1) What is Paul Krugman main argument and its premises/assumptions?

Does Krugman
make other, secondary, claims in addition to his main argument? If so, give examples.

P1: The “efficient market” system, approved by most economists, does not make allowance of
any financial failures and states that any event occurring is correct.
 “Actually, even in the face of total collapse some economists insisted that whatever happens
in a market economy must be right.”
 “But there was something else going on: a general belief that bubbles just don’t happen.”
P2: Due to this system’s negligence, a dreadful global financial crisis in 2007-2008 occurred.

 “It’s what you say with regard to disasters that could have been predicted, should have been
predicted and actually were predicted by a few economists who were scoffed at for their
pains.”
 “In short, the belief in efficient financial markets blinded many if not most economists to
the emergence of the biggest financial bubble in history.”
 “Since this collapse of the intellectual edifice was also a collapse of real-world markets, the
result was a severe recession — the worst, by many measures, since the Great Depression.”

C: Thus, economists should abandon the idea of a “frictionless market system” and adapt it to
the realities of finances, otherwise the anticipation of any fiascos would be still considered
absurd.

 “First, they have to face up to the inconvenient reality that financial markets fall far short of
perfection, that they are subject to extraordinary delusions and the madness of crowds.”
 “They’ll have to do their best to incorporate the realities of finance into macroeconomics.”

In support to his main argument Krugman presents a counterexample for the “efficient market
hypothesis” – the Keynesian system, which relies on government intervention in the activity
of financial markets.

 “Second, they have to admit […] that Keynesian economics remains the best framework we
have for making sense of recessions and depressions.”
 “Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation
we’re currently in.”

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2) What is Cochrane’s answer? What is his main argument (conclusion +
premises/assumptions) against Krugman? Does he have one main argument or several
ones?

Cochrane’s answer mainly covers contradiction of several points made by Krugman and
criticism of his insults. The main argument I identified is:

P1: Krugman subjectively addresses the problem, by totally adhering to the Keynesian system
and misrepresenting the „efficient market” hypothesis with lack of plausible evidence against
it.

 “To Krugman, there is one magic cure-all for all economic problems: fiscal stimulus.”
 “Paul Krugman has absolutely no idea about what caused the crash… He seems completely
unaware of the large body of work by economists…”

P2: Krugman resorts to ad-hominem attacks and appeal to his authority, in order to support his
claims (these being argumentative fallacies).

 “Krugman wants people to swallow his arguments whole from his authority, without
demanding logic, or evidence.”
 “The level of personal attack in the New York Times article, and the fudging of the facts to
achieve it, is simply amazing.”

C: Krugman’s arguments are wrong and unsound.

3) Give three examples of fallacies or bad reasoning picked from the exchange between
the two economists. How do you think they negatively affect the quality of the debate?
 Tu Quoque: “Government regulators failed just as abysmally as private investors and
economists to see the storm coming.”
 Ad-hominem: “He once wrote eloquently about how only mathematics keeps your ideas
straight in economics. How quickly time passes.”
 Hasty generalization: “Many economists will find these changes deeply disturbing”; “But
many, and eventually most, economists turned to the insights of John Maynard Keynes for
both an explanation of what had happened and a solution to future depressions.”

These fallacies lead to alteration of the debaters’ arguments, by pointing out their subjective
way of approaching the problem. Due to these fallacies, they rely their claims on weak claims,
whose purpose is to either strongly contradict the arguer’s statement or to embellish theirs.