Boom Times: Paul Krugman and the Little People

in The Brick House Cooperative
on February 1, 2022

The last time there was a world-altering tech revolution, Nobel prizewinning economist and NYT columnist Paul Krugman got it wildly, comically wrong. In 1998, he famously predicted that by 2005 it would be clear that the Internet’s impact on the economy would be trivial.

The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

[…] the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

Most people have nothing to say to each other, you see.

Krugman would double down on that skepticism. In March of 2000, he compared the runup in tech stocks to a Ponzi scheme, citing Robert Shiller’s book Irrational Exuberance.

[Shiller] makes a powerful case that the soaring stock market of recent years is a huge, accidental Ponzi scheme in progress, one that will come to a very bad end. The book actually focuses on the market broadly defined (most numbers are for the S.&P. 500), but it reads even better as a tale of the tech stocks. It’s a book that I hope many people will read; but I doubt that many will be persuaded.

By 2000 pretty much everyone working on internet-related projects was certain that the internet was, if anything, likely to become too powerful a force in our lives. But here was Krugman, advising against the risk of investing in soaring tech stocks.

For sure, plenty of people lost their shirts investing in high-risk tech stocks at the dawn of the internet, particularly in 2001. But Krugman’s overarching skepticism was absolutely backwards. If, on that day in March of 2000, you’d bought a thousand shares of AAPL, it would have set you back $1120, and your shares would now be worth about $174,000.

That signal failure to read the signs aright did not stop Paul Krugman from dusting off his crystal ball a few days ago, when he decided to warn hoi polloi against buying cryptocurrency because it might crash. “Exposing vulnerable Americans to risks they don’t understand,” he tweeted. Evidently these vulnerable Americans really need him to set them straight because they are super dumb and also, he mused, they “seem to be” brown people and maybe didn’t even go to college, unlike stock market investors. Yikes!

Investors in crypto seem to be different from investors in other risky assets, like stocks, who consist disproportionately of affluent, college-educated whites. According to a survey by the research organization NORC, 44 percent of crypto investors are nonwhite, and 55 percent don’t have a college degree. This matches up with anecdotal evidence that crypto investing has become remarkably popular among minority groups and the working class.

(GameStop, anyone?? lol.)

Krugman’s concern for us rubes, though touching, is misplaced. The events of the last 13 years strongly suggest that it is he, and not “minority groups and the working class,” who maybe doesn’t understand the thing that is already going on, just like he didn’t get the internet twenty-odd years ago.

(“Most people have nothing to say to each other!” I will never, ever get over this.)

I’m not saying that crypto investing isn’t risky; it is, just like investing in tech stocks was in 2000. What I’m saying is that blockchain represents a technological advance as significant as the internet itself, even though hidebound old white pontificators like Krugman can’t and couldn’t see it, then or now.

Krugman has made good predictions on things he understands well, like the housing bubble. But understanding markets does not equate to understanding society, or culture, or innovation.

In 2011, he wrote a bit about how the Bitcoin experiment was not a success.

So how’s it going? The dollar value of that cybercurrency has fluctuated sharply, but overall it has soared. So buying into Bitcoin has, at least so far, been a good investment.

But does that make the experiment a success? Um, no. What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin.

It’s not only a monetary system; it’s better understood as a recordkeeping system. A foolproof, permanent, incorruptible shared recordkeeping system that has the potential to make everything from publishing to banking to energy trading more transparent, fairer, and more efficient.

Applications built on blockchains can transform energy grids with renewable power, streamline heavily-polluting supply chains, and protect the works of independent publishers in the digital commons.

But if you want to talk returns, just note that if you’d bought and hodled $1000 worth of Bitcoin on that day in 2011, when one bitcoin cost about $6.80, you would now be sitting on about $5.6 million.

It’s hard to tell when the crypto bubble will burst,” opined the New York Times yesterday. I don’t think it will, though I can be wrong just like Paul Krugman can, obviously.

Just as a matter of media analysis, though. It would make a lot more sense for the New York Times to secure the services of someone who understands these things better to write about them (as they did once).

What we can be pretty sure of, though, is that it won’t cost Paul Krugman a thing to have gotten this wrong. It never has, and it likely never will.

Boom Times is a blog about gambling, luck, money, greed, investing, blockchain technology and cryptocurrency.

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