What exactly happened at Fukushima ?

Conventional Wisdom upside down: Designed in USA, Manufactured in China !

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I recently came across very provocative but still very critical-pragmatic paragraphs about the things we experience in economic policy crisis these days. I was reading John Kenneth Galbraith`s biography written by Richard Parker. In his very in-depth analysis about the transition from Alfred Marshall to Milton Friedman via George Keneyes through John Kenneth Galbraith. In the context of last three years financial crisis following lines are very noteworthy.

" It has recently been common-indeed fashionable-to talk about the end of the New Deal legacy that was born in 1934. In this view, Franklin Roosevelt`s idea of activist government, and the kind of economic theory eventually labeled 'Keynesian'-activist, interventionist, and liberally purposive-with which Galbraith is associated, has come to a close. Replacing it, we are told, is our 'new' era; Information age has replaced industrial age;  computers, fibre optics, and biotechnology are the new iron of the American economic power; and with them is coming a new way not just of doing things, but of living itself. We are told, we`ll be 'set free' to change our jobs (and careers) repeatedly, to manage our health care, investments, and retirement on our own to compete globally, and thereby to win (if we compete successfully) an unprecedented new prosperity alongside our new freedom."

And now when the issue of competitiveness comes across Paul Krugman tears apart this argument in his famous "Pop Internationalism." Krugman basically argues that notion of competitiveness can hold among different firms but never among different countries. He challenges conventional wisdom in this way: "Conventional view suggests that capital and technology are in fixed supply, and the growth in new countries comes at the expense of the more established countries. The reality is that diffusion of the technology, while it increases competition faced by the leader`s exports also expands their markets and reduces the price of their imports."

          Next, Krugman points out at the credibility crisis and manhandling of the situation which leads to debt crisis. "People in early 1990s were convinced that devaluation was not going to work and Europe seemed on an inevitable path of full monetary union. These apparent lessons for the advanced countries were reinforced by different but seemingly related experiences in the developing world. The debt crisis in the developing world led to the emergence of very high inflation rates. In the efforts to control inflation, exchange rate targets came to play an important role." Then he asks very acute question: Where does the conventional wisdom about economic policy comes from? It is partly driven by economic analysis, I don`t mean to say that research is completely ignored and partly driven by recent economic experience. Confidence of economic experts in what they say comes not so much from solid evidence as from the fact that so many other important people are saying the same thing. You get my point: conventional wisdom, to some extent based on real evidence, has a strong element of sheer fashion into it."

When we observe completion of 10 years of 9/11 or three years of financial crisis, one question looms largest: How does experts get it wrong that none could predict that. (Except this...)  Again Krugman, three years back wrote, about the reasons behind wrong forecasts of the coming economic situation. He says: "Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems."

Apt description of the crisis in the Krugman`s words is: " Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism." He concludes: "Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center."

Why I referred to all of this: Just one experience. When I was visiting downtown market in Trieste, Italy recently, I visited many shops which shown the mark on the various products with the punchline: "Designed in USA, Manufactured in China". And I was trying to interpret what it really meant when Italian finance minister visited Beijing to request Chinese government to buy Italian debt. Then certainly conventional wisdom was upside down; welcome the inevitable but unimaginable.

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