Category Archives: Professors

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. Continue reading

Steven Gjerstad and Vernon L. Smith: From Bubble to Depression

March 26, 2018

An article by Steven Gjerstad and Vernon L. Smith entitled “From Bubble to Depression?: Why the Housing Crash Ruined the Financial System but the Dot-com Crash Did Not,” appeared in The Wall Street Journal, of April 6, 2009.  The article cited key statistics which constituted the recent Great Recession. Even now some nine years later the article is worth rereading as substantiation of Functional Macroeconomic Dynamics. Also, that article is buttressed by a paper dated January 27, 2009 by Gjerstad entitled Housing Market Price Tier Movements in an Expansion and Collapse.

Gjerstand and Smith’s careful analysis of a) the statistics of mortgage-backed housing loans prior to the 1929 Crash and subsequent recession of the 1930’s, b) the downturn in the equities market between December, 1999 and September, 2002, and c) the Great Recession beginning in 2006 leads them to conclude that the major causes of all three crises were eroded lending standards and excessive credit, especially credit pre-1929 and pre-2006 for low price-tier housing.

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Walter Scheidel re Cataclysm as the Only Cure

Walter Scheidel, a historian at Stanford University, wrote an opinion piece entitled Only Cataclysm Can Cure Inequalityin the June 11, 2017 Boston Sunday Globe.  Professor Scheidel rails against distortions of the economic process but offers no scientific perspective explaining the distortions as violations of a normative theory of the economic process.  His perspective is largely political rather than scientific.  Similar to the condition for proof in mathematics, until a statement is grounded in verified theory, it may be true or false; it is verified theory alone that elevates opinions such as Professor Seidel’s to the rank of theorems.

In the absence of proof we may have strong evidence for our belief in a certain statement but we cannot state that it is true. … until a proof is provided (statements) remain only statements that may be true or false.  It is a proof alone that elevates them to the rank of theorems. [Bush and Obreanu 1965, 6]

In the long-term creative-destructive process, a capital-expansion phase is intrinsically anti-egalitarian; and the subsequent consumer-goods-expansion phase is intrinsically egalitarian.  Furthermore, in a properly managed economy, the phases will be characterized by surges and tail-off’s but with no systematic requirement for a slump, depression, or Scheidel’s cataclysm.  Thus, Professor Scheidel’s conclusion “only cataclysm” is false.  It is not true that the only cure is a cataclysm.

Enlightenment of higher-paid people as to the science of the normative functionings of the economic process would induce both massive philanthropic activity  and increases in the incomes of the lower-paid people in conformity with the normative requirements of the process.  This philanthropy would be an instance of enlightened government by the competent rather than wasteful bungling by an ignorant, self-interested government bureaucracy.  It would not have the negative connotations of plutocracy or oligarchy; rather, in combination with the provision of increased incomes to satisfy the possibilities of supply, this philanthropy would constitute the competent and effective partial management of the economy by knowledgable and talented, free people.

These free, enlightened philanthropists would constitute a fourth branch of government.  Their adaptation to the norms of the economic process to effect the social good would be an exercise of moral precepts based on the scientific understanding of the dynamics of the economic process by enlightened free persons.

The cure is not cataclysm; rather it is the achievement of an understanding of how the economy normatively functions, coupled with goodwill.  To dispel ignorance, a dynamic perspective and explanatory science are more effective than Professor Scheidel’s recitation of historical, but not determinate, facts.
Cf CWL 15, xxviii, xxxii-xxxv, xivi-xivii, 6

Again,

In the absence of proof we may have strong evidence for our belief in a certain statement but we cannot state that it is true. … until a proof is provided (statements) remain only statements that may be true or false.  It is a proof alone that elevates them to the rank of theorems. [Bush and Obreanu 1965, 6]

Also,

When suitable classes and rates of payment have been defined, it will be possible to show that under certain conditions of human inadaptation this pure cycle results in a trade cycle.  However, that implication is not absolute but conditioned, not something inevitable in any case but only something that follows when human adaptation is lacking.CWL 15, 35