Paul Krugman’s One-Man War on Science
When David Card was recently awarded the Nobel Memorial Price in Economic Science (along with two other economists), I figured Paul Krugman would weight in, since Card, along with the late Alan Krueger, authored an economic study almost thirty years ago that allegedly debunked standard economic theory on the effects of a binding minimum wage. Krugman did not disappoint.
As is his M.O., Krugman cherry-picked his information and then went on to claim that the Card-Krueger studies, along with other studies that seemingly disprove how economic theories normally are applied, should “favor a policy move to the left,” at least when it comes to government policies. This is another way of saying that Krugman once again claimed that opportunity cost is irrelevant and probably wrong. No, he did not make that statement per se, but there is no other way to interpret his remarks. So, let us begin.
For many years, Krugman has argued that whenever economic theory and the wish lists of left-wing politicians and activists come into conflict, that economic theory simply is wrong and, if one is honest, probably evil. It gives Krugman one more reason to hate Austrian, who are a priori in their approach to economic analysis, but it also gives Austrians once again the opportunity to point out Krugman’s errors and outright fallacies.
The Nobel this year was awarded to economists who have engaged in what we call “empirical” economics, that is, they look at statistical analysis harvested from data they have collected in order to “test” economic hypotheses such as the Law of Demand. Krugman writes:
Economists generally can’t do controlled experiments — all we can do is observe. And the trouble with trying to draw conclusions from economic observations is that at any given time and place lots of things are happening.
Economist David Henderson—who clearly is not Krugman’s biggest supporter—writes something similar in The Wall Street Journal:
Why do natural experiments matter? One of the toughest problems in economic research is figuring out whether a relationship between two variables is causal or coincidental.
Austrian economists can point to the opening statement in his 1871 classic, Principles of Economics, which states: “All things are subject to the law of cause-and-effect.” When economists gather data, they often are trying to figure what is a cause and what is an effect and all too often they erroneously get the relationships backward. For example, I have read in some economics texts that inflation is the general increase of prices of goods and services when, in fact, price increases are the effect of inflation, which is the debasing of money when governments increase its supply.
Thus, understanding causality is important when engaging in economic analysis, especially when the economic analysis portends government policy initiatives. During the Great Depression, for example, both the Herbert Hoover and Franklin D. Roosevelt administrations believed that falling prices were the cause of business failures when, in fact, it was the recession that caused falling prices. (I should add tha
Article from Mises Wire