The accidental theorist

The Accidental Theorist
All work and no play makes William Greider a dull boy.
By Paul KrugmanPosted Friday, Jan. 24, 1997, at 3:30 AM ET

Imagine an economy that produces only two things: hot dogs and buns. Consumers in this economy insist that every hot dog come with a bun, and vice versa. And labor is the only input to production.
OK, timeout. Before we go any further, I need to ask whatyou think of an essay that begins this way. Does it sound silly to you? Were you about to turn the virtual page, figuring that this couldn't be about anything important? One of the points of this column is to illustrate a paradox: You can't do serious economics unless you are willing to be playful. Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it isa menagerie of thought experiments--parables, if you like-that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings. And I use the word "play" advisedly: Innovative thinkers, in economics and other disciplines,often have a pronounced whimsical streak. It so happens that I am about to use my hot-dog-and-bun example to talk about technology, jobs, and the future of capitalism. Readers who feel that big subjects can only be properly addressed in big books-which present big ideas, using big words--will find my intellectual style offensive. Such people imagine that when they write or quote such books, they arebeing profound. But more often than not, they're being profoundly foolish. And the best way to avoid such foolishness is to play around with a thought experiment or two. So let's continue. Suppose that our economy initially employs 120 million workers, which corresponds more or less to full employment. It

takes two person-days to produce either a hot dog or a bun. (Hey, realism is not thepoint here.) Assuming that the economy produces what consumers want, it must be producing 30 million hot dogs and 30 million buns each day; 60 million workers will be employed in each sector. Now, suppose that improved technology allows a worker to produce a hot dog in one day rather than two. And suppose that the economy makes use of this increased productivity to increase consumption to 40 millionhot dogs with buns a day. This requires some reallocation of labor, with only 40 million workers now producing hot dogs, 80 million producing buns. Then a famous journalist arrives on the scene. He takes a look at recent history and declares that something terrible has happened:Twenty million hot-dog jobs have been destroyed. When he looks deeper into the matter, he discovers that the output of hotdogs has actually risen 33 percent, yet employment has declined 33 percent. He begins a twoyear research project, touring the globe as he talks with executives, government officials, and labor leaders. The picture becomes increasingly clear to him: Supply is growing at a breakneck pace, and there just isn't enough consumer demand to go around. True, jobs are still being created in the bun sector;but soon enough the technological revolution will destroy those jobs too. Global capitalism, in short, is hurtling toward crisis. He writes up his alarming conclusions in a 473page book; full of startling facts about the changes underway in technology and the global market; larded with phrases in Japanese, German, Chinese, and even Malay; and punctuated with occasional barbed remarks about theblinkered vision of conventional economists. The book is widely acclaimed for its erudition and sophistication, and its author becomes a lion of the talk-show circuit. Meanwhile, economists are a bit bemused, because they can't quite understand his point. Yes, technological change has led to a shift in the industrial structure of employment. But there has been no net job loss; and there is no...