The Hindu Business Line : Paul Krugman and the Economics Nobel

Professor Paul Robin Krugman, the 2008 Nobel Economics prize winner, has demonstrated intellectual leadership and contributed to innovations in concepts and analysis, shaping decisions and research directions.

Prof Krugman’s contribution to the ‘dismal science’ transcends the widely cited trade theory and includes his use of realistic model by dispensing with the unrealistic assumptions of perfect competition and constant returns to scale to draw meaningful conclusions in a world of ubiquitous market imperfections; his criticism of the Chinese growth model with inadequate attention on productivity growth and lucid explanation of currency crises.

Global economics

His research focused on an area of economic theory, which has deep implications for understanding how globalisation affects industries, populations, regions and the structure of trade, particularly in developing countries. His cogent theory explains observed patterns of trade between countries, as well as which goods are produced where and why.

His approach to economic theory is based on the premise that many goods and services can be produced more cheaply in long series, i.e., through economies of scale. The theory shows that globalisation tends to increase pressure on urban living because specialisation sucks people into centres of concentration in which “regions become divided into a high-technology urbanised core and a less developed periphery”.

Prof Krugman developed a model to explain how two countries gain from trading similar products. In his model, firms in each country produce differentiated varieties of similar goods. Trade allows the firms to produce on a larger, more efficient scale, because they can sell their product in a larger market, and consumers gain access to more varieties of goods.

Foresight in theory

His theory shows why worldwide trade is in fact dominated by countries that not only have similar conditions, but also trade in similar products, eg Sweden both exports and imports cars. The theory thus filled up a vacuum of the traditional trade theory and marked a paradigm shift by bringing out the effects of economics of scale and product differentiation on trade patterns and the location of economic activity.

It is easy to be wise in hindsight, particularly for economists. But Prof Krugman was one who foresaw the dangers inherent in the East Asian model of development and the difficult set of economic conditions due to ballooning trade and budget deficits, housing bubble zones, and denial among economic agents creating these conditions.

His searing analysis of the weakness and volatility of financial markets, his prediction that housing prices would drop 25 per cent overall and up to 50 per cent in locations such as Miami or Los Angeles clearly show his uncanny ability to foresee things in a manner not possible for many.

In view of his scathing criticism of the Bush Administration and his refreshingly candid but extremely damaging assessments of the contemporary macroeconomic landscape, his writings evoke strong reactions ranging from “the best claimant to the mantle of John Maynard Keynes” (Brad DeLong) and “the rare professional economist who knows how to explain the essence of policy issues to a non-professional audiences” (Peter Passell) to “gratuitous spleen”(James Fallows) and a “shrill” rhetorical style (Nicholas Confessore, Peter Ferrara, Jack Shafer). But there is a fair measure of consensus that Prof Krugman has made a significant contribution to knowledge.

(The authors are Chief Economist, Canara Bank, Bangalore, and faculty member at the Vinod Gupta School of Management, IIT Kharagpur, respectively. blfeedback@thehindu.co.in)

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