Krugman Mangles Smith

by Gene Callahan

Here’s Paul Krugman, explaining the meaning of Adam Smith’s pin factory, and why it opposes Smith’s invisible hand metaphor:

“What may not be obvious is the way these two concepts [pin factory and invisible hand] stand in opposition to each other. The parable of the pin factory says that there are increasing returns to scale — the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So in a world of increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players.”

And, of course, this monopolistic competition wrecks the operation of the invisible hand, per Krugman. Continue reading

What Kind of Doctor Is This?

by Gene Callahan

Let’s say you are suffering from a moderately severe cold; you’re operating at, say, 90% of your peak energy level, and so you go the doctor to see if he can help get you back to 100%. After examining you, the doctor says:

“The point of our therapy is to approach the current malady in the spirit that we’ll do whatever it takes to turn things around; if what has been done so far isn’t enough, do more and do something different, until health starts to flow and the patient starts to recover.”

Wouldn’t you be inclined to sprint out the door? Continue reading

Lord Keynes: A Hayekian Appreciation

by Mario Rizzo


No, I haven’t gone crazy. John Maynard Keynes’s economics is not Austrian economics. He and Friedrich Hayek had serious disagreements over economic theory and policy.  I believe that Hayek was largely right in these disagreements. Nevertheless, Keynes was personally kind to Hayek. He found him a place to stay in Cambridge during the Nazi bombing of London. He also had some good things to say about Hayek’s controversial and, at the time, underappreciated book, The Road to Serfdom.


But, of course, this is not all. They shared a deep appreciation of the humanistic (for lack of a better word) aspect of economics. In effect, they looked at it as a “philosophical science” – a term that today might be considered a contradiction in terms. Continue reading

Inappropriate Stimulation


by Mario Rizzo


Paul Krugman continues to say on his blog that the fiscal stimulus was too small. After all, unemployment is rising quickly:


“[I]t’s rapidly becoming clear that yes, the plan was too small.”


Brad DeLong has also added his voice to the call for bigger stimulus, again largely because of the deteriorating employment picture. He also instructs those who disagree with him as to which objections to stimulus are reasonable. (The one I raise here is not included.)


However, Krugman and DeLong’s inferences are superficial. If we look more carefully at what is going on we see that macro stimulus is designed to hit precisely the wrong targets. The problem is not size but appropriateness. Continue reading

Orthogonal mindsets

by Sandy Ikeda

At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with Hayek versus Keynes in the 1930s, from his forthcoming book on the “clash of economic ideas” in the 20th century – that helped a non-macro-guy like me better understand, from a sociological perspective, why economists on different sides of the bailout/stimulus debate often just don’t seem to get each other. Continue reading

Paul Krugman Is Right About Differences

by Mario Rizzo


Paul Krugman is right. David Broader recently said that we need “the best ideas from both parties.” We could of course interpret this trivially. I too want the best ideas to predominate. But Krugman sees an important point 

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground. 

Continue reading