The Paranoid Style in Economics

NEW DELHI – Why do high-profile economic tussles turn so quickly to ad hominem attacks? Perhaps the most well-known recent example has been the Nobel laureate Paul Krugman’s campaign against the economists Carmen Reinhart and Kenneth Rogoff, in which he moved quickly from criticism of an error in one of their papers to charges about their commitment to academic transparency.

For those who know these two superb international macroeconomists, as I do, it is evident that these allegations should promptly be dismissed. But there is the larger question of why the paranoid style has become so prominent.

Part of the answer is that economics is an inexact science, with exceptions to almost every pattern of behavior that economists take for granted. For example, economists predict that higher prices for a good will reduce demand for it. But students of economics will no doubt remember an early encounter with “Giffen goods,” which violate the usual pattern. When tortillas become more expensive, a poor Mexican worker may eat more of them, because she now has to cut back on more expensive food like meat.

Such “violations” occur elsewhere as well. Customers often value a good more when its price goes up. One reason may be its signaling value. An expensive handcrafted mechanical watch may tell time no more accurately than a cheap quartz model; but, because few people can afford one, buying it signals that the owner is rich. Similarly, investors flock to stocks that have appreciated, because they have “momentum.”