Paul Krugman on the Great Illusion of economic rationality and war — in 2008

 

 - by New Deal democrat

Paul Krugman wrote an article this past week about how free trade can enable authoritarians, and how Russia’s invasion of Ukraine may be putting an end to globalization. I went looking for an excerpt that wasn’t behind a paywall, and look what I found instead: the below article from Krugman in 2008, helpfully copied in the old Economist’s View blog.

In retrospect, it is an amazing read. I’ve highlighted In bold portions of particular interest.

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“Is the ‘second great age of globalization’ about to end?”

The Great Illusion, by Paul Krugman, Commentary, NY Times: So far, the international economic consequences of the war in the Caucasus have been fairly minor, despite Georgia’s role as a major corridor for oil shipments. But as I was reading the latest bad news, I found myself wondering whether this war is an omen — a sign that the second great age of globalization may share the fate of the first. 

If you’re wondering what I’m talking about,... our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment... Writing in 1919,... John Maynard Keynes described the world economy ... on the eve of World War I. “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.” 

And Keynes’s Londoner “regarded this state of affairs as normal... The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion ... appeared to exercise almost no influence at all on ... internationalization ... which was nearly complete in practice.” 

But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together. 

So, can things fall apart again? Yes, they can. 

Consider ... the current food crisis. For years we were told that self-sufficiency was ... outmoded..., that it was safe to rely on world markets for food supplies. But when the prices of wheat, rice and corn soared, Keynes’s “projects and politics” of “restrictions and exclusion” made a comeback: many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits. 

And now comes “militarism and imperialism.” ...[T]he war in Georgia ... mark[s] the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization. 

Most obviously, Europe’s dependence on Russian energy, especially natural gas, now looks very dangerous... After all, Russia has already used gas as a weapon...

And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won’t others do the same? Just think about the global economic disruption that would follow if China ... were to forcibly assert its claim to Taiwan. 

Some analysts tell us not to worry: global economic integration itself protects us against war,... successful trading economies won’t risk their prosperity by engaging in military adventurism. But this, too, raises unpleasant historical memories. 

Shortly before World War I another British author, Norman Angell, published ... “The Great Illusion,” in which he argued that war had become obsolete, that in the modern industrial era even military victors lose far more than they gain. He was right — but wars kept happening anyway. ...

Most of us have proceeded on the belief that ... we can count on world trade continuing to flow freely simply because it’s so profitable. But that’s not a safe assumption. 

Angell was right to describe the belief that conquest pays as a great illusion. But the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.

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Fourteen years later, I wonder if Krugman himself even remembers writing this.

For years I have been pounding on the theme Krugman relates in the second to last sentence of the article:

“the belief that economic rationality always prevents war is an equally great illusion.”

Economic rationality is an assumption. And it’s an assumption that is only approximately correct if you have a large set of economic decision-makers, whose decisions fall along a typical distributional curve, with its center on the most “rational” decision. Once you have a more limited set of decision-makers, some of whom have market power, now the market is only as “rational” as those individual decision-makers. 

Further, the assumption is that people will pursue their preferences. You’re a vegetarian, I like beef. Economic rationality does not assert that either you or I have to change our preferences.

One hundred years ago, the monarchs of Central Europe were the decision-makers who counted, and what they wanted was to expand their influence into one another’s territory. It would have been meaningless to explain to Kaiser Wilhelm II, who was the only relevant decision-maker in Germany, that spending Germany’s treasury on a military build-up was economically wasteful. He pursued his preference.

Now Vladimir Putin, who is the only decision-maker who counts in Russia, has decided that Ukraine does not deserve a separate existence.

In 2008, Krugman was powerfully prescient. And yet how much folly has been loosed by  the modern neoliberal assertion that free trade is always good?