Economics: Not Nice, Not Fair, Not Pretty
Thursday 25 November 2010
by: Paul Krugman, Krugman & Co. | Op-Ed
People wait in a bread line near the Brooklyn Bridge in New York City during the Great Depression. (Photo: US Farm Security Administration)
Whenever I mention that World War II ended the Great Depression, I get a lot of mail accusing me of being a warmonger.
Allow me to make a point: Economics is not a morality play. It’s not a happy story in which virtue is rewarded and vice punished.
The market economy is a system for organizing activity — a pretty good system most of the time, though not always — but not according to any moral significance.
The rich don’t necessarily deserve their wealth, and the poor certainly don’t deserve their poverty.
Nonetheless, we accept this system’s considerable inequalities because systems without any inequality don’t work. (Before anyone says, “Aha! Krugman concedes the truth of supply-side economics!” — all I am saying is that there are limits.)
And when we’re struggling with depression economics, in which it is difficult to create sufficient demand and achieve full employment — mainly because short-term interest rates are up against the zero lower bound — the essentially amoral nature of economics becomes even more acute.
As I’ve said repeatedly, this is a situation in which virtue becomes vice and prudence becomes folly; to resolve it, what we need is for someone to spend more, even if the spending isn’t particularly wise.
When nations find themselves in this dilemma, conventional theories tend to prevail even when they should not.
In particular, public spending on the necessary scale never seems to get approved.
That’s why the British economist John Maynard Keynes in the 1930s facetiously proposed burying bottles full of cash in coal mines, so people could dig them up again. Since any proposal to spend money on things that were needed got shot down on grounds of prudence and efficiency (sound familiar?), he proposed completely pointless spending instead.
What ended up doing the trick in the 1930s (spending on the war effort) was actually destructive — a sort of cruel joke on the part of the gods of economics. It would have been better if the Depression had been ended through spending on useful things — on roads and railroads and schools and parks.
But the political consensus for spending on a sufficient scale never materialized; the world needed Hitler and Hirohito instead.
So what about the common assertion that the United States prospered after the Depression only because our competitors were in a state of ruin following the war?
First of all, trade was a minor factor in the American economy both before and immediately after the war, with imports and exports a much smaller share of gross domestic product than they are now. There was an increase in trade for a few years in the late 1940s due to the effects of the Marshall Plan, which allowed ruined economies to buy more from the United States — in effect, a form of fiscal stimulus — but it was temporary.
While it’s true that the war had largely destroyed our overseas competitors, it had also largely destroyed our overseas customers — because by and large these were the same thing.
In general, devastation is indeed bad for business.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2010 The New York Times.
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