Krugman Defends Price Theory
By David Henderson
One of my frustrations when reading Paul Krugman’s blog is that I often get the feeling that I’m not reading a post by an economist. We economists tend to talk about relative prices, how prices motivate behavior (incentives), etc. Krugman knows all that, but way too often it doesn’t come across in his blog the way it does in, say, his and Robin Wells’s textbooks
Well, there’s some good news. Today Paul has a very good blog post. In it, he takes on the claim of Roger Pielke, Jr. that we can’t limit carbon without either limiting GDP growth to zero or getting large gains in technology.
Specifically, Pielke writes:
Carbon emissions are the product of growth in gross domestic product and of the technologies of energy consumption and production.
. . .
Thus, by definition, a “carbon cap” necessarily means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule, such that economic growth is not constrained. Because halting economic growth is not an option, in China or anywhere else, and because technological innovation does not occur via fiat, there is in practice no such thing as a carbon cap.
It’s this kind of reasoning that in the past I have, following the lead of Al Harberger, labeled “priceless.” And, as I’ve noted, I, like Harberger, do not mean that as a compliment.
And Krugman catches it. Of course, he does his usual sarcastic schtick, but look beyond that and he does the price theory very well. He writes:
Yes, emissions reflect the size of the economy and the available technologies. But they also reflect choices – choices about what to consume and how to produce it, choices about which of a number of energy technologies to use. These choices are, in turn, strongly affected by incentives: change the incentives and you can greatly change the quantity of emissions associated with a given amount of real GDP.
Take, as an example we’re all familiar with, auto emissions. In a wealthy economy, people will want to move around. But some of them might use public transit if the price and quality is [sic] right; they could drive fuel-efficient cars rather than big SUVs; they could use diesel, or hybrid vehicles. All these choices would impose some cost, and reduce real income to some extent — but the effect wouldn’t remotely be that real GDP would fall one-for-one with emissions.
It would have been nice to then see Krugman point out something that economists who have studied the issue know very well: that the best way to get the “right” kinds of cars and trucks, if you’re worried about global warming, is not to impose CAFE standards but to have the carbon tax that Krugman has written about elsewhere. Alas, he doesn’t. Instead, he writes:
As it happens, by the way, the Obama administration’s tightening of fuel economy standards is by some measures as important a move as its power-plant regulations.
This isn’t mistaken. It’s just that he missed an opportunity to take his reasoning about prices and incentives all the way.
Still, his piece is a nice antidote to “priceless” thinking.
HT to Mark Thoma.