Economic with the truth

Paul Krugman's theories on the world markets have won him adoration in America. But, argues New Labour adviser Paul Thompson, above, they don't tell the whole story about recent economic crises The Accidental Theorist and Other Dispatches from the Dismal Science (Penguin #8.99) The Return of Depression Economics (Allen Lane #16.99) Paul Krugman Anyone who is being touted as combining the talent and writing ability of JM Keynes and JK Galbraith has a lot to live up to. Two new books of essays by the American economist Paul Krugman give British readers an opportunity to share in the adulation - or not, as the case may be.

For all the dust jacket praise, Krugman is not universally loved. In fact, as he makes clear on numerous occasions, hate mail from economists and other pundits is a frequent accompaniment to his voluminous output. He spends a lot of time attacking other purveyors of the "dismal science". In itself this is not unusual for academics, but Krugman goes for the jugular and makes the epithets personal.

He has two favourite targets. First, politicians and others who let their prejudices get in the way of the facts. Occasional sideswipes are taken at the left, notably an article praising the inevitability and progressive nature of cheap labour in developing countries. But, as you would expect in a US context, the targets are mostly right wing. Supply-side economics is taken apart - not simply for its obsession with low taxes, but for the inability or unwillingness of its adherents to explain the long boom under the different policies of the Clinton administration. His second enemy is academics who popularise, if not prostitute, their arguments to the point at which any connection to the complexity of the real world disappears. The peddlers of rhetoric about globalisation (dubbed 'globaloney'), down -sizing and techno- hype are amongst those lined up and shot down. A lot therefore rides on Krugman being able to avoid these sins. One thing is certain, he can write - popular without being populist, simple without being simplistic. Brilliant use is made of illustrative examples, though the recurrent use of the baby-sitting co-op began to suffer from diminishing returns. Short pieces demolishing conservative arguments on wealth distribution, and on how speculators rigged the word copper market, are superb examples of his craft. So all is well? Not quite. Good writing and being right are not the same thing. It is, as ever, easier to do critique than provide alternatives. Despite his claim to live entirely in the kingdom of facts (he even says that his favourite book is The Statistical Abstract of the United States), Krugman pushes a fairly specific and consistent line. He is a moderate Keynesian. That is, he has a firm belief that the fiscal levers that control demand, such as interest rates, are still the most appropriate means of economic policy. This approach is applied systematically - and with some success - to explain the recent economic crises in Latin America and Asia. The sequence is carefully set out and dissected, but the detailed description is less interesting than the punchline: bad things happen to good economies. His view is clearly at odds with conventional wisdom - that any economy in that kind of trouble is getting what it deserves, either because its financial structures were deficient or political institutions corrupt. There were things wrong with the political economies of, say, Brazil or Malaysia - but nowhere near enough to justify the terrible things that happened to them. The hapless administrations of most of these countries did exactly as the World Bank (in other words the US Treasury) told them. They deregulated their markets and they swallowed the nasty medicine to deal with the adverse consequences. Strangely this nasty medicine - meaning fiscal austerity measures and punitive interest rates - are exactly the opposite remedies that would be used to cure the ailing patient in the 'advanced' economies. The real object of treatment is, however, the financial markets; their confidence has to be 'restored' to health, at all costs. The New World Order is so devoted to the idea that markets set the rules that it cannot comprehend anything that might restrict its powers. Krugman comes to the reluctant conclusion that some controls on capital are necessary. This interpretation is supported by the fact that the main Asian economies that bucked the trend were China and Hong Kong. The former has controls on capital and its currency is not convertible. The latter had the muscle - and the nerve - to face down the speculators when they moved in on its currency. The Japanese sub-plot is a little more complicated. Krugman is dismissive of those who hyped Japan as a superior model of capitalism and competitiveness. Its long stagnation is therefore something of a comeuppance. But Krugman doesn't like 'structural' explanations for economic decline - that it might be 'inevitable' in any way. The Japanese problem didn't get serious until the speculative financial bubble burst, particularly in real estate, though it was exacerbated by the cosy, sometimes corrupt, relations between politics and business. Governments tried pretty much everything from the Keynesian cookbook to kick-start the economy, including cutting interest rates and boosting public spending. Nothing worked. The culprit, according to Krugman, is the "liquidity trap": a Japanese public that just won't spend its savings. His solution is again at odds with expected wisdom; a healthy dose of managed inflation. The state, in other words, should print quite a lot more money. Heard that one before? Through these explanations and solutions Krugman's view of the market emerges. It goes something like this. Markets are amoral, capricious and cruel. Left to themselves they will produce a number of social ills, including pollution and traffic chaos. They are, nevertheless, the least worst form of economic organisation we've got. The problem is that the operation of markets is not getting more efficient or effective - and the main culprit is financial deregulation. A new breed of "evil speculators'', notably the hedge funds of the kind run by George Soros, have created a financial doomsday machine with the biggest negative feedback loop in history. Markets, therefore, need rules and regulations. In a very real sense this is Keynes' message updated for the end of the century - free market capitalism needs to be saved from itself. This is fair enough. But it's not far enough. Krugman shows no interest in broader economic issues - for example, how markets are formed and shaped, and all those other aspects of what used to be known as 'industry policy'. Paradoxically the apparent strength of his argument with respect to Asia - no miracle, no crisis - is also its weakness. Krugman dismisses the idea that the 'benign' policies of government had anything to with economic success. Yet most other commentators would accept that, whatever the Asian weaknesses, the co-operation between major economic actors in these country - banks, workers, bosses, politicians - did contribute to their success. We would do well to remember this, in a British and Scottish context. While Gordon Brown has been ceding more powers to Eddie George, and perhaps in future to a European Central bank, Labour has long argued for an economic strategy that is based on a form of "supply-side socialism". In other words, one that invests in "human capital", skill development and lifelong learning. Many of those powers now rest with the Scottish parliament. While it would be foolish to believe that you can train your way to prosperity, there are still sources of competitive advantage in distinctive ways of organising financial, product and labour markets. Market rules, not market rule. Krugman's good - but he's not good enough. Paul Thompson is Editor of the New Labour journal Renewal, and teaches in Human Resource Management at Strathclyde University.

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