Thursday, July 19, 2012

How Bob Murphy is too easy on Krugman, graphically

Maybe this helps too:

I say "at least a little closer", because as I alluded to before we'd really need some factor markets.

Bob's is an improvement on Krugman's. He's got the changes in the marginal products right. But Krugman is still wrong on the total income point.

Negative supply shocks reduce total income. Who the hell cares that income equals expenditure? It's an aggregate supply shock!!!


  1. Keep going. You'll discover the Envelope Theorem eventually.

    1. To defend my honor a little, right, I agree. But that amounts to much the same thing I suggested, and still bypasses what I think is the more important point. It amounts to much the same thing in that it derives factor demand and takes into account substitution on the part of the producer.

      I think it's more intuitive, though, to think about the fact that what Krugman is actually talking about is an impact on factor supply. I think it's more straightforward to say that to some readers than subsuming that and using the envelope theorem to talk about how the firm responds. Because the envelope theorem would assume perfectly elastic factor supply at that price, would not? The way the problem is set up by Krugman, that's probably not an assumption we're interested in.

      That having been said, I think your raise an interesting point that may contradict my next post, which suggests that marginal analysis really isn't the right tool to think about these questions. After a nice envelope theorem refresher, I think perhaps it's a better tool for that question than I gave it credit for.

  2. To put this into perspective, Krugman is surely joking with this stuff. 3 reasons why I say that:
    1) He's assuming constant returns to scale, since with increasing returns marginal productivity theory breaks down. Since he made his name modelling increasing returns it's safe to assume he doesn't think CRS accurately describes the world.
    2) He's assuming that the hefty earnings of the Masters of the Universe accurately reflect their marginal productivity. From the way he disparages them in other contexts he obviously doesn't believe that for a moment.
    3) He knows damn well that the people who berate him in his comment section don't subscribe to any folderol marginalist calculus. They see a world of Galtian supermen whose contribution to society far outweighs their earnings; without them the looters and moochers would be eating each other to survive. So he's not trying to convince these Randroids, he's just winding them up.

    1. Randroids.... I'll have to remember that one.

      I'm not quite so sure he's kidding, but I could be wrong. Is and ought can blur for him when it gets into super-rich/class warfare stuff. I don't think his analysis is ideological in the way a lot of people he can accuse him of. I just think he writes political opinion posts and economic analysis posts, and sometimes he slips "it's just elementary economics!!" kinds of phrases in his political opinion posts when he shouldn't.

      Sometimes we just have to say "taxes on these people will reduce labor effort, but it's still the right thing to do because of X, Y, and Z".

      Thanks for the thoughts Kevin!

  3. Daniel, of course total output goes down; that's why Krugman said GDP goes down by $x million. But total output *among the rest of the population* stays the same as their total income before the supply shock.

    If it didn't, then it must not be the case that the factor owner got paid his marginal product for that last unit of effort, after all.

    I will do another post on this, with actual numbers, like K initially equals 1m and then it goes down to 999,999. Krugman's point will be approximately true (not exactly, because a change of 1 is not infinitesimally small).

    1. Yeesh - I might have read Krugman's point to be a lot stronger than I should have. Don't do a numerical example on my account if my reading comprehension is the only thing here that's messed up...

    2. OK I won't link to this post then, since you seem to realize now that Krugman wasn't relying on a tautology (instead he was incorrectly applying the assumption of a competitive factor market). But I still need to do another post, because people are all screwed up in the comments at my blog.


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