Dear Dr. Krugman,
For many years now I have been reading your op-eds in the New York Times. In my mind you are one Nobel Prize economist who speaks the truth to the weaknesses and strengths of past and present economic theory. With all due respect though; let me suggest that the time has come for you and the many economists in your field to step out of your shoes and take a long hard look at a fatal flaw in the economic theory that the world has accepted for so long as having intrinsic value.
You and your colleagues need to begin an articulation within your profession of new economic theory that will meet the pressing planetary challenges confronting our species. I do not see this happening.
The architecture that grew out of the industrial revolution, on which capital markets today justify their operation, now finds its “raison d’etre” shaking under its own weight. The cold hard fact is that this architecture has not only seen its day; it is like an insidious disease working against human survival.
All around us there are indications of the failure of past economic theory; from the recent debacle on Wall Street to unemployment on Main Street, from the toxic tar sands in Canada to the overfishing of tuna in the oceans, from the increasing CO2 in the biosphere to the acidification of the oceans. And this failure extends well beyond these few observations. Planet Earth is telling us something. It is pointing to its rejection of our open and free capital market economic system.
The key fault is the unfettered operation of our capital markets. These markets have grown to a size where they are energizing ecologically and socially destructive forces of a magnitude that has never before been seen in the history of the planet. Resource allocation is being misguided and misappropriated on a massive scale. Irreparable planetary damage is being done. Fingers can be pointed in many directions for this such as human greed, political dysfunction, just plain stupidity; however, the rules under which capital markets have been operating since they took form from the beginning of the industrial revolution onward must take primary blame.
Your profession has come forward with no new ideas to stem the tide. You and those like you need to be thinking and writing and speaking about new economic theory. It is not happening. Physical scientists throughout the world have been describing the ecological problems with great clarity; it is time for economists to offer economic solutions. So far, there is only silence.
Boiled down into a few words; our resource exploitive capital market system needs to be transformed into a constrained yet incentive directed market system emphasizing the equitable and humanistic provision of both the material and psychological needs of all humanity. The long lasting functionality of all the earth’s resources to meet these needs must take on the highest priority. Every element of today’s energy intensive market driven consumerism must be made to meet this planetary survival/functionality test.
How can we mechanistically achieve this? Negative external costs and positive incentives must be built into every investment decision. And these costs and incentives must be applied to every human economic activity from the mine to the chemistry lab to the assembly line to the opera house to the athletic field to the hospital. Economic outcomes with negative social and/or ecological value must be recognized. Negative externalities need to be measured and priced in up front so as to discourage, temper, or at the extreme eliminate investment.
Every investment decision must be internally priced to reflect its socially constructive or destructive outcome. Croplands, grasslands, forests, fisheries, inorganic resources; all of the earth’s natural resources, must be internally priced so as to prevent their exploitation and damage to the planet.
In our present world, none this is happening on a broad enough scale to make a difference. We see punitive cigarette and liquor taxes and some others like them, but across the board, any form of built-in “negative external” cost reflecting ecological considerations is almost nil. Disincentives/Incentives in vital areas like energy are being very poorly handled. The most simple questions such as; is this or that delivering real worth to society and to the health of the planet are avoided. As I am certain you are aware; some progress is being made in northern Europe, but I am sure you will agree with me that on a world scale that is insignificant.
Humanity is crying out for an entirely new form of economic/monetary theory. Social/political theory must necessarily be a part. A response is coming from some enlightened intellectuals in the world community; however, there is at present no universal consensus, nor are there long term solutions at hand. Our species remains in gridlock. Your economics profession remains notably silent, content on using its advanced theories of algorithms for trading purposes, but not for the above.
How much time do we have to come up with a revised capital market system? Some highly accredited scientists say our present trajectory will present very serious planetary problems within the next fifty years and they even point to the end of our species.
Will our great and great-great grandchildren find themselves at the bottom of Dante’s inferno with no escape? There is this possibility. The time has come for humanity to recognize that unless it can change the way it prices what it desires to consume, the biblical prophecy of the end of times may very well prove to be self-fulfilling.
I think that above is a great summation of the reason(s) we need economists to, well, come back (for the first time?) to reality to help us formulate a response to the neoliberal policies that are destroying our world — both environmentally and socially. When profit — the continuing enhancement and consolidation of wealth and power among a very few — is the goal, everything else is grist for the mill. That includes our planet, and, thus, ultimately, our existence.
One of the solutions David offers is strict taxation and regulation of harmful business practices while incentivizing those that produce positive results through positive means (for the means are the ends, as people must to perform and receive both, in social policy). His position is, as I read it, essentially, that we need to increase and improve government oversight of business. Getting the charlatans out of the halls of government, and replacing them with those with both hearts and minds (rather than merely pseudo-scientific inclinations/aspirations) would be a great start.
I’ve started to think that if you have a really hard time understanding an economic proposal, suggestion or analysis, it’s probably the economics that are wrong. On the other hand, myths like Adam Smith and the invisible hand are also quite easy to understand (and be led astray by). I suppose the solution is to assume the economics are wrong until you understand them and have better proof (whatever that may be — clear causal relation between policy and outcome?). [This paragraph is really just me going stream-of-consciousness there for a minute.]
My thanks to David for allowing me to republish his letter.
If you think he (or I) sounds alarmist, it’s because this is an issue — a way of life — that should alarm you.