Krugman wins Economics Nobel

Paul Krugman has been awarded the 2008 Nobel prize for economics[1]. The rules of the prize, honoured more in the breach than in the observance in economics, say that it is supposed to be given for a specific discovery, and Krugman is cited for his groundbreaking work in the economics of location done from the late 1970s to the early 1990s.

The reality, though, is that economics prizes are awarded for careers. Krugman’s early work put him on the list of likely Nobelists, but his career took an unusual turn around the time of the 2000 election campaign. While he has still been active in academic research, Krugman’s career for the last eight years or more has been dominated by his struggle (initially a very lonely one) against the lies of the Bush Administration, its supporters and enablers. Undoubtedly, the award of the prize in this of all years, reflects an appreciation of this work on behalf of truth in economics and politics more generally.[2]

The crew at Crooked Timber, of which I’m part, have a more parochial reason for cheering this outcome. Paul has generously agreed to take a part in a CT seminar on the work of Charles Stross, which should be published in the next month or so. Without giving too much away, there are some Nobel-related insights in his contribution.

fn1. Strictly speaking, the Bank of Sweden prize in Economic Sciences in honour of Alfred Nobel, or something like that.
fn2. Doubtless, Republicans will complain about being implicitly identified, yet again, as enemies of science and of truth. But they’ve made their bed and must lie in it (in both senses of the word).

86 thoughts on “Krugman wins Economics Nobel

  1. Ikonoclast, that’s just the same as Galilean relativity, i.e., the thing that was accepted well before Einstein’s special relativity, also known as Newtonian mechanics.

    In actual fact, special relativity was fairly well understood in the ten or twenty years prior to Einstein’s publication in 1905, and necessarily flowed from Maxwell’s work in 1873. Special relativity would have become main-stream with or without Einstein.

    Einstein’s major work was on gravity, i.e. general relativity, regardless of the fact that he’s popularly remembered for special relativity.

  2. I agree with SJ, I think. Feynmann has some pretty sharp things to say about the idea that you can derive Einstein’s physics from abstract philosophical reasoning about relative motion. Without empirical evidence like the Michelson-Morley experiment, it would have been impossible to get there.

  3. Damocles says “Unemployment is currently lower than the US in Sweden, Norway, Denmark, Austria; the Netherlands and the UK (not to mention Australia).”

    The only reason unemployment is lower in many of these countries is that far more long-term jobless people are on disability benefits and other payments.

    In the Scandinavian countries and the Netherlands, I believe around 8 or 9% of working-age people are on either disability or sickness benefits. In the US about 4% of working-age people are on disability.

    The unemployment rate is pretty meaningless, as there are all sorts of things that governments can do to reduce the number of people actually looking for work without creating one extra job.

    As for Australia, our unemployment rate only came down after many years of economic growth (not to mention the resources boom). Because Australia has a more regulated labour market, it takes more growth to get people into work.

  4. Ubiquity at 32, Krugman has also argued that America should follow the European example in creating more family-friendly policies in the workforce.

    Yet he ignores the obvious fact that the US is about the only developed nation to have birthrates above replacement levels, while the Europeans have all got birthrates well below replacement levels.

    If the European model is so much better, why is the European family disappearing faster? Indeed, we ought to look at what the Americans do better. One is that they have a tax system more favourable to family breadwinners.

  5. John hit the nail on the head @53.

    Maxwell threw a spanner into the works of the Galilei/Newton framework in 1873, which required one of two possible explanations, either an ether, or the bizarre Lorentz transformations.

    The Michelson-Morley experiments killed off the ether explanation, leaving only the Lorentz formulation on the table.

    Similarly, the Laffer curve postulates two possible tax rates where tax revenue is equal, but one where decreasing the tax rate decreases tax revenue and another where decreasing the tax rate increases tax revenue. The experimental evidence from Reagan and Bush II killed off the theory that decreasing tax rates increases tax revenue.

    Experimental evidence can’t be ignored. Bushies and glibertarians are a waste of time and space.

  6. Nick K, if birthrates are the measure of economic success, I guess Iran and Ceacescu’s Romania are the models, having achieved birthrates well above what would be expected given their level of development.

    On your other point, the US Employment/Population ratio is not remarkably high, particularly for males. US social and economic institutions do encourage/demand fairly high rates of female participation compared to other countries. With relatively high birthrates, as you note, and little support for childcare, this creates problems of its own.

  7. “Similarly, the Laffer curve postulates two possible tax rates where tax revenue is equal, but one where decreasing the tax rate decreases tax revenue and another where decreasing the tax rate increases tax revenue. The experimental evidence from Reagan and Bush II killed off the theory that decreasing tax rates increases tax revenue.”

    Huh? The central concept of the Laffer Curve is obviously sound, although when assumed to be smooth the curve itself is just plain nutty. The supply-siders of the early 80s overstretched (for example, the revenue-maximising rate may be higher than 80%, but you would never have heard that from them). The Reaganites hopelessly oversold the fiscal benefits of reducing marginal tax rates, when they should have focussed on the pro-growth effects (we got another dose of stupidity on this from the Bush administration, IIRC). In short, they walked straight into the statists’ trap.


  8. I have no idea what you’re talking about BBB, and I really don’t care what nuance you’re trying to add.

    As I said before, Bushies and glibertarians are a waste of time and space.

  9. Yes, I’m not surprised you don’t understand. That seems to be a central failing of yours. But to spell it out: your implication that the Laffer Curve postulates all tax cuts increase revenue is hopelessly wrong. It’s a standard canard; a shallow talking point of Teh Left. Now go back and read what I wrote, carefully mind you, over and over again, and you may begin to comprehend. I doubt it though.


  10. But the quote from SJ says exactly what you are saying, BBB – that a tax cut may decrease or increase revenue depending where you are on it. And the point JQ was making was that this idea was well known for ages, and the main contribution of Laffer and most of his fellow supply siders was, as you say, to argue that tax rates were above the maximum point on the curve (where further tax increases would decrease revenue). This was almost certainly done for political reasons, and without empirical evidence. So what are you arguing about?

    Laffer’s (or whoever’s) argument is still being (mis)used. Political parties over here in North America (I include Canada) do it all the time, with absolutely no empirical justification. Eg, I seem to recall John McCain has said “tax cuts always increase revenue.”

  11. Terje, giving the name “Laffer curve� to something well-known for centuries before is evidence of ignorance, not a basis for authority. I could call E=mc^2 the “Petersen equation� if you liked, but that wouldn’t make me an expert on physics.

    The issue was whether Mundell agreed with the supply side position on US taxation which he clearly did. You seem to be trying to change the topic.

  12. Sigh. Because it’s a generic argument for the possible existence of something like the Laffer curve, and says absolutely nothing about the position on the Laffer curve in his own day, let alone about today.

    In the quote Keynes is sufficiently clear. Specifically the quote includes the following words:-

    For to take the opposite view today

  13. And the point JQ was making was that this idea was well known for ages, and the main contribution of Laffer and most of his fellow supply siders was, as you say, to argue that tax rates were above the maximum point on the curve (where further tax increases would decrease revenue).

    The point was known for ages (in antiquity in fact) but I doubt it was well known. The main contribution of Laffer was to resurrect the concept at a time when people had lost sight of the fact that tax increases face diminishing returns (not to mention the cost to private sectory output). It was also nice of him to express the idea as a graph.

    We could rename it the Khaldun curve after Ibn Khaldun (1332-1406) but even those such as JQ that object to any contribution on the part of Art Laffer (or Robert Mundell or Jude Wanniski) still call it the Laffer curve.

    In any case the topic has digressed from my original point. Which was simply that if Krugman getting the Nobel prize is as much about his politics as his economics then we can infer the same for Mundell.

    I am no fan of Krugman or his politics in general. However neither am I a fan of George W Bush. So in so far as the former is one more voice chipping away at the deceit of the latter then hurray.

  14. Terry, that’s about the thousandth time you’ve quoted Keynes in support of the Laffer Curve. But what John says at #43 (and I’m sure I’ve told you before, myself) is exactly right. You seem deaf to the point. Have you actually read the essay?

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  16. Could someone elighten me: I thought the Laffer curve was a simplistic heuristic for people who could not think in more that two mathematical dimensions at once. It’s not something you can have a serious argument about, is it?

    If you really wanted to know the relationship between taxation and revenue – and the other variables – surely you’d want to use the “revolutionary” empirical method: go and look at the actual evidence out there. Ideology, theory, historical quotations from esteemed or reviled figures, and accumulated belief sets may aid the production of a subject feeling of certainty but if you’re really interested actually knowing what’s going on, aren’t you eventually going to have a look at the real world evidence?

    You’ll probably find the evidence on the taxation-revenue question is mixed and incomplete. This would seem to me to be grounds for admitting uncertainty – or even a badly posed question – rather than a good reason for reaching for a bit of ideology to prop up that feeling of certainty.

  17. Jim,

    The laffer curve is a concept and a proposition. Nations don’t have one single tax rate they have multiple rates that apply at different levels of government, that vary by income category and which apply to different things (income, goods and services land etc). Likewise revenue improvements may not all accumulate at one tier of government but may be collected at multiple tiers even though changes in tax policy may have occured at only one tier.

    Some people have tried to use total revenue as a ratio of GDP as some form of national tax rate proxy but this approach is deeply flawed. For instance if a nation had a simple two tier income tax with a 1% rate on income below 50k and a 100% rate above 50k then any reduction to the top tax rate would probably deliver more tax revenue due to added incentive but it would also probably increase tax revenue as a percentage of GDP. The proxy would register a tax hike even though the reality was a tax rate reduction.

    Further more the laffer curve illustrates steady state revenue for a given tax rate but the variation in outcome due to a change in the tax rate is the result of dynamic processes that yeild a benefit (or cost) over a protracted period of time. There is no next day effect on revenue because habits and behaviour and commitments don’t respond immediately to a shift in policy.

    As such all this leaves the empirical question and comparative analysis subject to considerable interpretation.


  18. Re #67: “I thought the Laffer curve was a simplistic heuristic for people who could not think in more that two mathematical dimensions at once.”

    I concur.

    “It’s not something you can have a serious argument about, is it?”

    No, it is not.

  19. #65

    James – If there is context that I have missed that casts the Keynes quote in a different light then I’d be happy to look at it. However on it’s own the quote seems to be very supply side in it’s language and it is a quote offered by Laffer himself. Whether Keynes saw the logic of tax cuts to raise revenue as being a demand effect or a supply effect doesn’t matter overly. However the latter seems more likely to me given the way the quote refers to incentives.

  20. From Wanniski’s article Terje linked to earlier:

    “The tax cuts passed this spring were correctly designed, reducing unnecessarily high tax rates on capital, which is why the stock market has been rising since mid-March when the first signs of the legislation taking shape began to appear.

    “…That combination led me to predict that as the lower tax rates would steadily increase the rate of economic growth over several fiscal years, the budget deficits would turn to surpluses.”

    I’m sure that the failure of the 2003 tax cuts to produce the predicted results is a demonstration that reality (and not supply-side economics) is at fault.

  21. John, if I may respond to Terjep by saying the general underlying theory of Keynesian economics is that governments use fiscal policies to stimulate demand and output during contractionary periods by increasing government spending and reducing tax rates thereby releasing more disposable income into the economy and vice versa. As for proponents of supply-side economics it failed to materialise during President Reagan’s era for government revenues fell sharply from levels that would have been realised without the tax cuts ((see Karl Case & Ray Fair, Principles of Economics (2007), p. 695)).

  22. JQ at 57, just a couple of things.

    I don’t really believe that birthrates are necessarily a reliable indicator of economic success (although they sometimes rise a bit during periods of economic boom).

    But low birthrates do cause various problems, such as producing declining numbers of working-age people supporting more elderly etc.

    Moreover, having a low birthrate is actually more of a problem in countries with high taxes and large social expenditures (particularly Western Europe). That is because as populations age taxes will have to further rise to meet these costs (pensions, health care etc.). There is a limit to how much the economy can cope with higher taxes.

  23. Paul Krugmans Zoned Zones is right up there and conveintly being ignored until the dam bursts and then some. Not so Dry after all.

  24. I found this interesting, can someone tell me if it’s true?

    That’s because, unlike the other Nobel prizes which were established by inventor and philanthropist Alfred Nobel, the “Nobelâ€? prize in economics was established (and funded) by the Sveriges Riksbank – the Swedish central bank.

    Not surprisingly, critics of central banking – such as the great Ludwig von Mises and his protege Murray Rothbard – were never tapped by the selection committee. In fact, in the nearly four decades since the first “Alfred Nobel Memorial Prize for Economicsâ€? in 1969, the Swedish central bank has only awarded its top honor to one critic of central banking – Austrian economist Friedrich von Hayek – and he had to share the 1974 award with a Swedish socialist.

  25. Is Hayek the only critic of central banking to win the prize? Friedman was a very moderate critic, as he didn’t want to switch to a gold standard, free banking or some of the more radical propositions by the Austrian economists (correct me if I’m wrong). So maybe he doesn’t count as a critic.

  26. A far more plausible explanation is that von Mises (who died in 1973) was regarded, by mainstream economists in general as being far less eminent than the economists who won the prize while he was in contention and that Rothbard is not taken seriously at all as an economist. To the extent that anyone pays attention to his work, it’s as a political philosopher.

    Similarly, the proportion of critics of central banking who have won the prize is not surprising given that this position is about as marginal as Marxism. I don’t think any Marxist/Marxian economists have won the prize, but I don’t attribute this to the fact that bankers don’t like Marxists.

  27. John, you’re probably right. Libertarian economists in general are in the minority, and Austrian economists (a more radical bunch) are even more marginal. That probably explains it.

    But then, one might argue that the Nobel Prize is merely picking the best of “mainstream” economics, and perhaps not truly the most innovative work. They have to play it safe by picking someone from the mainstream, to maintain the credibility of the award in the eyes of the economics profession (thus even Hayek was a risky choice).

  28. I was under the impression that Rothbard was taken seriously as an economist. Usually when people have a PhD in economics (as he did, from Columbia University), and publish widely in academic journals, that automatically qualifies them to be “taken seriously”.

    You shouldn’t take anything I say about economics seriously, as I’ve never taken economics at university. But Rothbard? Of course you should take him seriously.

  29. Assuming the Economic prize follows the same rules as the Nobels, Von mises was only eligible from 1969 until his death in 1973.

    Also, I’d always understood that while the Sveriges Bank sponsors the award, the bulk of the money for running it and the prizes themslves came from right-wing American sources – hence the early dominanceof the award by Chicago School members.

  30. On a parochial note, while Krugman’s prize is richly deserved, the scientific background on his work, published on the Nobel prize web site, contains references to papers by four Australian economists (5 if you count a New Zealander who has been here for decades).

    Two of them, Murray Kemp and Max Corden, are worthy contenders themselves for their work in international economics.

  31. A quick examination of Rothbard’s bibliography such that his scholarly publications consist of a smattering of reviews, two articles in American Economics Review and a handful of book chapters – unless you want to count “Libertarian forum” and “Free Man” as academic journals.

  32. Damocles, Snap! I just wrote this then saw yours

    Sukrit, I downloaded Rothbard’s bibliography from the Mises site

    and the suggestion that he published widely in academic journals is quite simply wrong. He wrote a couple of notes in the AER in 1951 and a handful in less high-powered places thereafter.

    The great majority of his (admittedly voluminous) output was in libertarian house journals, books by libertarian presses and the like.

  33. Based on what I have read of his work (admittedly limited to banking) Murry Rothbard is a loony. He arrives at some good conclusions (ie pro gold standard) via some very flawed reasoning. I think he is on balance bad for libertarianism.

  34. The last eight years in the US has been like a return to Reaganomics and the notorious ‘Laffer Curve’. It seems there’s no group more rich and powerful than the rich and powerful over there.

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