December 20, 2010
Julian Simon, and Paul Krugman, Remembered
I was just reading through an old Red Herring magazine. Red Herring Issue 55 was our 5th Anniversary Issue, published in June 1998, and it featured Jim Barksdale on the cover in front of a red curtain, exiting stage left - a metaphor for Netscape's surrender in its battle against Microsoft. It's remarkable that even in the summer of 1998, four years after Netscape was founded, we were still talking mostly about the basic building blocks of the Internet (remember the browser wars?) rather than what we were going to build with those blocks. That issue's major focus: Java. Amazon, eBay, and Google weren't even mentioned in that issue - the last one was probably because Google hadn't been started yet :).
Issue 55 was a major redesign, crafted by the famous magazine designer Roger Black, and was our "pivot" (though we didn't use the word back then) from an insider Silicon Valley finance magazine to a "business of technology" magazine - a business magazine, first and foremost, focusing on what we thought was the most interesting part of business: technology, innovation, and entrepreneurialism. Technology, we felt, had moved from a vertical industry to something that touched all of business, and this issue was our adjustment to that reality.
Encapsulated in that issue, which was our optimistic appraisal of the future of technology, was a contrast of two very different economists: Paul Krugman and Julian Simon. I suspect that of the two, many more people know Krugman (who is now a columnist for NYT and regular on ABC's This Week) than Simon. And that's a real shame.
The two economists appeared in different ways. Krugman wrote a deeply, though unintentionally, ironic article titled "Why most economists' predictions are wrong," filled with predictions that were... mostly wrong. Simon, sadly, had just passed away and so his appeared in the issue was by way of David Henderson's remembrance of him.
Krugman is probably one of the most, if not the most, influential economist in the lay world today so it's interesting to see how well his predictions have stood the test of time.
Krugman's article, written in 1998, is a missive against "overly optimistic economic forecasting," makes remarkable claims like: "when all is said and done, the technological progress we keep hearing about is occurring in only a small part of the economy," and "The truth is that we live in an age not of extraordinary progress but of technological disappointment."
He went on to make some specific predictions, all of which were either mostly or completely wrong:
"Productivity will drop sharply this year."
Nope - didn't happen. In fact productivity continued to improve, as this chart shows:
"Inflation will be back. ...In 1999 inflation will probably be more than 3 percent; with only moderate bad luck--say, a drop in the dollar--it could easily top 4 percent."
Nope - that didn't happen either. Inflation in 1999 was 2.19% and hasn't gone above 4% since Krugman wrote this piece.
"Within two or three years, the current mood of American triumphalism--our belief that we have pulled economically and technologically ahead of the rest of the world--will evaporate."
Nope -- that didn't happen, either. Though September 11th, which happened more than three years after this article, and the Lehman Brother's collapse, which happened more than 10 years after this article was written, have certainly reduced American triumphalism. Here is where I think Krugman may have been the most right, albeit it way too early.
"The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."
"As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly."
"Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both."
Meh. While have seen oil prices spike (although they have yet to reach the annual peak we saw in 1980), this was not due to a crunch or disruption or running out of oil (we have more known oil reserves now than when Krugman wrote this article) but rather growth in demand.
This whole article was supposed to be proof that some economists are overly optimistic, but in retrospect all this did was prove that Krugman is overly negative. Not only were all of his predictions wrong, but they were wrong in the same direction: they were all too negative. (And in an article in which he was criticizing another economist for being too optimistic!)
Contrast this with Julian Simon. Where Krugman has underestimated humanity, Julian Simon looked at the evidence and realized that humans, and our ability to innovate, was a huge resource. Here's a passage from Henderson's article, and the whole thing is worth reading.
Simon seemed to deny the obvious. He said that resources were not finite. He hadn't always believed this: in the late '60s, he wrote papers advocating the use of economic incentives for women to have fewer children. In the preface to his 1996 book, The Ultimate Resource 2, he explained that in the '60s he had "aimed to help the world contain its 'exploding' population, which I believed to be one of the two main threats to humankind (war being the other)." But Simon found that the evidence didn't support that gloomy view--if governments left people free to innovate, invest, and create, he determined, population growth did not, in fact, hinder economic development, reduce the standard of living, or dry up natural resources. So Simon actually changed his mind, something that is much rarer among academics than you might think.
How could population growth not reduce resources? It is true that in the short run, population increases drive up demand for natural resources and thus their prices. But then the high prices prompt entrepreneurs and innovators to find new resources, or new ways of getting existing resources more cheaply. The net result: resources are more plentiful and cheaper than they were before the population grew. In The Population Bomb, Mr. Ehrlich generalized from animal behavior--he had studied butterflies--to human behavior. But Simon saw humans as fundamentally different from animals. He liked to quote the 19th-century American economist Henry George: "Both the jayhawk and the man eat chickens, but the more jayhawks, the fewer chickens, while the more men, the more chickens."
This holiday season, I will be remembering Julian Simon.
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