's a race to the bottom in terms of wages. Maybe inflation (what there is of it) already caught up with the bottom, looking at WalMart's recent moves.

Sure there's unemployment, but make that less traumatic through some sort of state intervention, and then wage floors make sense in a way.

Absent the wage floor, could anyone what the market clearing price for labor would be?

Paul O'Cuana writes:

Krugman as the new Friedman? I think not. For one thing Friedman was quite wrong about the efficacy of standard monetary policy post financial crisis. (And please don't make me scold you a la Keynes "in the long run we're all dead".)
No, I think Krugman is the new Krugman. Economics that serves the greatest number of people with the least amount of suffering.
By the way, how long do you think the Western world can go without spending on infrastructure?

Angus writes:

Summing up: basic economic theory says that minimum wage hikes reduce employment; but if we look at data on real-world minimum wage hikes, they don't support the theory.

1990s Krugman sided with theory, and 2015 Krugman sides with the data.

So... am I going insane here, or does 2015 Krugman make a lot more sense than 1990s Krugman? If data doesn't back up the theory, why on earth would you base policy decisions on the theory?

charlie writes:

I like the "changed his mind" distinction.

One good contrast would be Larry Summers--LS may be drifting to policy prescriptions that are further to the left, but he seems fairly chained to using conventional economic reasoning to get there.

Derp writes:

[Comment removed for supplying false email address. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Glen writes:

As others have noted, Paul Krugman has simply responded rationally to incentives.

Given his preexisting assets and liabilities, becoming “the favorite economist of intellectuals who hated economics” was the ideal way to maximize his status, power and wealth.

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