The Public Policy

Paul Krugman’s Obsolescence

His stimulus obsessions have deadened his thinking.

By 9.21.12

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Last week in his New York Times column, Paul Krugman cheered Apple's introduction of the iPhone as an example of the Keynesian theory of how depressions end -- through "use, decay, and obsolescence," which provide the stimulus economies need to recover. He went on to suggest that government can do what Apple does by increasing spending.

I then wondered whether Krugman was channeling Mad Magazine's satirizing of planned obsolescence. In its early days, the magazine suggested that companies had figured out that making your products obsolete quickly was a real money-spinner, and so would build obsolescence into them. The example that always stuck with me was the humble eraser, which Mad noted now seemed to have a thin shell of eraser materiel surrounding a vulcanized rubber core, forcing you to throw the eraser away and buy a new one after just a few uses.

Taken to its logical extreme, Mad's planned obsolescence business model could become the foundation for a whole new economic theory of growth. Make your products easily disposable and jobs will be guaranteed! More workers, more shops, more salespeople! The economy will be humming right along.

Of course, it wouldn't be. An economy based on planned obsolescence falls afoul of the classical French economist Frederic Bastiat's warning about broken windows. Why not break a shop window deliberately, as it will provide employment to the glazier and a new window to the shopkeep? Because this simply diverts the shopkeep's money away from a more productive use -- all that happens is the economy is down one window instead of up something else.

However, Krugman's celebration of obsolescence does ring true in one way. It is innovation -- which sometimes, but not always, makes products obsolete as a consequence (it can also make existing products more efficient) -- that drives the end of recessions. Yet, the current bloated regulatory state that Krugman also celebrates is an enemy of innovation. Regulations make it difficult to start a business, difficult to find money to finance a business, and difficult to bring a product to market.

For instance, according to my colleague Wayne Crews, businesses with just one employee have to comply with 10 different costly regulations. By the time you get to 100 employees, you have to comply with 20 regulations for each and every employee. In fact, regulations cost small companies over $10,000 per employee each year. That's quite a barrier to innovation right there.

Then there's the difficulty in raising money. It used to be that a bank could give a promising start-up a loan. Today, due largely to financial regulations aimed at big corporations, small companies cannot access finance as easily as they used to, which is one reason why crowdfunding has taken off. There has been some small relief since the passage of the bipartisan JOBS Act, which has made stock market launches easier, but much remains to be done.

As a final example, many innovative products have to jump through regulatory hoops before they can be sold. Medical devices, to take just one case, have significant restrictions placed upon them, made even worse by a new tax imposed on them to help pay for the Obamacare bureaucracy.

Then there is the barrier to innovation imposed by America's patent courts, which Apple used to sue Samsung over its competing smartphones, after patenting such innovations as a "rounded rectangle shape." By using these barriers, Apple has protected itself from competition to increase its market share -- and, in the Krugman view of the world, harmed the economy by preventing its own phones from becoming obsolete quickly.

If Paul Krugman is serious about wanting an economy where products grow obsolete quickly, he should be arguing for radical and swift deregulation. The fact that he isn't suggests that what he really wants to do is grow the size of government, seemingly for ideological reasons. It is that ideology that needs to become obsolete if we are to get out of this recession.

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About the Author

Iain Murray is Vice-President for Strategy at the Competitive Enterprise Institute.