What do you think— with how much, or how little, salt should we take things said by Paul Krugman (and other economists)? On the one hand, he seems to be smart and insightful; on the other hand, he seems to assume certain things (like the IMF model of development, Ricardo’s trade prescriptions, and the seesaw model of inflation and unemployment) as self-evidently true and right even though there are various reasons (some of them covered by you) to have doubts about them. So, where do you agree with him and where do you disagree with him, and why? And what do you think how economics, as a field, is likely to develop in the near future (keeping in mind that this might well be different from how you might think it should develop)?

—Raphael

I don’t think Krugman in particular supports the neoliberal IMF model.  He’s an unrepentant Keynesian, after all— at the moment, for instance, he’s advocating a huge stimulus plan and actually worried that Obama won’t make it big enough.  That’s the opposite approach to the ‘austerity programs’ that the IMF imposes on developing nations.  Similarly, I remember him advocating currency controls during the 1990s troubles in southeast Asia.

A layman should be cautious, but not over-cautious, when disagreeing with experts.  Mere ignorance isn’t very attractive, and to be sure where the experts are not is a sign of quackery.

Where we can criticize the economists is in the assumptions they make about the world, intended to be simplifying, and arguably distorting instead.  An obvious one (now questioned by many economists) is the rationality of economic actors.  In many areas people simply don’t behave with a cold-blooded eye to their financial advantage.  Sometimes they’re simply valuing things other than money (e.g. prestige or conformism or fair play); sometimes they’re just dumb (e.g. the persistence of racism, which shrinks the market and discards good workers).

Thinking about money and incentives can produce a healthy cynicism— I like Tim Harford’s The Undercover Economist for this.  Harford obviously spends too much time in coffeeshops, and he answers interesting questions like “Why do cafés cluster together?” and “Why are consumers willing to spend so much on coffee these days?”  On the other hand, there’s Joel Spolsky’s observation that incentives are counter-productive in management: you get more of what you measure, but rarely in a way that benefits the business.  The workers always learn to game the system, and more direly, their intrinsic motivation (doing a good job) is eroded by the extrinsic one (bonuses and incentives).  Economists helped produce highly inflated compensation for executives; in theory this was supposed to motivate them better, but with the failure of two major industries (investment banking and automobiles), it’s hard to see it as anything but dangerous looting.

Another issue, again recognized by good economists, is externalities.  The market doesn’t properly value non-production costs (e.g. pollution, or the despotism of oil-producing regimes) or long-term ones (e.g. mine cleanup or resource exhaustion or bubbles bursting).

The expert to really distrust is the one who never says “I don’t know.”  In retrospect, Greenspan’s air of authority, which so cowed even Democratic legislators, proved to cover an out-of-touch ideology more than any actual sagacity.

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