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Economics Articles by Paul Krugman

Economics Articles by Paul Krugman

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Published by Rike Nueva Villa
Several articles by Paul Krugman before the Nobel, put together from various sites.
Several articles by Paul Krugman before the Nobel, put together from various sites.

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Published by: Rike Nueva Villa on Oct 24, 2010
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Economics Articlesby Paul Krugman
There is something about macro***
The world’s smallest macroeconomic model**
The rise and fall of development economics**
Is capitalism too productive?**
Capitalism’s mysterious triumph*
Soft microeconomics: The squishy case againstyou-know-who**
In praise of cheap labor**
The spiral of inequality***
Economic culture wars**
Ricardo’s difficult idea***
What economists can learn from evolutionarytheorists**
What should trade negotiators negotiate about: Areview essay*
Requiem for the New Economy: Millennialoptimism confronts reality*
 
Paul Krugman’s Articles 
 2
There is something about Macro
Paul Krugman
It's holiday season, and my thoughts have turned to ... course preparation. Classes don't begin until February, butbooks must be ordered, reading packets must receive copyright clearance and go to Graphic Arts, and backgroundnotes must be prepared.This spring I have a new assignment: to teach Macroeconomics I for graduate students. Ordinarily this course istaught by someone who specializes in macroeconomics; and whatever topics my popular writings may cover, myprofessional specialties are international trade and finance, not general macroeconomic theory. However, MIT has atemporary staffing problem, which is itself revealing of the current state of macro, and I have been called in to fillthe gap.Here's the problem: Macro I (that's 14.451 in MIT lingo) is a quarter course, which is supposed to cover the"workhorse" models of the field - the standard approaches that everyone is supposed to know, the models thatunderlie discussion at, say, the Fed, Treasury, and the IMF. In particular, it is supposed to provide an overview of such items as the IS-LM model of monetary and fiscal policy, the AS-AD approach to short-run versus long-runanalysis, and so on. By the standards of modern macro theory, this is crude and simplistic stuff, so you might think that any trained macroeconomist could teach it. But it turns out that that isn't true.You see, younger macroeconomists - say, those under 40 or so - by and large
don't know this stuff 
. Their teachersregarded such constructs as the IS-LM model as too ad hoc, too simplistic, even to be worth teaching - after all, theycould not serve as the basis for a dissertation. Now our younger macro people are certainly very smart, and couldlearn the material in order to teach it - but they would find it strange, even repugnant. So in order to teach this courseMIT has relied, for as long as I can remember, on economists who learned old-fashioned macro before it came to beregarded with contempt. For a variety of reasons, however, we can't turn to the usual suspects this year: Stan Fischerhas left to run the world, Rudi Dornbusch is otherwise occupied, Olivier Blanchard is department head, RicardoCaballero - who is a bit young for the role, but can swallow his distaste if necessary - is on leave. All of whichleaves me.Now you might say, if this stuff is so out of fashion, shouldn't it be dropped from the curriculum? But the funnything is that while old-fashioned macro has increasingly been pushed out of graduate programs - it takes up only afew pages in either the Blanchard-Fischer or Romer textbooks that I am assigning, and none at all in many othertracts - out there in the real world it continues to be the main basis for serious discussion. After 25 years of rationalexpectations, equilibrium business cycles, growth and new growth, and so on, when the talk turns to Greenspan'snext move, or the prospects for EMU, or the risks to the Brazilian rescue plan, it is always informed - explicitly orimplicitly - by something not too different from the old-fashioned macro that I am supposed to teach in February.Why does the old-fashioned stuff persist in this way? I don't think the answer is intellectual conservatism.Economists, in fact, are in general neophiles, always looking for something radical and different. Anyway, I haveseen over and over again how young economists, trained to regard IS-LM and all that with contempt if they evenknow what it is, find themselves turning to it after a few years in Washington or New York. There's something aboutprimeval macro that pulls us back to it; if Hicks hadn't invented IS-LM in 1937, we would end up inventing it allover again.But what is it that makes old-fashioned macro so compelling? To answer that question, I find it helpful to think about where it came from in the first place.
 
Paul Krugman’s Articles 
 3
Afficionados know that much of what we now think of as Keynesian economics actually comes from John Hicks,whose 1937 article "Mr. Keynes and the classics" introduced the IS-LM model, a concise statement of an argumentthat may or may not have been what Keynes meant to say, but has certainly ended up defining what the world
thinks
he said. But how did Hicks come up with that concise statement? To answer that question we need only look at thebook he himself was writing at the time,
Value and Capital
, which has in a low-key way been as influential asKeynes'
General Theory
.
Value and Capital
may be thought of as an extended answer to the question, "How do we think coherently about the
interrelationships
among markets - about the impact of the price of hogs on that of corn and vice versa? How doesthe whole system fit together?" Economists had long understood how to think about a single market in isolation -that's what supply-and-demand is all about. And in some areas - notably international trade - they had thoughtthrough how things fitted together in an economy producing two goods. But what about economies with three ormore goods, where some pairs of goods might be substitutes, others complements, and so on?This is not the place to go at length into the way that Hicks (and others working at the same time) put the story of "general equilibrium" together. But to understand where IS-LM came from - and why it continues to reappear - ithelps to think about the simplest case in which something more than supply and demand curves becomes necessary:a three good economy. Let us simply call the goods X, Y, and Z - and let Z be the "numeraire", the good in terms of which prices are measured.Now equilibrium in a three-good model can be represented by drawing curves that indicate combinations of pricesfor which each of the three markets is in equilibrium. Thus inFigure 1the prices of X and Y, both in terms of Z, areshown on the axes. The line labeled X shows price combinations for which demand and supply of X are equal;similarly with Y and Z. Although there are three curves, Walras' Law (if all markets but one are in equilibrium, thatmarket is in equilibrium too) tells us that they have a common intersection, which defines equilibrium prices for theeconomy as a whole. The slopes of the curves are drawn on the assumption that "own-price" effects are negative,cross-price effects positive - thus an increase in the price of X increases demand for Y, driving the price of Y up,and vice versa; it is also, of course, possible to introduce complementarity into such a framework, which was one of its main points.This diagram is simply standard, uncontroversial microeconomics. What does it have to do with macro?Well, suppose you wanted a first-pass framework for thinking coherently about macro-type issues, such as theinterest rate and the price level. At minimum such a framework would require consideration of the supply and

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