Economists are supposed to be boring. And the reputation is justified.'' This is the opening shot of Paul Krugman's latest book, The Accidental Theorist.
Do not be fooled. The book is great fun. I read a few chapters every night in lieu of my beloved comic books and, without fail, I fell asleep with a large, smug grin across my face.
Krugman would have us believe that this is just a mere anthology of articles, some of them previously published, some unpublished or even censored by a politically correct editor. If you believe that, you also believe that the Philippicae were a collection of poems. Each article goes directly for the jugular vein of some poor amateur economist or politician or policy-maker with surgical precision, the like of which I had not had the opportunity to enjoy since reading Cicero at school.
Krugman defines himself as a mainstream economist. Indeed, he was proclaimed by The Economist as "the most celebrated economist of his generation''. The John Bates Clark medal he won in 1991 is an award given every two years to the best American economist under 40.
As a mainstream economist, he cannot endure those who take it upon themselves to educate the masses in economic and financial matters without having even so much as an undergraduate education in economics. At every instance, I felt a surge of empathy and at the same time a sense of shame. Empathy, since I am a trained economist; shame, because every so often I pick up a book or a pamphlet and get bedazzled by the infectious glamour of a very plausible economic theory or hypothesis and it takes me time to detach myself - whereas Krugman seems able to cut through the logical or statistical flaws like a knife through butter.
What is worse, I have also, from time to time, come up with a hare-brained idea of my own, like the time I was convinced that long-term interest rates were causally impacted by the rate of technological change. Luckily I had no time to expand on such an idea and no public to listen to it.
It appears that many others have had the time, the energy and the chutzpah to come up with even more hare-brained ideas and to find a public and a publisher. Krugman makes it his crusade to destroy their arguments by playing with his "menagerie of thought experiments'', which is what he claims economics is all about.
If you are not the sort of person who likes intellectual teasers, such as how to model an economy which produces only buns and hot-dogs, this book is not for you. If you like only pompous academic texts or equally pompous political pamphlets, move on. But if, on the other hand, you love Martin Gardiner's mathematical puzzles and on top of that are interested in economics and current affairs, this book is a must.
Let me give you a taste of Krugman the polemicist: "The appeal to the intellectually insecure is also more important than it might seem. Because economics touches so much of life, everyone wants to have an opinion. Yet the kind of economics covered in the textbooks is a technical subject that many people find hard to follow. How reassuring, then, to be told that it is all irrelevant - that all you really need to know are a few simple ideas!'' Arrogant? Maybe, but so very true!
Two most important points are made by the author. First, in "The lost fig leaf'', Krugman demonstrates just how limited are the options in managing the annual budget of a major developed country like the Unites States. He does not say it explicitly, but he points firmly to an almost forced convergence between the parties in government and opposition, which is what we are experiencing on both sides of the Atlantic in an ever-increasing way. The political debate is therefore confined to issues of style and "packaging'' and to economically peripheral or marginal themes.
The second point, made in "Jobs, jobs, jobs'', is that models cannot disregard the positive powers (with positive or negative effects) of the monetary authorities. Too many models overlook this primary factor and look foolish for it. He states the point in compelling terms: "If you want a simple model for predicting the unemployment rate in the US over the next few years, here it is: it will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God."
Along the way, there are entertaining intellectual challenges such as this one: "Want an easy way to eliminate the US trade deficit? Just declare New York City a separate 'entity', with its own balance of payments statistics. I can almost guarantee you that the trade deficit of the rest of the country - call it 'mainland America' - will disappear." Krugman uses this notion to demonstrate, by bringing Hong Kong into the picture, how fallacious the whole argument regarding the US-China trade imbalance really is.
His model of a baby-sitting co-operative society is used successfully to illustrate the role of monetary policy. Not very sophisticated? On the contrary, some of the most challenging counter-intuitive truths that I have come across here hit you in the face when you examine the most simple or the most paradoxical examples. The brief article, "Delusions of growth'', clarifies in a sensible way what entire books on the death of inflation have failed to make clear.
With only one major statement do I firmly disagree with Krugman. He says:
"Anyone who has watched the press pounce on a novice central banker naive enough to speak plainly realises why more experienced hands, however well-intentioned and clear-headed, prefer to cloak their actions in obscurantism and hypocrisy." I have had the privilege to meet personally and to listen often to the most celebrated central bankers of this generation: reserved and cautious they must be because their words move the markets; obscurantist and hypocritical they certainly are not.
But I agree with Krugman in believing that the Maastricht Treaty has imposed a strait-jacket on European policy. It was an excellent tool for forcing convergence, which the politicians of member countries would not have had the strength to carry through individually, but, like any tool, it serves its purpose for a given task and then gets blunted with every inappropriate use. After all, the ten commandments have lasted thousands of years but, by and large, that is only because people observed only those that suited them.
Rudi Bogni is chief executive for private banking and member of the group executive board, UBS, Basel.
The Accidental Theorist: And Other Dispatches from the Dismal Science
Author - Paul Krugman
ISBN - 0 393 04638 9
Publisher - Norton
Price - £16.95
Pages - 204