Economic Theories: A Critical Analysis of Paul Krugman's Arguments

This essay provides a critical analysis of Paul Krugman's economic theories, focusing on his perspectives on international trade, Keynesian economics, and market failures. The paper examines Krugman's arguments on strategic trade policy, government intervention, and fiscal stimulus, contrasting his views with those of mainstream economists and critics like John Cochrane. The discussion includes Krugman's stance on wage rates, budget deficits, and the effectiveness of monetary and macro-prudential policies. Furthermore, the essay explores a discussion between Krugman and Jeff Madrick, highlighting their critiques of mainstream economics. The conclusion summarizes the key points, emphasizing Krugman's theories and their implications, while acknowledging criticisms related to their applicability to the 2008 financial crisis.

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Introduction
Mainstream economics is thought to cause severe damages to the world markets with a
change in the entire market structure. The paper deals in the study of how the basic economic
theories depending on Keynesian economics have widely affected economies, which has an
impact in the entire market. The aim of the paper is to critically analyze the arguments put by
Krugman in his theories and analyzing them.
Discussion
Krugman has written several papers between 1978 and 1080 regarding the policy of
international trade, which did not focus about the notions of comparative advantage. Krugman
started noticing about the way economic decisions are being made. He noticed that decisions are
being taken by senior officials who does not have much understanding of economics. He focused
that Americans does not have a sound political system that is effective for international trade.
Krugman faced a wide range of difficulties relating the formulation of correct trade policies
(Briggeman, 2013). According to Krugman, the national interest rate must take precedence over
the fast and hard principles of international trade. Free trade policy is not the most efficient
practice for business objectives, it can only be used to serve as an agreement to avoid trade wars.
He has proposed the strategic trade policy, which is aimed at extracting the excess returns for the
domestic firms and support the industries for yielding the benefits and raise the income levels.
Theories of Krugman
Over the years, Krugman’s policy international trade has significantly changed and he
supported the publisher of the New York Times for criticizing about the Chinese government
regarding the provision of cheap exports to US. He urged US to threaten China about

improvising the trade policies that would lead China dropping the interventionist trade policies
that hampers the trade gap of US. However, trade conflict would not only affect the Chinese
economy but hamper the economic performance of US as well. The competition is not between
the rich and the poor countries but between the poor countries who are constantly striving
towards success. That is why strict work conditions is effective for bringing about the
performance of the third world countries where most of the industries are shifting. An example
has been provided where it has been mentioned that the change in the overall cost effective
techniques have prudent control over the change in market conditions. If Bangladesh is been
threatened then most of the businesses would move out of Bangladesh towards China.
A change in the market demand for goods and services would improve the performance
of poor economies with a higher standards standard and an improvement in the activities of
business industries. Krugman has focused about his views on the market wage rate. He opposes
about the implantation of market determined high wage rate or a minimum wage policy because
a higher wage rate means that firms can keep only skilled labors who demand a high wage rate.
Businesses will respond by laying off its workers because otherwise it is not possible for the
firms to hire more workers and pay them a higher wage rat, although a mild increase in the
minimum wage rate is preferable. Krugman has also worked on government budget and budget
deficit. He focused about the effectiveness of a good budget that a change the performance of the
economies with respect to a lower fiscal deficit.
The effectiveness of economic policies
The most effective parameter is the inclusion of monetary policy into the system to drive
out budget deficit in the time of crisis. The role of the governments is to focus in the debt value
such that the growth in the tax base must be lower the growth in tax base which could balance

the trade policies. There is need for more government expenditure instead of lowering it, on the
additional goods and services in order to lower the unemployment trap. Macro prudential
policies are effective for the regulation of tax structure for limiting the risk of crisis according to
Krugman. A proper banking system is effective at the times of crisis in order to boost the
economic performance of the economies and drive out inefficiencies. However, Krugman has
said that there is no need of effective banking policies that can bring changes to the overall
economic conditions. People believe there is no solution to economic depressions that slows
down the business productivity and leads to a total fall in productive output. On the contrary,
Krugman has pointed about how the qualitative changes in the market structure can push an
economy out of depression like the flow of business cycles.
Discussion of Paul Krugman and Jeff Madrick about the theories of mainstream
economists
In a discussion between Jeff Madrick and Paul Krugman, they focused about how the
mainstream economists hampered the economy of America and the rest of the world. The
mainstream economists believe in the effectiveness of fiscal or monetary policy because the self-
adjusting quality of the economy would take over them. Krugman does not believe in such
policies because he thinks that efficiency is identical to prosperity. The mainstream economists
believe in the operation of free market mechanism in bringing about quality changes to the
economy. Their price concern is the implementation of a correct price strategy for maintaining
the financial securities. Inequality is not the prime corn of mainstream economists and the
equality of opportunity is their prime concern. They criticize about the implementation of a
correct policy and keeping it at a rate of 2 percent a year, would solve the problems.

Government needs to focus on government failures without, which is an important
detriment to the mainstream economists that can drive suitable policies to bring about efficiency
in the market. On the contrary, Paul Krugman and Jeff Madrick cannot agree to that, because
marker failures are rampant and very hard to define. According to Paul Krugman and Jeff
Madrick, markets can be affected by a number of changes which is not analogous to an
appropriate change in the market strategies (Krugman, 2015). They cannot agree that investment
expenditure can solve business problems and market inefficiencies due to aggregate changes in
the market conditions. Public investment has to be modest which did in the thirty five years such
that economic growth is detrimental to changes in the overall market strategies relating to
advanced technologies, human capital, investment and aggregate expenditure. These economic
tools are not bad as per the change the overall market strategies that deals in the change of
aggregate expenditure and market effective outcomes. They are mostly concerned about the
basic economic policies that have demanded the working conditions and changes the structure
off economies.
Stability plays an important role in the market perceptions that indulges with the price
level. The most effective reason is that there is no actual definition to economies and its policy
implications such that a 2 percent inflation rate is a not a decent implication of economic
policies. Markets are affected by a lot of parameters and cannot be defined by a single parameter.
As a result, markets started implementing plans or actions that would increase their economic
efficiencies. There is no definition of economics that is detrimental to the change in market
strategies because there are various factors that has to be kept in mind that affects nosiness
environment and economic profit.
Criticisms of John Cochrane

John H. Cochrane has criticized about the theories put by Krugman about the global
financial crisis of 2008. He was sad by the fact that the theories put forth by Krugman could have
no clear implications about the causes of the economic crisis. As per John Cochrane, Krugman
has no interesting ideas that can justify the performance of financial markets with respect to
economic and financial problems. However, he agrees about the fact that Keynesian economies
cannot solve all the economic problems because of various other parameters that comes into play
with respect to market changes. Social sciences cannot solve all the policies effectively and that
economic theories is about the culmination of economies with social sciences that can bring
about changes in the lifestyle of the people with respect to level of GDP, income earning
(Cochrane, 2011). Krugman believes that government needs to create effective policies and
regulate the financial markets to control market which is criticized on the grounds that capital
allocation should be given to government. Krugman is a strong supporter of fiscal stimulus that
can boost the productivity of business environment which is different from the Keynesian
economics. Krugman has opposed the bank statements about the introduction of inactive policies
and therefore the need of government to influence market outcomes.
Conclusion
Therefore it can be concluded that the three articles provides a clear picture about the
policies of the economists and the difference in the policies of each economist. The entire paper
is about the theories put forth by Krugman and the way he deals with market failures. He has
effective economic theories which is dependent on various policies such as international trade,
public policies, government intervention and inefficiency of market outcomes. However, his
theories has been criticized on the grounds they does not provide any clear indication of the
market outcomes and is ineffective for the ideologies of the great financial crisis.