Paul Krugman: Depression Economics

Paul Krugman, currently Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times, commented on the unfavorable events of 2008 with his book:

Krugman, Paul (2009) The Return of Depression Economics and the Crisis of 2008, (New York, NY, W. W. Norton & Company)

Early in the book Krugman states his intention to explain what went wrong; he would address not so much what happened but why it happened. But to explain scientifically what went wrong requires a theory, a scientific explanation of the normative behavior of the economy. The theory would be a general theory universally applicable to all equilibrated and disequilibrated configurations of aggregate functional flows in the economic process. And since the economic process is a dynamic process, with flows of money and products per period of time, the theory must be a theory of economic dynamics. Professor Krugman does not appear to have reached such a general theory which explains all situations as either meeting the norms of the theory or diverging from the norms so as to require systematic correction. Consequently, rather than educating the populace regarding the functional norms of dynamic equilibria in an intrinsically-cyclical process, and rather than provide precepts for different possible current states of the economic process, he can only confuse effect and cause and – as though they were mysteries rather than explained by adequate theory of disequilibria at an adequate level of abstraction – cite statistics of inadequate demand, excess credit etc.

Now as the statistical approach differs from the descriptive, the analytic differs from both. Out of endless classificatory possibilities it selects not the one sanctioned by ordinary speech nor again the one sanctioned by facility of measurement but the one that most rapidly yields terms which can be defined by the functional interrelations in which they stand. CWL 21, 112

Professor Krugman and other academic economists fail to take clues from science and from a scientific heuristic exemplified by, for example, of Newton’s discovery of a coherent set of relations – laws of motion and definition of mass – which provided a deeper unity and an adequately general theory which a) explained the incidental Kepler’s laws of planetary motion and Galileo’s law of inverse time squared, b) was the basis of a superstructure of relations, and c) had general explanatory applicability to all motions of planets, projectiles, pendula, coiled springs, and falling apples. Krugman and other economists require a Leibnitz-Newtonian shift of context.[1]

Krugman attributes depression to inadequate demand; however depression is not caused by inadequate demand, rather it is constituted by inadequate demand. And, from a scientific, dynamic point of view, inadequate demand is explained as the correlative of inadequate outlays constituting the failure to implement the egalitarian distribution of incomes systematically required by the implementation of the basic expansion.[2] Criticism, such as Professor Krugman’s, requires a sound basis, a set of coherent relations constituting a verifiable theory. It requires a framework of interrelated and mutually defining flows a) constituting the overall scheme of Gross National Flows, and b) explaining the equilibrium or disequilibrium of the current configuration of flows in the objective economic process.

To cite an analogy from the motions of automobiles: The laws of the mechanism called the automobile are prior to and more fundamental than a mere recap of the driver driving the automobile into a ditch. Similarly, the laws of the macroeconomic mechanism are prior to and more fundamentl than a recap of the driving of the economy into a slump or depression. There is required a functional macroeconomic theory of the overall functioning called the economic process. This theory is independent of the human psychology of the economy’s drivers.

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems. Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. CWL 21,42- 43

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. CWL 21, 56

The scientific economist must advance beyond the statistical to the analytic and explanatory.

Now as the statistical approach differs from the descriptive, the analytic differs from both. Out of endless classificatory possibilities it selects not the one sanctioned by ordinary speech nor again the one sanctioned by facility of measurement but the one that most rapidly yields terms which can be defined by the functional interrelations in which they stand. CWL 21, 112

See on this website Lonergan’s Goal.

See on this website in Key Notions: Functions; Scientific Explanation; Postulating vs. Explaining in Macroeconomics

 

[1] (In doing macroeconomic dynamics,) taking into account past and (expected) future values does not constitute the creative key transition to dynamics. Those familiar with elementary statics and dynamics (in physical mechanics) will appreciate the shift in thinking involved in passing from equilibrium analysis (of a suspended weight or a steel bridge)…to an analysis where attention is focused on second-order differential equations, on d2θ/dt2, d2x/dt2, d2y/dt2, on a range of related forces, central, friction, whatever. Particular boundary conditions, “past and future values” are relatively insignificant for the analysis. What is significant is the Leibnitz-Newtonian shift of context. McShane, Philip, Lonergan’s Challenge to the University and the Economy, p. 127

 

[2] For the meaning of “basic expansion,” See herein: Why and How the Basic Expansion Fails to be Implemented

 

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