Correction on Krugman
By David Henderson
But nowhere does Krugman mention that another way to solve a problem of excess supply is to let prices fall. This missing piece is interesting, given that it was explicitly discussed in the article from which Krugman draws the analogy. The Sweeneys pointed out that because the founders of the co-op economy imposed price controls, decreeing that one unit of scrip must always exchange for a half-hour of baby-sitting services, there would be shortages when demand was too high and surpluses when it was too low. It’s not surprising that Krugman left this out: He seems to be biased in favor of having government step in rather than letting markets work things out.
Commenter Kevin Donoghue pointed out that in fact Krugman had noted that a solution was to let prices fall. Sure enough, I found that point on p. 182 of his new edition, whereas his use of the analogy to drive the analysis in the book is on pp. 16-20 of the book. So I should not have used the term “nowhere.” What I should have said is that in his discussion of such coops when he sets up the analogy at the start of the book, he doesn’t mention that a solution is to let prices fall. So, throughout almost the whole book, this solution is not presented. My point, without the “nowhere,” stands. Leaving out this possibility is like teaching a course in micro, pointing out in the first class that an increase in supply with the price fixed causes a surplus, arguing that the best way to eliminate the surplus is to increase demand, and not pointing out until the last class of the semester that, oh yes, one way to eliminate the surplus without increasing demand is to get rid of the price floor.