One of Paul Krugman’s favorite tactics is to assert that all he’s doing is channeling the time-honored lessons of Economics 101 — pre-empting dissent with the implication that any dissenter must be either an ignoramus or a radical. (Journalistic honesty compels me to acknowledge that I might have employed this rhetorical tactic once or twice myself over the years.)
It’s interesting, then, to take note of how very far his central arguments actually deviate from Economics 101. Here’s what he said last week on his blog:
Mulligan and others keep emphasizing examples of individual groups that have managed to gain jobs by cutting wages or offering other attractions to would-be employers. They then assert that these examples tell us what would be needed to expand overall employment.
The point, of course, is that all such arguments amount to committing the fallacy of composition…The essence of macroeconomics is understanding why such things are a fallacy, why what happens if one group does something is not at all what happens when everyone does it.
But you see, here’s the thing: According to the standard Economics 101 version of the sticky-wage Keynesian model, this is a case where what happens if one group does something is exactly the same as what happens when everyone does it. According to that model, as long as wages continue to fall, firms will continue to move along their labor demand curves until we reach full employment.
What Krugman presumably has in mind is not the Economics 101 model at all, but some variant of the Barro-Grossman model, which is a canonical source for the kind of conclusions he wants to draw. This is a model with an interesting history. On the one hand, it’s one of the most heavily cited (and presumably one of the most influential) papers in the history of economics. On the other hand, Robert Barro repudiated this paper — and abandoned this line of research — after cracks began to appear in its microfoundations. (Specifically, the paper assumes that people sign certain contracts which there are good reasons to believe that no denizen of Barro-Grossman-land would ever sign.)
Now disowned children are perfectly capable of going on to lead productive lives, and Barro-Grossman has continued to lead a fruitful life without Barro, spawning many variations that constitute a lively branch of modern macroeconomics. There are, however, other branches on that tree, and no one of them can claim to be uniquely rooted in the soil of Economics 101.
