The Nobel Prize in Economics to Paul Krugman

From the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel‘s description of Krugman’s scientific contributions:

Trade and Geography — Economies of Scale, Differentiated Products and Transport Costs

By the late 1980s, researchers had begun to integrate economies of scale into general equilibrium models of location and trade, thereby giving precision to the verbal analyses of earlier researchers and adding important new insights. In the resulting work, now commonly known as the new economic geography, economic geographers made use of the new tools, along with economists who took a renewed interest in the field. Several researchers took part in these developments, but the most influential contributions were made by Paul Krugman.

Krugman has published a large number of important articles and monographs in the fields of both trade and geography. In particular, he made the initial key contributions. He wrote the first article in the trade theory, soon followed by another influential paper that extended his initial analysis (Krugman, 1979a and 1980). Further, Krugman (1991a) is commonly viewed as the starting point of new economic geography. In fact, the seeds of the new economic geography can already be found in his 1979 (a) article which, in its final section, argues that patterns of migration can be analyzed within the same framework as the new trade theory.
While this article had an immediate impact on the trade literature, it would take more than ten years for the final section, on migration and agglomeration, to have an influence on the geography literature – kindled by Krugman himself, in the 1991 (a) paper.

As an economist who received his training in the mid-to-late 1980’s, I can attest to the excitement that Krugman’s work engendered in the trade literature. As a newly minted PhD teaching at UC-Santa Cruz, I saw how the undergraduate trade textbooks were transformed from descriptions of Ricardian, specific factor, and factor proportion models, and partial equilibrium analyses of tariffs and quotas, to ones that could also formally address issues of intra-industry trade, and the role of internal and external economies of scale.

Commentators remarking on the fact that Krugman has been a strong critic of the Bush Administration ([1], and particularly [2]) are right, but miss the point. Krugman was awarded the prize for his academic work on trade, geography (and international finance), and not for his political views — just as George Stigler won for his academic work on industrial organization and regulation. And Finn Kydland and Ed Prescott for real business cycle theory and time consistency (none of these would be construed as forwarding left-wing theses). Hence, those who argue Krugman’s popular writings explain his selection simply do not know what they’re talking about. Among academic economists, the question for years was not whether Krugman would get the prize, but when. Now we know the answer. Congratulations to Paul Krugman!

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29 thoughts on “The Nobel Prize in Economics to Paul Krugman

  1. MM

    This issue is not whether Krugman’s political writings explain his win, the issue is contorted Krugman has become in order to twist “economics” to his political will. I was somewhat taken with Mr. Krugman for a time. Today his blatant skewing of economic argument for partisan purposes is shameful and embarassing as a life-long student of economics. That he holds such sway over a largely economically illiterate public in this way via his position at the NYT makes it that much worse.

  2. GNP

    Most deserving. Krugman’s work was nothing short of brilliant. Krugman, in addition to the names listed above, is yet another example of the successful path-breaking integration of non co-operative game theory into contemporary micro decision-based economic theory.

    Menzie: I’ve heard some speculation in the halls over the years that Krugman’s partisan op-ed writing had or would jeopardize his chances of winning the prize. On a lighter note, it is interesting to observe that the committee awarded the prize in the waning days of the Bush II administration.

    Pure coincidence I’m sure. But it is fun to contemplate the possibility that the committee wished to avoid retribution against Sweden. Can you imagine if President McCain or Vice-President Palin had threatened not to talk to the Swedes?

  3. Piper

    Oh please, more right-wing outrage. So the guy got political. So he’s a LEFTY. Deal with it. What’s shameful and embarassing is how shrill you boyz are getting now that your bubble has burst.

  4. Barkley Rosser

    I think it is important to note that he got it for applying the Dixit-Stiglitz model to both trade and location theory. One alone would not suffice as he was beaten to the punch on this in both areas, by Brander and Spencer and Helpman in trade and by Masahisa Fujita in regional. That Dixit did not get it also is reminiscent of the fact that the inventor of rational expectations, John Muth, has not received it, while Robet Lucas got it for applying rational expectations to macroeconomics.
    It is not perhaps surprising that this combination was awarded, as the last time trade got one it also went to someone who did both, Sweden’s own Bertil Ohlin in 1977, author of _International and Interregrional Trade_.

  5. tedK

    I am in Engineering and Economics is just a hobby for me. But when I was in Graduate School back in 1996 or so, I read a book listing the world’s top 100 economists with detailed descriptions of their work.
    I recall seeing Stiglitz, Sen and Krugman on the list, and they were all well-known even then, though none of them had their Nobel at that time. I knew that Nobel prizes would go to people on that list and listed the three names to my economist friends at the World Bank. One by one, they have all got it, and in a small way I was right.

  6. Ray Taylor

    What I don’t understand is why there is a Nobel prize for economics? Has economics proved to be of any value whatsoever? Has any economic “theory” generated testable hypotheses whose confirmation/refutation led to anything of practical value? Can Krugman, on the basis of his work, predict anything about the real world. My own research suggests that economists are about as useful as number theorists — put them all in a large boat and sink it in the Pacific and no one would ever even realize they were missing.

  7. Daniel

    Ray Taylor: what about mathematicians? Are they useless as well? How many of their theories are actually testable? Is mathematics useless?

  8. Chris

    Ray Taylor: Take the current Financial Meltdown. Had the economy faced the same situation 30 years ago, we would not have the economic understanding of how to deal with it. How do I know this? Great Depression.
    Yes I know we may be in line for another depression, but I doubt it.
    Does economics allow us to avoid the crisis in the first place? No, but then does physics allow us to avoid car cashes?

  9. Chris

    My real problem with Krugman is his overly harsh criticism of Greenspan, which is politically motivated. Even taking account of the current crisis, any objective review of the last 20 years have to be viewed very favorable. Greenspan negotiated the Oct 87 crash, the fall of the Berlin Wall and subsequent upheavals in E. Europe, the rise of China, 9-11, etc., etc. Only in the last few years, starting with LTCM, did Greenspan misstep.

  10. GNP

    This comment is for the colleagues.

    Krugman had an undergraduate degree in history if I’m not mistaken. By lay standards, his stuff was complicated but by professional standards his stuff was relatively simple and elegant, yet profound. He’s an inspiration to those of us who would like to emphasize original social science insights over excessively burdensome math.

    I would also add that this crisis and popular writings such as Krugman’s will help create more demand for the services of professional economists. That has to be viewed as socially beneficial over the long-term no matter where you slot in on the ideological spectrum.

  11. Piper

    Given that Greenspan was treated as a God until recently I think it’s understandable that Krugman had raise his voice a bit for it to be heard over the worshipping masses.

  12. GNP

    Yes, given Greenspan’s personal tendency to grandstand, the harsh criticism is well deserved. Other fed governors that supported questionable decisions also deserve criticism but wouldn’t want to nuance and confuse the public now, would we?

  13. Ray Taylor

    “Daniel” — “How many of their theories are actually testable? Is mathematics useless?”…mathematicians don’t need testing since they have something called “proof” — a requirement that would certainly sink economists…useless?…number theorists — yes; the rest — no…”Does physics allow us to avoid car crashes?”…uh, well, yes…e.g. understanding centrifugal force provides a basis for determining what consitutes an appropriate speed for a given car going around a given curve…I don’t believe, on the other hand, that anyone has demonstrated that economists — despite access to mountains of historical data and supercomputers by the dozen — are any more accurate in their predictions than what would be achieved by flipping a coin.

  14. Nr

    people criticizing economists vs. math miss a point. math is just a tool for economists, economics is a “child” of philosophy and thus its theories depend on the assumptions AND values we start out with. math models are just a way of thinking the assumptions trough and applying proposed remedies (in positive economics).

  15. nr

    ray taylor, economists are not there to make predictions and forecasts. ideally economists will give you an idea of ptimal use of resources withiin a values framework you can formulate, with the constraints you wish to use. forecasts are basically a linear stats application t a social science, and i agree, economists posing as forecasters are useless, but since there are people hungry for useless numbers, cheao economists take advantage 🙂

  16. Amos Newcombe

    Krugman was awarded the prize for his academic work on trade, geography (and international finance), and not for his political views — just as George Stigler won for his academic work on industrial organization and regulation.

    And Einstein won his for the photoelectric effect. Right.

  17. GK

    While it is correct that Krugman won the Nobel Prize for his academic work, he would not have been granted the prize for the same academic work IF his political views were favorable to the GOP.
    A right-wing economist would never, ever win such a prize, for the same academic work.
    Much like the Nobel ‘Peace’ Prize – it is merely a left-wing stamp of approval, nothing more.

  18. Eric

    Ray Taylor
    Economists, much like mathematicians as you have shown, do rely on proofs in most academic journals. Its not all words and magic, they do go through lengthy proofs.
    Also, is economics useless? Its a social science, and its foundations are inherent in markets and world affairs. Economists are those that study the science. Just like math is present in every day life, and mathematicians study the science.
    If you don’t think economists have ever done anything important, tell that the Muhammad Yunus, Jeffrey Sachs, or any economic development team that is the forefront of regional growth across the globe.
    However, I will forfeit that policy advising economists have given the science a bad view among the public. And it can be argued that they have caused a lot of backlash for the school of thought, but all in all I’d say economists and economics is one of the most important sciences we have all come in contact throughout our lives.
    Keep in mind, without a firm understanding of how the world works we are all ignorant and helpless

  19. adam

    GK – Did Neil Cavuto tell you that?
    You are correct. Lets see here Kissinger never won the Nobel Peace Prize and Milton Friedman never won the Economic Prize.

  20. Barkley Rosser

    Oh, please, not another conservative convinced the Swedish Bank Prize committee has a leftist bias. Last year’s award for mechanism design went to among others a student of Friedrich Hayek, namely Leonid Hurwicz. The recipients the year before were Kydland and Prescott, as mentioned by Menzie. Obviously you do not know much about them. After getting his, Prescott wrote a column for the Wall Street Journal praising Bush’s fiscal policies and calling for more supply side tax cuts. There have been several other very pro-free market pro-Republicans receiving the prize within the last few years. If anything, the political balance has been the other way. You are simply out to lunch.

  21. Menzie Chinn

    GK: You are flat out wrong on this point. Look through the list of Nobel laureates in economics, and examine what they won for. And, you might even try reading a couple of the papers of each of them — perhaps starting with the ones I cited in the post.

  22. GK

    Yawn…the Commie view of morality rears its ugly head again.
    That Al Gore, Jimmy Carter, Kofi Annan, Yassir Arafat, and Rigoberta Menchu can win the Peace prize makes it the biggest joke on the planet.
    As they say, the best way to win the Nobel Peace Prize is to first enable the death of millions, and then stop.
    Your IQ is clearly not high enough to note that what Cavuto said was actually correct.

  23. GNP

    Folks, I doubt that GK is here to learn.

    But he does allude albeit indirectly to an interesting issue, these popular perspectives that economists are either all biased liberals or entrenched conservatives or hyper-materialists.

    Personally, I’m a little confused, and I suspect that my state of confusion is widely shared by North American economists. I cannot tell if I’m a democratic socialist–Scandanavian style–or a freemarket libertarian. It seems to change from day to day. Many of my favourite economic theorists exhibit an apparent right-wing bias. Have not conservative economists (from Chicago and Washington) produced the best insights to help better manage public assets?

    Is not this eclectic state of affairs a core strength of modern western economics?

    Does not this tendancy of many lay folk to label and reject ‘economists’ simply reflect the important role economists play as the leading group of modern secular priests?

  24. Broxburnboy

    John Maynard Keynes:
    The ideas of economist and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
    – John Maynard Keynes

  25. Bearish

    Ray Taylor:
    Number theory has many practical applications, an obvious one being cryptography, which allows for any secure transmission or storage of sensitive information. Thus, if you have ever used email, you’ve likely benefitted from the work number theorists have done.
    The rest of your rant is similarly misguided, as various economic theories have been used successfully in decision making processes.

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