The article that led to debate on Krugman on this thread:
----------
November 9, 1998
Not Just Academic
Economist Paul Krugman has won a broad audience; sometimes, he's even right
By GENE EPSTEIN
Last year, when Morgan Stanley Dean Witter held its annual retreat in the Bahamas for its key institutional customers, one of the featured speakers was MIT economist Paul Krugman, an academic who was rapidly establishing a reputation as a major-league double threat: brilliant theorist and public intellectual. While his hosts knew that Krugman had contributed no grains of sand whatsoever to the great castle of efficient-market theory, and had written nothing else about investment issues, they still thought the conference attendees would enjoy a scintillating evening with him.
After all, the 44- (now 45-)year-old wunderkind, professor at a world-class institution and winner of the coveted John Bates Clark Medal for the best economist under 40, already had been spoken of as a candidate for a Nobel Prize, based on his paradigm-busting work on international trade theory. And with such influential essays as his 1994 Foreign Affairs piece, "The Myth of Asia's Miracle," with columns running simultaneously in Fortune and the online magazine Slate, with lucidly written books bearing catchy titles like Peddling Prosperity and The Age of Diminished Expectations --and with all of that, the inevitable five-figure lecture fees -- he was beginning to be viewed as the thinking man's John Kenneth Galbraith.
Morgan's representatives had suggested he discuss two topics on which he had written and lectured extensively: his doubts about the New Age Economy and his concerns about Asia.
Certainly, Krugman responded, but would it be all right if he also presented a theoretical model of the stock market? No, they answered emphatically, stick to your expertise -- and besides, these investors had seen more stock-market models than they knew what to do with.
But the headstrong academic presented the market model anyway, and when the attendees grew restive, with a few even walking out, matters rapidly went downhill. Suddenly embarrassed and tongue-tied, the veteran speaker proceeded to lose his audience altogether, lapsing into a halting discussion of the prearranged topics he was supposed to know so well. As planned, Krugman stayed on for the duration of the conference, but instead of being sought-after, he was politely regarded as one of those out-to-lunch stammerers from the ivory tower.
When he got home, the economist commemorated the experience with a column entitled "The Seven Habits of Highly Defective Investors," in Fortune's December 29, 1997, issue. While Krugman didn't mention the Morgan conference directly, he did speak of recently attending a "meeting of money managers" who "collectively ... control several hundred billion dollars"-and whom he regarded as "an extremely dangerous flock of financial sheep." (Their first defective habit was that they "think short-term" -- and "any economist will tell you that even a short-term investor should look at the long run.")
So there.
When I recently asked him about the incident, Krugman denied that the column had been written out of pique. Still, the short, stocky economist has more than once displayed a vengeful streak, as when he confessed in print that he was "pissed off" about a best-forgotten error that might or might not have been made by The New Yorker's economics writer, in an article that touched off a controversy yielding far more heat than light.
But, when harnessed to a worthy cause, Krugman's sharp-tongued feistiness can produce enlightenment, as well as pleasure. One of his high-water marks was the 1996 book, Pop Internationalism, which skewered another MIT economist, the best-selling author Lester Thurow, together with then-Labor Secretary Robert Reich, for promoting the silly and dangerous idea that international trade is some kind of zero-sum game.
Malaysia apparently listened to him. Will Japan do so, too?
His articles and columns are often must-reading for anyone yearning to understand the domestic and global economy. Check out his delightful excoriation of the French in an article called "Unmitigated Gauls: Liberte, Egalite, Inanite," or read "In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All," a sensitive, insightful defense of the notorious employment practices of multinationals. His influence lately has been soaring; a recent piece of his apparently helped motivate Malaysia to impose currency controls.
(Computer users can find virtually all of Krugman's good writing on the Web for free -- web.mit.edu -- and many of his best articles are in his 1998 book, The Accidental Theorist.)
A couple of weeks ago, when I visited Krugman in his office at MIT in Cambridge, Massachusetts, the economist was hunched over his word-processor, but paused to greet me cordially, then begged a few minutes to finish his work. His walls were lined with books from floor to ceiling, and other books and papers were spread out on his desk and floor. It was every inch the busy academic's nest.
An undergraduate economics major at Yale, then an economics doctoral student at MIT, a former staff member with the Council of Economic Advisers under President Reagan and now the Ford International Professor of Economics at the institution that trained him, Krugman struck me at the end of the day as not quite any of these things. Rather, he seemed more the Long Island high school student he once was-the Smartest Kid in the Class, accustomed to getting attention for wit and insight.
I did have some conceptual bones to pick with him, and over the course of the afternoon he responded with good humor and even at times gave a little ground -- such as on his long-held opinion about the speed limits on economic growth. But on one point, he stone-walled.
I objected to his having written that, before John Maynard Keynes came along, the world's understanding of recessions was "in a state of arrested development." Wasn't he familiar with the Austrian theory of business cycles, as set forth by Ludwig von Mises, Friederich Hayek and their American disciple, Murray Rothbard? He allowed that he wasn't, implying that such ideas were off his radar screen, since they couldn't be expressed mathematically.
In fact, however, the Austrians wrote brilliantly about the supply-side, and what they had to say is quite relevant to an understanding of the global slow-down.
Take Krugman's creative Keynesian-style solution for curing Japan's ills. He proposes that the central bank flood the system with money, to induce inflation. Then, the rate of price rise will exceed the cost of credit, bringing the much-needed magic of negative real interest rates (a condition in evidence last week, when investors in Japan were paying prices for six-month Japanese treasury bills that ensured negative yields). And when the price of funds gets into minus territory, both business and consumer will be induced to borrow again.
That's a demand-side approach with a lot to say for itself, but it ignores supply-side problems. For example, High Frequency Economics chief economist and Japan-watcher Carl Weinberg says he welcomes Krugman's proposal, but speaking as a "practitioner" -- meaning that he sees things that academics don't -- he believes that certain steps must be taken before such concepts can take effect. First, he says, deal with the problems of the banking system and its gargantuan burden of non-performing loans, lest the monetary expansion be for naught.
Or as this particular practitioner puts it: "Professor Krugman wants to put more gas in the tank, and he's quite right. But not before you repair the motor."
Just before I left him, my host told me he was working on that big financial enchilada, an undergraduate economics textbook, and he cited some of the major inadequacies of the currently available fare. He also added that he had high hopes of making his million from the venture. It would be yet another A+ for him before that Nobel comes along. Given his skills, reputation and brilliance, odds are that he'll eventually bring off both.
|
