In she taught AP Economics at Collegiate School in Paul Krugman, recipient of the Nobel Memorial Prize in Economics, is. Paul Krugman, recipient of the Nobel Memorial Prize in Eco- nomic Sciences CourseSmart eBooks offer the complete book in PDF for- mat. Students. KRUGMAN'S ECONOMICS for AP* *AP is a trademark registered and/or owned by the College Board, which was not involved in the production of, and does not.
|Language:||English, Spanish, Japanese|
|Genre:||Children & Youth|
|Distribution:||Free* [*Sign up for free]|
monograph Geography and Trade (Krugman a), which most people Economic Advisers, not a Council of Geographical Advisers, the. Keat/Young. Managerial Economics. Klein. Mathematical Methods for. Economics. Krugman/Obstfeld/Melitz. International Economics: Theory & Policy*. Laidler. specifically the linked set of ideas that I have elsewhere (Krugman ) development economics, in which Albert Hirschman appears as a major character.
Yet even this to-1 ratio vastly understates the difference in complexity between the largest business organization and the national economy. A mathematician will tell us that the number of potential interactions among a large group of people is proportional to the square of their number. Without getting too mystical, it is likely that the U.
Moreover, there is a sense in which even very large corporations are not all that diverse. Most corporations are built around a core competence: As a result, even a huge corporation that seems to be in many different businesses tends to be unified by a central theme. The experience of a successful wheat farmer offers little insight into what works in the computer industry, which, in turn, is probably not a very good guide to successful strategies for a chain of restaurants.
How, then, can such a complex entity be managed? A national economy must be run on the basis of general principles, not particular strategies. Consider, for example, the question of tax policy. Responsible governments do not impose taxes targeted at particular individuals or corporations or offer them special tax breaks.
In fact, it is rarely a good idea for governments even to design tax policy to encourage or discourage particular industries. Instead, a good tax system obeys the broad principles developed by fiscal experts over the years—for example, neutrality between alternative investments, low marginal rates, and minimal discrimination between current and future consumption.
Why is that a problem for businesspeople? After all, there are many general principles that also underlie the sound management of a corporation: But many businesspeople have trouble accepting the relatively hands-off role of a wise economic policy-maker. Business executives must be proactive. It is hard for someone used to that role to realize how much more difficult—and less necessary—this approach is for national economic policy.
Consider, for example, the question of promoting key business areas. But should a government decide on a list of key industries and then actively promote them?
At various times, governments have been convinced that steel, nuclear power, synthetic fuels, semiconductor memories, and fifth-generation computers were the wave of the future. Of course, businesses make mistakes, too, but they do not have the extraordinarily low batting average of government because great business leaders have a detailed knowledge of and feel for their industries that nobody—no matter how smart—can have for a system as complex as a national economy.
The same syndrome is apparent in some business leaders who have been promoted to economic advisers: They have trouble accepting that they must go back to school before they can make pronouncements in a new field.
The general principles on which an economy must be run are different—not harder to understand, but different—from those that apply to a business. An executive who is thoroughly comfortable with business accounting does not automatically know how to read national income accounts, which measure different things and use different concepts.
Personnel management and labor law are not the same thing; neither are corporate financial control and monetary policy.
A business leader who wants to become an economic manager or expert must learn a new vocabulary and set of concepts, some of them unavoidably mathematical. That is hard for a business leader, especially one who has been very successful, to accept. Imagine a person who has mastered the complexities of a huge industry, who has run a multibillion-dollar enterprise. Is such a person, whose advice on economic policy may well be sought, likely to respond by deciding to spend time reviewing the kind of material that is covered in freshman economics courses?
Or is he or she more likely to assume that business experience is more than enough and that the unfamiliar words and concepts economists use are nothing but pretentious jargon? Of course, in spite of the examples I gave earlier, many readers may still believe that the second response is the more sensible one. Why does economic analysis require different concepts, a completely different way of thinking, than running a business? To answer that question, I must turn to the deeper difference between good business thinking and good economic analysis.
The fundamental difference between business strategy and economic analysis is this: Even the largest business is a very open system; despite growing world trade, the U. Businesspeople are not used to thinking about closed systems; economists are. Let me offer some noneconomic examples to illustrate the difference between closed and open systems. Consider solid waste. Every year, the average American generates about half a ton of solid waste that cannot be recycled or burned.
What happens to it? In many communities, it is sent somewhere else. My town requires that every resident subscribe to a private disposal service but provides no landfill site; the disposal service pays a fee to some other community for the right to dump our garbage.
This means that the garbage pickup fees are higher than they would be if the town set aside a landfill site, but the town government has made that choice: For an individual town, that choice is feasible. But could every town and county in the United States make the same choice? Could we all decide to send our garbage somewhere else? Of course not leaving aside the possibility of exporting garbage to the Third World. The country can make choices about where to bury its solid waste but not about whether to bury it at all.
That is, in terms of solid waste disposal, the United States is more or less a closed system, even though each town is an open system. Here is another, perhaps less obvious one. Every morning, I would drive to a large parking garage and then take public transportation downtown. Unfortunately, the garage was not large enough. It consistently filled up, forcing late commuters to continue driving all the way to work. I soon learned, however, that I could always find a parking space if I arrived by about 8: In this case, each individual commuter constituted an open system: He or she could find a parking space by arriving early.
But the group of commuters as a whole could not do the same. If everyone tried to get a space by arriving earlier, the garage would only fill up sooner! Commuters as a group constituted a closed system, at least as far as parking was concerned. What does this have to do with business versus economics? Businesses—even very large corporations—are generally open systems. They can, for example, increase employment in all their divisions simultaneously; they can increase investment across the board; they can seek a higher share of all their markets.
Admittedly, the borders of the organization are not wide open. A company may find it difficult to expand rapidly because it cannot attract suitable workers fast enough or because it is unable to raise enough capital.
An organization may find it even more difficult to contract, because it is reluctant to fire good employees.
But we find nothing remarkable in a corporation whose market share doubles or halves in just a few years. By contrast, a national economy—especially that of a very large country like the United States—is a closed system. Could all U. In those industries, one U. In industries that do enter into world trade, U.
Any increase in their market share would therefore mean a move into trade surplus; and, as we have already seen, a country that runs a trade surplus is necessarily a country that exports capital. A little arithmetic tells us that if the average U. If you think this is an implausible scenario, you must also believe that U. Businesspeople have trouble with economic analysis because they are accustomed to thinking about open systems.
To return to our two examples, a businessperson looks at the jobs directly created by exports and sees those as the most important part of the story.
He or she may acknowledge that higher employment leads to higher interest rates, but this seems an iffy, marginal concern. What the economist sees, however, is that employment is a closed system: And what about the effect of foreign investment on the trade balance?
Again, the business executive looks at the direct effects of investment on competition in a particular industry; the effects of capital flows on exchange rates, prices, and so on do not seem particularly reliable or important. The economist knows, however, that the balance of payments is a closed system: The inflow of capital is always matched by the trade deficit, so any increase in that inflow must lead to an increase in that deficit. Another way of looking at the difference between companies and economies may help explain why great business executives are often wrong about economics and why certain economic ideas are more popular with businesspeople than others: Open systems like companies typically experience a different kind of feedback than closed systems like economies.
This concept is best explained by hypothetical example. Imagine a company that has two main lines of business: Suppose that this company experiences unexpected growth in its sales of widgets. How will that growth affect the sales of the company as a whole? Will increased widget sales end up helping or hurting the gizmo business? The answer in many cases will be that there is not much effect either way. The widget division will simply hire more workers, the company will raise more capital, and that will be that.
The story does not necessarily end here, of course. Expanded widget sales could either help or hurt the gizmo business in several ways. But such indirect effects of the growth of one part of the company on the success of the other are both ambiguous in principle and hard to judge in practice; feedbacks among different lines of business, whether they involve synergy or competition for resources, are often elusive.
By contrast, consider a national economy that finds one of its major exports growing rapidly. If that industry increases employment, it will typically do so at the expense of other industries. If the country does not at the same time reduce its inflows of capital, the increase in one export must be matched by a reduction in other exports or by an increase in imports because of the balance of payments accounting discussed earlier.
That is, there will most likely be strong negative feedbacks from the growth of that export to employment and exports in other industries. Indeed, those negative feedbacks will ordinarily be so strong that they will more or less completely eliminate any improvements in overall employment or the trade balance. Because employment and the balance of payments are closed systems.
In the open-system world of business, feedbacks are often weak and almost always uncertain. In the closed-system world of economics, feedbacks are often very strong and very certain.
But that is not the whole difference. The feedbacks in the business world are often positive; those in the world of economic policy are usually, though not always, negative. Again, compare the effects of an expanding line of business in a corporation and in a national economy.
That is, a company that does well in one area may end up hiring more people in other areas. But an economy that produces and sells many goods will normally find negative feedbacks among economic sectors: Expansion of one industry pulls resources of capital and labor away from other industries. There are, in fact, examples of positive feedbacks in economics.
They are often evident within a particular industry or group of related industries, especially if those industries are geographically concentrated. For example, the emergence of London as a financial center and of Hollywood as an entertainment center are clearly cases of positive feedback at work.
However, such examples are usually limited to particular regions or industries; at the level of the national economy, negative feedback generally prevails. The reason should be obvious: An individual region or industry is a far more open system than the economy of the United States as a whole, let alone the world economy. An individual industry or group of industries can attract workers from other sectors of the economy; so if an individual industry does well, employment may increase not only in that industry but also in related industries, which may further reinforce the success of the first industry, and so on.
Thus if one looks at a particular industrial complex, one may well see positive feedback at work. But for the economy as a whole, those localized positive feedbacks must be more than matched by negative feedbacks elsewhere. Extra resources pulled into any one industry or cluster of industries must come from somewhere, which means from other industries.
Businesspeople are not accustomed to or comfortable with the idea of a system in which there are strong negative feedbacks. In particular, they are not at all comfortable with the way in which effects that seem weak and uncertain from the point of view of an individual company or industry—such as the effect of reduced hiring on average wages or of increased foreign investment on the exchange rate—become crucially important when one adds up the impact of policies on the national economy as a whole.
In a society that respects business success, political leaders will inevitably—and rightly—seek the advice of business leaders on many issues, particularly those that involve money. All we can ask is that both the advisers and the advisees have a proper sense of what business success does and does not teach about economic policy. In , as the world slid into depression, John Maynard Keynes called for a massive monetary expansion to alleviate the crisis and pleaded for a policy based on economic analysis rather than on the advice of bankers committed to the gold standard or manufacturers who wanted to raise prices by restricting output.
Keynes was right: Economics is a difficult and technical subject. It is no harder to be a good economist than it is to be a good business executive. He has thereby integrated the previously disparate research fields of international trade and economic geography. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.
Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods.
The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products — for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities. Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations.
Lower transport costs can trigger a self-reinforcing process whereby a growing metropolitan population gives rise to increased large-scale production, higher real wages and a more diversified supply of goods. This, in turn, stimulates further migration to cities. Paul Krugman , US citizen. The Royal Swedish Academy of Sciences, founded in , is an independent organization whose overall objective is to promote the sciences and strengthen their influence in society.