SYNOPSIS: Below is my (Bobby's) response to Ben Stein's open letter regarding Paul Krugman's March 12th tribute to James Tobin. Of course the following are my own opinions and do not represent those of Krugman, Kevin, or the Unofficial Site.
My opinion is that two of Ben Stein's arguments are sloppy enough to confuse the public while the third is so sloppy as to be ridiculous. My explanations are very oversimplified but I hope helpful in the debate.
First, Stein criticizes Krugman for saying that Milton Friedman's monetarism was "naive."
But Stein fails to distinguish between what I can only call the weak form of monetarism and the strict form. You will find Krugman discussing the the difference between the two in the second and third paragraphs of Getting Fiscal.
Few people today besides Larry Lindsey disagree with the weak form, which says that monetary and not fiscal policy is the first, quickest, and best line of defense against recessions. This is what laymen think of when you say "monetarism" and what Krugman has agreed with in past columns. Put another way, money supply fluctuations are most important in determining business cycle fluctuations, but Friedman took this idea too far.
In the Tobin column, Krugman was criticizing Friedman's strict form of monetarism. This more extreme form prescribes letting the money supply grow at a steady rate or according to some other rule that should be followed regardless of the business cycle. Supposedly this lets us have the smoothest growth pattern over time.
On the first, Friedman was right and on the second, the one Krugman criticizes, Friedman was wrong. Margaret Thatcher arguably tried to implement the strict form in Britain in the 1980s which had some disastrous consequences.
Further, Stein criticizes Krugman for saying, "with laissez-faire policies widely blamed for the Great Depression, it was hard to see how free-market economics could survive. John Maynard Keynes changed all that . . ." Stein retorts, "Just to start, you say the great depression was 'widely blamed' on laissez faire policies. By whom? It has been blamed on many things, but no serious scholar has blamed it on free market economics. In fact, just the opposite-many blame it on price fixing and restraint of trade encouraged by the New Deal. Your idea that there is or ever was any intellectual rigor in blaming the great depression on the free market is simply a non-starter, period."
But Stein's discussion of "intellectual rigor" is somewhat irrelevent, since intellectual rigor -- as any government economist will tell you -- has an apallingly low level of influence when policy decisions are actually made in the real world (read the "Washington" section of Krugman's Incidents from My Career or anything about Joseph Stiglitz's stints at the CEA and World Bank).
Krugman was saying correctly that anti-market policies would have occurred in a world without Keynes. And the New Deal policies that Stein mentions show that politicians were already in the process of abandoning free markets to a larger degree than is desirable. If you wonder what a world without Keynes looks like, just go to Europe. There the politicians "don't read Keynes" -- Franco Modigliani's words not mine -- and the ECB's officially stated goals are oriented towards inflation control and not decreasing unemployment (At A taped MIT conference at 49:56 and at 1:28:35 Modigliani supports these facts). In Europe, unemployment is persistently high, and you find far more anti-market laws than in the U.S. (And such laws of course exacerbate Europe's problems).
But my favorite part of Ben Stein's piece is this one: "It really is shocking that someone of your limited background in economics presumes to judge a great man like Tobin or in eulogizing him to so pervert his opinions and work…" I will refer Stein to Krugman's CV for this one. Apparently words like "New Trade Theory" and "Clark Medal" aren't familiar to Stein.
Aside from Stein's final inane argument, I think Stein is too intelligent not to have taken into account everything else I just said (he was Yale's valedictorian, a staff member for Nixon and is probably far more brilliant than 99% of the population). But, as you could probably tell, Stein is exploiting the lack of precision in language, the enforced brevity of Krugman's columns, and the public's ignorance of economics in order to grind a political axe and distort what Krugman actually said. Stein knew very well what Krugman meant in the Tobin article and wrote the open letter for the purpose of confusing the public.
Originally published by Bobby, 3.17.02