Krugman has long ridiculed the idea that for thirty years now in the U.S. has been known as "the Laffer curve." Indeed, as his "hokum for the yokels" remark makes clear, Krugman sneers at the Laffer curve.
My first reaction, whenever I read Krugman’s (or anyone else’s) dismissal of the Laffer curve as illogical hooey, is to wonder if Krugman ever studied the concept of own-price elasticity of demand.
For the non-economists among you, this concept is taught in Economics 101, and explains that firms that raise their prices do not always earn higher sales revenue; their revenue can and often does fall. (To see the point clearly: ask youself what would happen if, say, Starbucks raised the price it charges for a tall latte to $1,000.) Likewise, firms can often increase their sales revenue by cutting their prices.
But Cafe Hayek’s Russ Roberts has a different thought: he knows that the Laffer-curve idea didn’t originate in the United States during the 1970s. Russ knows that it expresses a truth so fundamental that thoughtful thinkers from even long ago understood it — thoughtful thinkers such as Adam Smith.
Here’s the great Scot writing in Book V, Chapter 2 of The Wealth of Nations:
The high duties which have been imposed upon the importation of many different sorts of foreign goods, in order to discourage their consumption in Great Britain, have in many cases served only to encourage smuggling, and in all cases have reduced the revenue of the customs below what more moderate duties would have afforded. The saying of Dr. Swift, that in the arithmetic of the customs two and two, instead of making four, make sometimes only one, holds perfectly true with regard to such heavy duties which never could have been imposed had not the mercantile system taught us, in many cases, to employ taxation as an instrument, not of revenue, but of monopoly.
Does the above sound like hokum for yokels — or hokum from a yokel?