Tag Archives: paul krugman

Economists: Incredibly Stupid for Smart People

The New Yorker recently (I am perpetually 4-6 weeks behind in my New Yorker, so I consider the March 1 issue to be recent) profiled Paul Krugman, the Nobel Prize winning economist and NY Times columnist. A section of this article made me realize that economists, despite being generally very smart and well-educated, are just incredibly stupid. And I say this as someone who was an econ major in college and very seriously considered going on for a Ph.D.

Krugman was exploring why there were geographic specialties in business: carpets produced in Georgia, cars in Detroit, technology in Silicon Valley, etc. This was an outgrowth of his work on international trade, for which he won the Nobel. He saw that once a company started in a place, an entire ecosystem built up in that place. Trained workers, relevant support businesses (eg. lawyers), and transportation infrastructure – all this tended to create an economy of scale which drew similar businesses to the area.

To this you undoubtedly say, as I did, “duh.” That theory just describes common sense. Which Krugman admits: he explained this idea to a non-economist friend “who replied in some dismay, ‘Isn’t that pretty obvious?’ And of course it is.” But Krugman was the first to mathematically model this common sense phenomenon. Before that, “because it had not been well modeled, the idea had been disregarded by economists.”

So just to be clear: even if a phenomenon is so obvious that my 16-year old nephew could figure it out, mainstream economists, all with Ph.D.s from Ivy League schools, choose to ignore it because a model for it doesn’t exist. No wonder the country just went through a financial crisis. We all knew there was a housing bubble. It was obvious to me and everyone I talked to that Starbucks baristas and migrant farm workers and cocktail waitresses can’t afford $750,000 homes. But the economists at Treasury and the Fed who were supposed to be watching this? Their models didn’t incorporate these sorts of housing hijinks, and so they ignored the gathering storm.

Economists: smart enough to understand Bayesian math, but too stupid to realize that meth heads can’t afford houses.

Krugman on $100 Million Bonuses

Just a quick link to Paul Krugman’s column on Andrew Hall’s $100 million bonus, about which I wrote the other day. Krugman focuses more on the downside of financial speculation than on the economic factors I discussed, but he is a Nobel prize winner, so linking to him is generally a good thing.