U.S. Growth May Hinge on Businesses

Update... Tigerhawk questions the Times' ability to predict the economy (based on its failure in 2005 to predict the economy).

Update 2... Here's another headline, this one from TheStreet.com, that competes with the Times both for sheer silliness and sheer class warfare:

Only the Rich Are Wealthy

Medical academics are saints -- devoted selflessly to patient care -- and corporate people are sinners, morally blinded by greed. But having worked in academic medicine for over 35 years and consulted for companies, this Manichean duality is inconsistent with my experience and a woeful distortion of reality. In a Sept. 8 article in the New England Journal of Medicine, I reported that no systematic evidence exists that corporate sponsorship of academic research contributes to misconduct, bias, public mistrust or poor research quality.

On the other hand, many academic colleagues working in my field of basic biological research (I study how your body cells crawl around, which has no obvious commercial value) would run over their grandmothers to claim priority for a discovery, impose their pet theory on the field, obtain a research grant, win an award or garner a promotion. It's the same in other scientific fields, and no wonder, because for relatively modest remuneration we compete for scarce resources and labor in obscurity to achieve small advances few understand or appreciate. We exercise our ambitions by publishing research papers in high-profile journals...

But unbeknownst to the media, the journals at the top got there because of herd behavior by researchers, not because they are better than lower-tier journals at vetting research quality. Here's why: Researchers submit their best work to the top journals, which can therefore afford to maintain their prestige by rejecting, not publishing, many high quality papers. That's brand creation -- not science. Most of their editorial effort goes into deciding which submitted papers are sufficiently newsworthy. Anonymous peer review by jealous competitors has its merits, but it has a tendency to select for fashionable if relatively unoriginal and inoffensive papers. Top medical journals compete for papers describing large clinical trials reporting small effects of treatments for diseases affecting many people, although these reports often do not substantively advance scientific knowledge, and many subsequently are invalidated.

Karlgaard makes the following sweeping and unsupported assertions:

"You'll also find most economists and professors in the zero-sum camp... Princeton economist Paul Krugman typifies the breed. He apparently can't conceive of a world that is both growing and getting better..."

(1) I have no data on economists' views on whether zero-sum characterizes the world, but I'll bet the vast majority do not adhere to the zero-sum view. Do you? What fraction of those you know do? Karlgaard doesn't even restrict his remark to academic economists, the subset most likely to have nutty views, but even if he had, I'm sure he would be wrong. Not a single economist I know personally (which is quite a few) holds such a view. So on my admittedly limited sample, the statistics are that the distribution of views has an atom at 0. A frequentist would conclude there are no economists at all with the views Karlgaard says most of them have.

(2) What evidence does he have the Krugman typifies the rest of us? That really is a low blow. Besides, Krugman ceased being an economist years ago.

(3) Krugman most certainly can conceive of a world that is both growing and getting better. He just thinks it is possible only if the Democrats are running things.

Your argument is no more convincing than Karlgaard's. I am skeptical of neo-Keynesian models, but they aren't zero-sum. The term zero-sum has a specific meaning, that anybody's gain is somebody else's loss. Neo-Keynesianism has nothing to do with that; it has to do with the mechanisms that cause short-term fluctuations in the macroeconomy.

Besides, even if your characterization of neo-Keynesianism were correct, you would still be way overstating things because neo-Keynesianism hardly constitutes a core belief of economists (and, by the way, not all textbooks emphasize it nowadays; see, for example, those by Barro or Williamson). Core beliefs include things like production possibility frontiers, gains from trade, Pareto optimality, net social benefit, the optimality of free-market pricing, the equivalence between competitive equilibria and social optimality, and so on. That's all positive-sum stuff. Karlgaard isn't merely painting with too broad a brush; he fundamentally doesn't know what he is talking about.

I won't argue with you about Krugman's inner psyche. You know a whole lot more about him than I do, and we seem to be in general agreement in any case.

I don't think it's fair for Seater to argue that "core beliefs" of economics consist only of the most basic and axiomatic models. That's just a quibble about what "core" means. When it comes to policy discussions (which is Karlgaard's subject), we are talking about beliefs that are well beyond simple axioms. Nor is it relevant that certain textbooks do not emphasize the kind of beliefs that I am talking about. The fact remains that most of them do, and most policy discussions in public fora do, too.

Update 2... More from Seater:

We aren't just quibbling about words. Lester Thurow wrote a book about 25 years ago called The Zero-Sum Society, which argued that all sorts of public policy issues were zero-sum games in the sense that I have used the term. The book was terrible, filled with sensationalist nonsense, mostly easily refuted by reference to theory or facts. There were grains of truth here and there, but it was widely rejected by economists. When Karlgaard says economists think in zero-sum terms, he implies they think like Thurow, which simply is not true. You say that Karlgaard meant something else. Well, he's supposed to be a skilled writer. If he meant something else, he should have said something else. What he did say was nonsense.

In your comments, you have shifted the ground completely from Karlgaard's use of the term zero-sum to a new discussion of whether or not economists are too wedded to their simple models. There is a problem, but you have overstated it. Lots of economists, even academic ones, try to go beyond the "simple" models (which often do a good job, by the way). You may find it ironic that the neo-Keynesians are motivated precisely by the desire to go beyond simple models. I think they have taken the wrong tack, but their motives sound like something you would applaud. There are lots of other academic economists trying to develop more realistic models. Airy theorizing is easy, but it's worthless. The trick is to make everything internally consistent and also to reflect reality. That's quite difficult. Progress typically is made one baby step at a time, using models that initially are ridiculously simple but gradually get more and more realistic as researchers figure out what is going on.

A lot of business economists have very good intuition for how the world works and can use that knowledge to make day-to-day practical decisions, but that's not the same thing as understanding what makes the economy work the way it does. The business guys take easy pot shots at academics toiling away on their formal models, noting that such models don't have much applicability in the "real world." In fact, ultimately they are wrong. For example, it was Black and Sholes' formal model that allowed them to crack the option pricing problem and provide the foundation for the active options market we have today. It also led to the development of real option theory, used by businesses all the time to make investment decisions (see, for example, Jonathan Mun's very practical book on the subject). It was Friedman's formal model that allowed him to figure out the connection between money growth and inflation, which ultimately led to the Fed learning how to conduct monetary policy, with the positive-sum result of making us all better off. In the end, it is the formal models that allow us to make major steps forward.

I really do get tired of business economists' undiscriminating ridicule of academics, whose work they frequently don't understand. Academics and non-academics have a lot to say to each other. Ignorant broadsides like Karlgaard's are not helpful.

Update 3... Reader Gordon Haave pulls no punches, implicitly making a distinction between what economists believe technically (which I think is what Seater is talking about), and what they say in the public forum (which I think is what Karlgaard was talking about):

John Seater writes: "The term zero-sum has a specific meaning, that anybody's gain is somebody else's loss."

And that is exactly the view that a huge plurality of economists have. Yes, they technically might recognize that economics is not a zero sum game, but by and large any time any economic issue is discussed, they immediately resort to the "who wins, who loses" framework of thinking.

Even when there is a situation where everybody wins, like when low taxes result in a strong economy, they resort to "well, the richer got richer faster than the poorer", and from that conclude that the richest (as a % of total wealth) gained and the poor lost. That is, they always find some way to frame it as a zero-sum game.

Update 4... from our long-lost friend James Crystal:

The definition of economics that I remember learning might contain the 'core' impetus to a zero-sum attitude that infects the entire faux scientific enterprise. It goes something like this -- "Having to do with the production, distribution and consumption of SCARCE resourses that have INFINITE uses" That is, economics recognizes that we live in a reality with real LIMITS when it comes to 'stuff', and even 'space' and 'time', but we humans have NO LIMITS to our DESIRE to use it.

My two cents: Karlgaard, you, Haave, and Crystal are correct. Karlgaard was talking about economic policy and public discourse, not technical academics. Though even much technical economics exhibits the zero-sum-like defects you say. Even the supposedly New Growth Theory (a la Romer) exhibits zero-sum thinking in some of its facets.

The whole budget process is precisely zero-sum. The energy debate is zero-sum. The China currency/trade debate is zero-sum. The Social Security debate is zero-sum. I wrote an article several years ago showing that Robert Rubin was actually a "negative-sum" economist. Come to think of it, our last four Treasury Secretaries have been mostly zero-sum. Summers and Snow are PhDs. Summer may have been the best of the bunch; isn't that depressing. Douglas Holtz-Eakin, supposedly a growth-oriented Republican, has been mostly a disappointment at CBO. I could go on.

Seater is far too defensive. We all know terrific major economists who "get it": Lucas, Prescott, Barro, etc. I have no doubt Seater is no zero-summer, but if most or even almost all economists really do understand how debilitating zero-sum thinking is, they should be far more vocal in public policy and general economic discussions. If Seater is right that such a large percentage of economists "get it," then he and his colleagues are doing a great job of keeping a secret of their enlightened economic views, and the conspiracy is even bigger than we thought!

Why do so many opinion makers promote the zero-sum view? I think that politicians, even the best and brightest, become zero-sum thinkers because they occupy a zero-sum world. Only one person can be President of this country; only 50 can be governors; only 100 can be senators. The most creative entrepreneur in the world can't change these parameters. Politicians live in a world in which one person's gain is another's loss.

You'll also find most economists and professors in the zero-sum camp. Perhaps the competition for a limited number of tenured faculty spots warps their views. Princeton economist Paul Krugman typifies the breed. He apparently can't conceive of a world that is both growing and getting better...

It's no surprise that the top business thinker of the last 50 years, the late Peter Drucker, operated outside of the university system. Drucker, who had escaped Germany in 1933, was no Pollyanna and no stranger to evil. But he saw that evil had its roots in a belief system of limits. The Nazis believed there was room on the planet for only one ideology and one race.

Compared with that norm, the rapid buildup of carbon dioxide now from a binge of burning forests, coal and oil lasting for centuries (and counting) is but a blip

In fact, the planet has nothing to worry about from global warming. A hot, steamy earth would be fine for most forms of life. Earth and its biological veneer are far more resilient than human societies, particularly those still mired in poverty...

The Mercedes was purchased by Kojo Annan in his father's name four days before the Hotel de Crillon meeting--and about two weeks before Cotecna won the U.N. contract. The use of the U.N. chief's diplomatic status qualified the car for a $6,541 discount on the purchase price and a $14,103 tax exemption when it was imported to his native Ghana. Mr. Volcker's investigators found a memo on the computer of Mr. Annan's personal assistant asking him to authorize a letter to Mercedes. "Sir, Kojo asked me to send the attached letter re: the car he is trying to purchase under your name. The company is requesting a letter be sent from the U.N. Kojo said it could be signed by anyone from your office. May I ask Lamin to sign it?" the assistant wrote.

Neither Kofi Annan, his aide Lamin Sise, nor his assistant, Wagaye Assebe, can recall what happened, and the original documents have disappeared--but somehow the Mercedes was purchased with the diplomatic discount anyway. Abdoulie Janneh, the U.N. official who arranged the tax exemption in Ghana was recently promoted to U.N. under-secretary-general, in charge of the Economic Commission for Africa.

Amid the clutter of unanswered questions, one query has the virtue of simplicity: Where is the car? I have been asking this for weeks at the U.N.'s daily briefing. It was this question that triggered Kofi Annan's outburst. He clearly wants me to shut up. I'm afraid, Mr. Secretary-General, that would be the wrong thing for me to do. Every schoolboy knows that.

I suspect that the average American has two competing images of George Bush. The first is of the leader who responded so vigorously to 9/11. Some average Americans might believe that the Iraqi aspect of his response was too vigorous, but the public was sufficiently satisfied with the overall vigor of Bush's post-9/11 response to re-elect him.

The second image is of a president perceived as slow off the mark this year when Hurricane Katrina hit. For many, that perception was strengthened by various false starts in 2005 with respect to domestic policy, such as pushing a doomed social security reform plan and nominating Harriet Miers.

By breaking and emphasizing the story of Bush's efforts to spy on terrorists, The New York Times and the liberal congressional Democrats have reinforced the first image of Bush just as it was beginning to fade from public consciousness.