Crash Landings: Paul Krugman's Depression Economics | The Nation


Crash Landings: Paul Krugman's Depression Economics

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But macroeconomics as a profession often seems indifferent to the ways production innovations drive economies, at least compared with ambient financial conditions. You imagine macroeconomists advising farmers to concern themselves mainly with forecasting the weather. Krugman writes, for example, that one could not explain the yen's wild fluctuations during the past twenty-five years by "measurable changes" in Japan's fundamentals. But surely you cannot explain what made Japan so filthy rich in the late 1980s, and so susceptible to a ridiculously huge real estate boom (and a ridiculously strong yen), unless you consider its striking advantages in paternalistic, labor-intensive and quality-focused manufacturing in the 1970s and early '80s. What Harvard Business Review article in the 1980s did not begin with a bow to Japan's "competitiveness"?

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Bernard Avishai
Bernard Avishai lives in Jerusalem and New Hampshire. He is a visiting professor of government at Dartmouth and an...

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Then again, can you explain the yen's fall, or Japan's prolonged crisis despite massive infrastructure investments, if you don't see that, indeed, new process technologies governed by robotics and software advances seriously undercut those older advantages, boosting European but especially American entrepreneurship; that the very paternalism that made Japan's 1980s factories hum also made employees hard to fire and information-driven start-ups rare? What if somebody in the co-op had invented a robot to baby-sit? What if members could conduct negotiations, or auctions, directly through Facebook? "A thing not yet so well understood and recognised," Mill wrote, "is the economical value of the general diffusion of intelligence among the people."

Which brings me to the last point. What has allowed emerging markets like Thailand and China to grow incredibly fast, and thus accelerate major financial imbalances, is the same information platform that will inevitably shape and pace our recovery. Lehman Brothers collapsed, and we got into global panic at the speed of light. But this was because the same platform that allowed investment banks to dice up and bundle mortgage debt in the first place narrowcasted specialized reasons for panic to every segmented country and industry, pension fund and CFO. What venture capitalist in the world was not reading Sequoia Capital's gloomy presentation on retrenchment in tech markets the day after it was delivered in Silicon Valley?

But why cannot this same platform, which gives entrepreneurs unprecedented powers to inform themselves, speed review of their business plans, hire new talent and so forth, be counted on to get us out of recession, however deep, at unprecedented speed? Why should state buttresses to financial services and investments in the real economy not accelerate business formation? Should not Obama's new, sturdier regulations, as well as his tax policies, give priority to entrepreneurs? Indeed, what venture capitalist will not also know within twenty-four hours about Kleiner Perkins's next investment in, say, a battery company--and, within an hour, be telling a friend managing the medium-risk portfolio of a sovereign wealth fund in Qatar?

Think again about carmakers. A competitive auto group--Volkswagen Group, for example--amounts to a global, virtual design center, sharing talent and intellectual property across brand units: Audi, Skoda, etc. The boss's job is to bring down overhead and transaction costs, something like the mogul of an old-time Hollywood studio; the goal is to enable multiple experiments, for myriad tastes and geographies, so that a brand's niche products can break even when, say, only 50,000 vehicles have been sold. More than 60 percent of the cost of an automobile is in the "bonnet," the cab and electronics, not in the drivetrain; and most drivetrain components are increasingly computerized. So Volkswagen Group survives because its burgeoning information platform enables its brands to establish multiple hubs for sharing intellectual capital--hubs for deciding about aesthetic and performance features, of course (a Skoda Octavia is not an Audi TT, though both share the same chassis), but also, increasingly, for software refinements invited by suppliers. Usually, Audi's designers set performance specifications but get an ever expanding roster of suppliers to compete on designing technical specifications. BMW, Tapscott and Williams tell us in Wikinomics, manages its marketing and supplier relationships and maintains only critical in-house engineering expertise. A web of suppliers does the rest--even, in some cases, the final assembly.

The Return gives us little to think about along these lines. So read it on the train, and take Wikinomics or William Taylor and Polly LaBarre's Mavericks at Work to bed. Then again, when Krugman writes in his column about the auto industry, describing a cluster of networked suppliers any bailout is really meant to sustain, you get the idea Wikinomics and some other new economy books have been on his night table, too. He knows, clearly, that whatever the government does--in healthcare and education, too--it must take into account that hundreds of fast, smart companies growing bigger will be the key to recovery, not a few established giants getting a makeover.

What made the Great Depression great, after all, was the time it took big businesses to be jolted into high activity. But we do not do business with gold transfers, patent monopolies and shortwave anymore: big does not mean trusted, or controlling, or informed. We've heard Santayana's aphorism, and many have been condemned to repeat it. But there are things to learn also from the present. And we count on nobody more than Paul Krugman to teach us about that.

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