Monday, October 13, 2008

Paul Krugman Wins Nobel Prize in Economics

Announcement details here. Paul Krugman’s academic writing reflected a convergence of theory and a considerable amount of luck. From the early days when John Von Neumann created game theory and John Nash improved upon his ideas, game theory moved quickly through the social sciences. This happened especially fast in economics. By the time Krugman entered graduate school international trade theory was on the cusp of becoming inundated with these models. Industrial organization had already made the leap. What this meant was that Krugman, and a few others were at a unique time in history. Krugman writes:

Within a few months, I had written up a basic monopolistic competition trade model — as it turned out, simultaneously and independently with similar models by Avinash Dixit and Victor Norman, on one side, and Kelvin Lancaster, on the other. … From 1978 to roughly the end of 1984 I focussed virtually all my research energies on the role of increasing returns and imperfect competition in international trade. … What had been a personal quest turned into a movement, as others followed the same path. Above all, Elhanan Helpman — a deep thinker whose integrity and self-discipline were useful counterparts to my own flakiness and disorganization — first made crucial contibutions himself, then talked me into collaborative work. Our magnum opus, Market Structure and Foreign Trade, served the purpose of making our ideas not only respectable but almost standard: iconoclasm to orthodoxy in seven years.

My point is not to diminish Krugman’s work but simply to point out that this could have easily been a joint prize. Krugman deserves credit for recognizing what few others did and taking advantage of the changes in theory and methods. Also, to his credit, Krugman presented an elegence in his work that few others have matched. Here’s Krugman in his own words again:

The point of my trade models was not particularly startling once one thought about it: economies of scale could be an independent cause of international trade, even in the absence of comparative advantage. This was a new insight to me, but had (as I soon discovered) been pointed out many times before by critics of conventional trade theory. The models I worked out left some loose ends hanging; in particular, they typically had many equilibria. Even so, to make the models tractable I had to make obviously unrealistic assumptions. And once I had made those assumptions, the models were trivially simple; writing them up left me no opportunity to display any high-powered technique. So one might have concluded that I was doing nothing very interesting (and that was what some of my colleagues were to tell me over the next few years). Yet what I saw — and for some reason saw almost immediately — was that all of these features were virtues, not vices, that they added up to a program that could lead to years of productive research.

I was, of course, only saying something that critics of conventional theory had been saying for decades. Yet my point was not part of the mainstream of international economics. Why? Because it had never been expressed in nice models. The new monopolistic competition models gave me a tool to open cleanly what had previously been regarded as a can of worms. More important, however, I suddenly realized the remarkable extent to which the methodology of economics creates blind spots. We just don’t see what we can’t formalize. And the biggest blind spot of all has involved increasing returns. So there, right at hand, was my mission: to look at things from a slightly different angle, and in so doing to reveal the obvious, things that had been right under our noses all the time.

I’m not sure that I would say his models are trivially simple, but they are cleaner and simpler and more clearly demonstrate his point than most economists are able to do. He has a knack for spelling out what is most obvious and crucial but previously overlooked. Aside from his work in new trade theory, Krugman is famous for his popular writings and his textbooks. In fact, I first became interested in economics after reading Peddling Prosperity. Many of his other writings, like Pop Internationalism are also excellent.

Around GMU his work on spatial economics and economic geography are especially popular. There is much to like about his academic work and I do not think any other nobel prize winner has had an unoffical page dedicated to their writing (The Unofficial Paul Krugman Archive). In short, if you are only familiar with his NY Times column and blog, then you are missing the most interesting parts.

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