Paul Krugman's "For Richer"

The study of the political economy of America in the recent years has brought about contradictory inferences, however a common thread that weaves through the political economics literature is that the rich are getting richer faster than the poor are getting richer. Paul Krugman, professor of economics at the University of Princeton and the most controversial political economist in America during these years, has addressed this hypothesis in a host of articles in his many books, newspaper and magazine articles.

In For Richer, the first essay in a New York Times series on class and class wars in the United States, Paul Krugman invites the reader's attention to issues that the libertarian economists often ignore or fail to recognize in their discourses. He proclaims the disappearance of the middle class, illustrates the increasing problems of income inequality and plutocracy, and examines the efforts by economists as well as government institutions to conceal class composition using statistical data. The shifting paradigms of corporate executive ethics and influence is yet another topic discussed in the essay. [Krugman, 2002]

While Krugman's sources may be limited and even debated, it points to certain essential and crucial socio-political and economic issues plaguing the American society. That the Americans are presently living in a new Gilded Age, which is as extravagant as the original, but with a gap between the very rich and the rest widening faster than ever. Whatever be the allegations on Paul Krugman, it is important that the issues are addressed and appropriate measures identified for the citizens and government to change the difficult state of things.

As Krugman's observations are essentially focused on the individual's greed and self-interest in the capitalist society that America is, it would be worthwhile to relate these observations with those of Adam Smith, the 18th century philosopher economist who wrote The Wealth of Nations, a tour de force on the theory of capitalism introducing the concept of the "invisible hand" that leads capitalist societies to economic efficiency. While Adam Smith believed greatly in the intrinsic worth of the capitalism and so-called "invisible hand" of the market, he could foresee the self-interested behavior of businessmen. According to Smith, maximizing self-interest was a 'rational' behavior in economics. His often quoted observation from The Wealth of Nations: 'people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices' - imply that the businessmen are always concerned of making themselves richer, even if its by harming their fellow citizens and their nation.

Paul Krugman's observation on corporate executive ethics and the statistical data that he presents on the concentration of wealth in a few hands in " For Richer" falls in line with Adam Smith's description of the capitalist system, which is essentially propelled by the self-interested behavior of the businessmen. However, a main argument in The Wealth of Nations is that the free capitalist market, though seemingly chaotic and uncontrolled, is in reality steered to produce the right quantity and range of goods by a so-called "invisible hand." According to his theory, in the event of a product shortage, its price rises, which creates the motivation for its increased production, thus curing the shortage ultimately.

The 'invisible hand' not only guides production, but also guides the price of the product in a competitive capitalist system. The increased competition among manufacturers and the increased supply would eventually lower the price of the product to its production cost, which he termed the "natural price." Nonetheless, Smith was cautious of the self-interest of businessmen and insisted against the formation of monopolies. Smith held that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole anyway.

Alexis de Tocqueville in his book Democracy in America also addressed the issue of self-interest of Americans. However Krugman's observations differ significantly from Tocqueville's concept of 'self interest properly understood. Tocqueville described America as a community of good Samaritans, with people persistently helping one another. He explains how Americans had an innate grasp of the concept of enlightened self-interest: "The Americans enjoy explaining almost every act of their lives on the principle of self-interest properly understood."

He continues to say "enlightened self-love continually leads them to help one another and inclines them to devote freely a part of their time and wealthy to the welfare of the state." [Tocqueville, 1840; pg. 611] Tocqueville's principle of self-interest properly understood seems to be in line with the pre-1970s America presented by Krugman; it's hard to associate the self -interest of modern corporate executives reported by Krugman with Tocqueville's concept of self interest.

Krugman's observations seems in line with that of Adam Smith, in that he attributes the economic achievements of the United States to the concentration of income at the top, typical of free market system, however his hypotheses goes beyond the "invisible hands" of the market that Smith considered would benefit the society. Krugman considers the concentration of wealth on the top as the main reason that the United States has more poverty and lower life expectancy than any other major advanced nation. Though he considers the hypothesis of the effects of "globalization", "skill-biased technological change," and "superstar" theory, he concludes that expla nations for the growing inequalities ultimately to the "role of social norms in setting limits to inequality." [Krugman, 2002]

Paul Krugman's views in a way confirm Adam Smith's caution of the greed of the businessmen, however he fails to identify the invisible hand that would guide the self-interest towards the benefit of the society. While he essentially seems to agree with Adam Smith's notion that individual's self interest might indirectly promote the interest of the society, he suggests the proliferation of global trade and globalization of business, the emergence of the new economy coupled with the absence of social norms have increasing sidelined the 'invisible hand'. Krugman's essay essentially point to the need for governmental control by creating effective laws and the reinstitution of ethical norms in the corporate world, so that Adam Smith's magical "invisible hand" will guide businesses in the right direction. Then corporations and executives, while trying to make themselves richer, will finish up doing things that are good for the whole society.