Michael Hudson Responds to Paul Krugman

By Michael Hudson, Distinguished Visiting Professor, UMKC

I have recently republished my lecture notes on the history of theories of Trade Development and Foreign Debt. (Available from Amazon) In this book, I provide the basis for refuting Samuelson’s factor-price equalization theorem, IMF-World Bank austerity programs, and the purchasing-parity theory of exchange rates.

These ideas were lapses back from earlier analysis, whose pedigree I trace. In view of their regressive character, I think that the question that needs to be asked is how the discipline was untracked and trivialized from its classical flowering? How did it become marginalized and trivialized, taking for granted the social structures and dynamics that should be the substance and focal point of its analysis? As John Williams quipped already in 1929 about the practical usefulness of international trade theory, “I have often felt like the man who stammered and finally learned to say ‘Peter Piper picked a peck of pickled peppers’ but found it hard to work into conversation.”  But now that such prattling has become the essence of conversation among economists, the important question is how universities, students and the rest of the world have come to accept it and even award prizes in it!

To answer this question, my  book describes the “intellectual engineering” that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual “toolbox” of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy.
Bad economic content starts with bad methodology. Ever since John Stuart Mill in the 1840s, economics has been described as a deductive discipline of axiomatic assumptions. Nobel Prizewinners from Paul Samuelson to Bill Vickery have described the criterion for economic excellence to be the consistency of its assumptions, not their realism.[2] Typical of this approach is Nobel Prizewinner Paul Samuelson’s conclusion in his famous 1939 article on “The Gains from International Trade”:

“In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions.”[3]

This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live. These conclusions are diametrically opposed to the empirically successful protectionism by which Britain, the United States and Germany rose to industrial supremacy.

Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize:

“Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them… The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor theconclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made.”[4]

Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because success requires heavy subsidies from special interests, who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?


[1] John H. Williams, Postwar Monetary Plans and Other Essays, 3rd ed. (New York: 1947), pp. 134f.

[2] I have surveyed the methodology in “The Use and Abuse of Mathematical Economics,” Journal of Economic Studies 27 (2000):292-315. I earlier criticized its application to international economic theorizing in Trade, Development and Foreign Debt (1992; new ed. ISLET, 2009), especially chapter 11.

[3] Paul Samuelson “The Gains from International Trade,” Canadian Journal of Economics and Political Science, Vol.  5 (1939), p. 205.

[4] William Vickery, Microeconomics (New York: 1964), p. 5.

15 responses to “Michael Hudson Responds to Paul Krugman

  1. Touché. My sentiments exactly. While right-wingers under the spell of Hayek (and others) were getting all worked up about impending socialism as "the road to serfdom," the oligarchy was working behind the veil to cement corporate statism in place. The corporate state has become a fixture not only owing to policy based on faux economics but also through legalized bribery and intellectual capture, to the degree that oligarchs now openly insult even the president. They remain unashamed that they have pauperized a large swath of the middle class and then had the gall to take public money to rescue them their own mistakes at public expense. This has been called "socialism for the rich." It is not socialism at all. It is corporatism and it has captured America, while most economists stand by and applaud its accomplishments. The crisis? "No one could have seen it coming," they say. Unemployment?" "Our models say it must be voluntary."

  2. >It was largely to counter criticisms of their unearned income and >wealth, after all, that the post-classical reaction aimed to limit the >conceptual "toolbox" of economists to become so unrealistic, narrow->minded and self-serving to the status quo. It has ended up as an >intellectual ploy to distract attention away from the financial and >property dynamics that are polarizing our world between debtors and >creditors, property owners and renters, while steering politics from >democracy to oligarchy.Krugman comes up with the same conclusion in his book Conscience of a Liberal. I articulate it simply as neoclassical economists are rich people's useful idiots. The ones I had in college were quite smart mathematically and they knew a hell of a lot of information. Their heads were totally lost in models though. They just don't know when its time to relax or get rid of some assumptions. Relaxing some assumptions is what got Joe Stiglitz his Nobel. Asking who can explain the economic reality the best (thank you Global Financial Crisis) is what lead me to UMKC.

  3. Tom Hickey above rightly asserts that it is corporatism that has evolved out of the interplay of events over the last several decades. And his descriptions of its basis and effects are also accurate. It seems to me that a comparison to the politico-economic situation that existed in Germany just prior to and immediately after Hitler's assention to power in 1933 is instructive. Although his party included the word, "Socialist", on its nameplate, Hitler, was anti-Marxist, and sought to incorporate all elements of the German economy into one command structure with pride of place reserved for the industrialists. In no small part was this formula the result of, oddly, a need for cash for the National Socialist Party. The unions were first crushed, then re-organized on a nationalist basis. Those within the party that took the "socialism" in the Party's name seriously, namely the popular Strasser, were purged as were its most active centers in the SA. The notion of what was then called a "second revolution" was officially denounced. A corporatist Germany then emerged. Throughout this period, the opposition of the German left, the Social Democrats and Communists, was uncoordinated and ineffectual. Out-maneuvered both on the streets and politically by the Nazis, by 1934 these parties had been outlawed and their leaders sent to concentration camps. Our emergence as a corporative state, not unlike Germany in the 1930s, has its parallels in the presnt day. Our "tea party" friends would do well to heed the the lession from the Night Of The Long Knives, in which the "second revolution" component on the right was swept away. And on the left, of course, the consequences of passivity are obvious.Andrei Vyshinsky

  4. Dr Mason Gaffney's The Corruption of Economics is useful reading in this general vein of the co-opting of modern economics.The University of Chicago was founded with Rockefeller support. He who pays the piper calls the tune.

  5. I think I will defend Hyack on this one. His premisis is that socialism leads to dictatorship and that is clearly a good part of what produced Hitler. Obama came in with his czars, many of them unappointed men of doubtful character. As much as it appears otherwise, it has been this centralization of power that has allowed for so much of what has transpired. The very fact we have a Federal Reserve is a portion of this unlimited credit scheme that has broadened the centralization of economic power into the hands of the government and the hands of the few. In times like these, the public will demand someone with dictatorial powers, as they demanded of FDR, who was governor of NY prior to President and not likely to have had a history of being at odds with Wall Street. Instead of trashing the Fed, FDR trashed the gold standard, which was the limiting factor of credit. The system set up after WW II was a form of world corporate socialism. Waging war is dangerous to Republics and putting a man in power and giving him the moral equivalent of war powers (12USC95a) to dictate at will (12USC95b)is the basis of the Corporate state in the US. Hudson attracts me, not because I agree with him 100%, but because he recognizes the major problem, which is compound debt that is being used to enslave the masses, most likely by a worldwide oligarchy. I am enraged the NY banks, the outfits on Wall Street and others have been bailed out and put beyond the reach of prosecution at this time. There should be no Citi Corp, no AIG shareholders, no FNM and FRE shareholders and there should be a lot more people than Bernie Madoff in jail. Guilty or not, Stanford of Houston Texas was subjected to something that not one of the above mentioned banks would have passed the smell test. Where are our prisoners there? I am going to buy your book Michael.

    • Simplistic assumptions. Hitler was never a socialist. He was a fascist and it was those views that underpinned the rise of ‘national socialism’ viewed through the prism of ‘Statism’, ‘corporatism’, etc. Essentially the hijacking of the apparatus of the German State for the purposes that are not in the interests of wider society. Whereas socialism is the opposite. Given this I have little regards for the views of Hyack.

    • ” His premisis is that socialism leads to dictatorship and that is clearly a good part of what produced Hitler. Obama came in with his czars, many of them unappointed men of doubtful character”

      First – Hitler & the Nazis were on the extreme right, fascists not socialists.

      Second – The term “czar” is just media jargon that has been in use for decades not an official title. It refers to certain key government posts that are not new to Obama but have long been in existence.

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  7. Michael: let me say firstly that I admire your work and read them whenever they cross my path.Criticism: (constructive, I hope)You don't go deep enough; economists are just a class of people that have found themselves at the top end and as such, have arranged themselves into a religious type grouping so as to appear officious and unassailable; every emergent collective acts accordingly.Bureaucrats:A grouping hoary with antiquity which were originally, back Circa 4-5000 years ago as "priests" and noted on written record as a troublesome group become more dishonest and uncontrollable all the time. Bureaucracy attracts those persons of 'no risk', or 'risk adverse' natures where given the opportunity in terms of environment and milieux, explode into an eager proliferation of corruptive practises and impositions (an offensive act of war)on all that beneath their hands.Politicians: Strangely enough also people but closely related to the Bureaucrats; risk adverse nature but more cunning and closely related to the sewer rat (analogically speaking) but, nevertheless, people. Given the opportunity, as untrustworthy as a bent nickel where if within your vicinity, one should take up defensive positions.Bottom line: All are people but all with differing attributes and differing -set – behavioural natures.Message: Parmenides said some 2500 years ago, or more(?) there are only two issues that should be the subject of consideration and they are 1. the physics (thread) that flows through all things and 2. the behaviours of men which can never be trusted.Comment: The fundamentals of any systematic organization of socio-economic structuring should be focussed on the reality of physics and human behaviour (at their worse).http://verbewarp.blogspot.com/2005/08/mares-that-carry-me-as-far-as-longing.html

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  10. Corporatism is what remains when public discourse is suborned and corrupted.Economists find rationales to 'paper' over economic predation. The quantity of ink expelled debating the finer points of the 'free market' is analogous to the amount of blood spilled In it's exploitation. The free market is a fiction- created and promoted to sanctify might makes right. True economics, if practiced by men of integrity, would call the lie to those who feed them, and enrage those who truly need them.

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