Arnold Kling  

Congratulations, Paul Krugman

Derivative Exchanges and Syste... Paul's Nobel: Nicht Ein Unrech...

He wins this year's Nobel in economics. Tyler Cowen has an excellent commentary and links.

Before Krugman, the only explanatory variable in international trade was factor endowments. You produced stuff because you happened to have the right type of land, or the right type of labor, or what have you. Moreover, there were diminishing returns, which meant that once location A had a large capacity to produce something, at the margin the next increase in production capacity for that product would likely be in location B.

Krugman suggested that there are increasing returns in an industry. That theory explains why movies are done in Hollywood, fashion is done in New York, autos are done in Detroit, and so forth. International trade patterns may owe more to historical accidents and path dependence than to factor endowments.

It is a classic contribution. In retrospect, it seems sensible and obvious. But until Krugman developed the argument, the rest of the economics profession was on a completely different wavelength.

UPDATE: I have a slightly longer tribute at Reason Online. I did NOT write the headline.

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CATEGORIES: International Trade

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The author at Sepia Mutiny in a related article titled Krugman wins Nobel, 2 desis lose it writes:
    Today, Paul Krugman won the “Nobel prize” in Economics. At the same moment, Jagdish Bhagwati and Avinash Dixit probably lost their best chance of getting one. Bhagwati You see, Bhagwati and Dixit are the giants on whose shoulders Krugman st... [Tracked on October 14, 2008 12:10 AM]
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COMMENTS (9 to date)
E. Barandiaran writes:

Very disappointed with your post. If the main reason for giving PK the prize was his application of the idea of increasing returns to scale to trade, then the prize should have been given jointly to W. Brian Arthur and the many others that developed the theory of increasing returns (you can ask Jim Buchanan about the history of this theory).

eresen writes:

Almost immediately after the ceremony, Paul Krugman gave an Special interview on U.S. economy to FOX. watch here: [link removed]
Highly recommended!

[Comment edited and link removed as bogus.--Econlib Ed.]

R. Pointer writes:

ATTENTION: eresen's link produces an automatic download onto your computer. BE CAREFUL.

[Hi, R. Pointer. Thanks for the alert. I've removed the url link in erensen's comment above. I am not removing his entire comment so as to not make your comment incomprehensible.--Econlib Ed.]

CK writes:

This sentence sounds like the "New Growth Theory" pioneered by Paul Romer. (E.g., endogenous sources of growth, etc.)

Is there any relationship between Krugman's strategic trade theory and Romer's "New Growth Theory?"

ck writes:

Sorry, "this sentence" is supposed to be this one:

Krugman suggested that there are increasing returns in an industry.
Luboš Motl writes:

First of all, let me say that I find it natural for Paul Krugman to win the award. He has acted as an obnoxious and biased leftist partisan but he is clearly the most well-known leftist economist in the world, so he may get it even for his fame. ;-)

On the other hand, the particular explanation of his major contribution sounds very bizarre.

Do you believe me that even rather normal people with common sense have always realized that it is no coincidence that movies tend to be produced at a few places, non-uniformly? If the economics community ever had a problem to understand it, it was just its local mental problem, not a genuine difficulty waiting for a solution.

There are many activities with diminishing returns. These occur especially if it the activity doesn't require special infrastructure, gadgets, or highly talented, specialized workforce. And if it is expensive or otherwise inconvenient to transfer the products too far. In that case, it is clearly better to produce products (e.g. crops) locally at many places.

On the other hand, there are activities with increasing returns. Why is it a better arrangement to have 1 Hollywood with 100% of it than 10 small, 10% Hollywoods? Well, simply because the concentration of the skilled people and gadgets - actors, cameras etc. - must exceed a certain critical number for the resources and people to be used efficiently.

In a smaller movie environment, it would be difficult for directors to find a sufficient number of good actors or for actors to find a sufficient number of good projects. Certain special technology couldn't be there at all because all of Hollywood shares it, etc.

The same thing holds in auto industry. It's simply cheaper to produce these things at one place, non-uniformly, because a lot of special machines is needed to produce it, the communication between engineers must be efficient and local, the pieces of the car must be moved between different parts of the factory many times, and so forth. Similarly for top science: concentration is often better, too - better communication etc.

There exist different contexts and it is possible, even with common sense, to predict whether it is better to arrange things uniformly or in "centers". I don't know whether one really has to waste USD 1 million for a leftist annoying columnist to see this particular point: we might find this investment to be truly non-economical. ;-)

Incidentally, there's one more way to look at the situation. Krugman's left-wing comrades often promote uniformity, quotas, equal representation of minorities etc. in each human activity. That's of course an ideological goal built on a basic lie - about the equal abilities across races. But even if the abilities were equal, it would be very natural for subcultures to optimize certain approaches to a discipline and specialize.

Even if men and women were equally good in math, which they aren't, it could happen that men would develop "men's math", because of historical accidents, and it would be counterproductive to divide the center (science's counterpart of Hollywood) into two because there's nothing wrong about specialization and non-uniformities.

But these are exactly the interpretations of his findings that he would never promote simply because the ultimate thing that drives his "focus" is ideology.

Greg Ransom writes:

Isn't this "history" of intellectual thought a bit canned? I.e. aren't Barkley Rosser and other right that Krugman isn't as singularly original as American economists wish to pretend?

E.g. here's what Rosser wrote today at Marginal Revolution:

I .. think Tyler is right that it is probably the combination of trade and location theory that is the key here, and Krugman certainly has been front and center on this. He is clearly the person who applied the Dixit-Stiglitz model to both trade and location theory, and it would appear that this is really the bottom line on what he got it for. It is indeed correct that the Swedes (and many other Europeans) are much concerned with location theory and economic geography. Krugman has defended regional economics, even as "regional science" has faded in the US. But that last trade prize recipient, Ohlin's most famous book was _International and Interregional Trade_. Indeed, the principles behind them are deeply linked. Given all this why then did I go out on a limb to say it would not be Krugman? Well, I thought that since what Krugman was most famous for was applying the Dixit-Stiglitz model to both trade and geography, and Stiglitz already got his for asymmetric information, that paper was clearly deserving, and Dixit should get it. Also, and Krugman has recognized this, others beat him to the punch in applying Dixit-Stiglitz in applying it to trade, with some of the other "losers" mentioned by others being here among those. However, Krugman clearly applied it more thoroughly and widely and vigorously. In a sense there is a bit of a comparison with the prize for Lucas here. He got it for applying rational expectations to macroeconomics. In the meantime, the man who invented rational expectations, John Muth, has never received the prize (although some would claim it was Jacob Marshak who did so). Regarding the economic geography part of this, Krugman clearly was almost the first to apply Dixit-Stiglitz to the matter (although he was preceded in this by Masahisa Fujita of Japan, whose work he has cited and with whom he later coauthored works), and then took it very far as the remarks by Venables indicate (Venables has coauthored an excellent book with Krugman and Fujita also). But, I must now confess that I wrote a very critical review of the book on this that Tyler praises, _Development, Geography, and Economic Theory_ (1996 in JEBO). I had two complaints. One was that the Dixit-Stiglitz heterogeneous goods model from monopolistic competition is not in fact the main source of agglomeration economies in actual regional economies, although Krugman defended his use of this model in that book by arguing that it was useful for providing a rigorous mathematical model, which it does. He compared himself to the person who provided a map to "darkest Africa" when those who had written of it earlier could only vaguely speak of it in words. My other criticism, connected to the first, was that there had been a long literature in the 1980s that did mathematically model agglomeration economies (not using Dixit-Stiglitz) that he never cited, in contrast with his citing of the use of Dixit-Stiglitz by others before him in trade theory and by Fujita in urban and regional economics. However, most of this literature was by physicists publishing in regional science or geography journals, such as Peter Allen, who was a student of Ilya Prigogine in Brussels, and Wolfgang Weidlich, who is an associate of Hermann Haken at the Institute for Theoretical Physics in Stuttgart. Krugman has never cited these people, and to be very blunt, I publicly called him out on this when he made a presentation at a session on complexity at the AEA meetings in the early 1990s (he was chairing the session and replied "we can discuss citations later, next question" [end of discussion]). Having made this rather snarky remark, I must admit a hard bottom line: it is very possible that Krugman never actually saw or read any of this literature, and certainly none of these people are as deserving of this prize as he is, due to his broader accomplishments (and if he did read it, he may have rejected their approaches as too "ad hoc," even if mathematical). However, at the time I thought it highly likely he was aware of it, which is what motivated the much more critical remarks I made in my book review, which I shall not repeat here, inappropriate as they would be on this day. Because, in the end, I would say that this is indeed like the award to Lucas. Paul Krugman may not have been the ultimate originator of the ideas for which he is being cited.

dearieme writes:

There surely must be an error in that post? It makes it sound as if one can get a reputation in Economics by explaining to fellow economists something that they are unfamiliar with, but which has long been understood by reflective outsiders.

Arnold Kling writes:

The relationship between Romer's growth theory and Krugman's trade theory is a main theme of David Warsh's book called Knowledge and the Wealth of Nations.

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