Paul Krugman Wins 2008 Nobel in Economics

October 13, 2008

While Paul Krugman is best known to the general public for his New York Times column that has for the past eight years been primarily an outlet to attack the policies of the current administration over and over again, Mr. Krugman does have a brilliant economic mind, especially on issues of international trade and finance. This is not an Al Gore winning the Nobel Peace Prize moment that has little substantive backing. If anything, I (along with Tyler Cowen) thought that Krugman’s obvious political leanings and his column in the N.Y. Times would have been a detriment to his chances of winning the Nobel, especially this year.

Some on the right will likely say that this choice was underserving. But if you asked these people what Heckscher-Ohlin means or even liquidity trap, most wouldn’t know. Long before his column in the Times (a period in which he won the John Bates Clark Medal), Krugman was one of the foremost experts on international trade and monetary issues, the East Asian miracle, financial crises, etc. If Paul Krugman was or wasn’t a columnist for the Times, he deserved this award. Political controversy far greater than this has been at the center of the Nobel in economics before, yet nobody in the economics profession (not even someone as liberal as say Paul Krugman) would deny that Milton Friedman deserved the award in 1976. Finally, Krugman’s views on the current financial situation should be taken seriously, even if they are accompanied by some snide comment about Bush or Cheney. Marginal Revolution has more.

Here is the press release from the Royal Academy:

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 to

Paul Krugman
Princeton University, NJ, USA

“for his analysis of trade patterns and location of economic activity”

International Trade and Economic Geography

Patterns of trade and location have always been key issues in the economic debate. What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions. He has thereby integrated the previously disparate research fields of international trade and economic geography.

Krugman’s approach is based on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale. Meanwhile, consumers demand a varied supply of goods. As a result, small-scale production for a local market is replaced by large-scale production for the world market, where firms with similar products compete with one another.

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations. Lower transport costs can trigger a self-reinforcing process whereby a growing metropolitan population gives rise to increased large-scale production, higher real wages and a more diversified supply of goods. This, in turn, stimulates further migration to cities. Krugman’s theories have shown that the outcome of these processes can well be that regions become divided into a high-technology urbanized core and a less developed “periphery”.

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