Krugman Wins Nobel

I am often asked by my non-economist friends (yes, I do have some) what I think about New York Times columnist Paul Krugman.  They know him only as a sometimes acerbic left-of-center political commentator that occasionally veers off into partisan rants. [Though he would defend himself by saying that stuff that he was accused of engaging in hyperbole about early on in the Bush administration has proven to be essentially correct] Usually they want to know what kind of economist he is - especially since his column is now only occasionally about economics.

What I have always said is that Krugman is a lock to win a Nobel Prize - he is that good an economist.  I did think it was going to be another decade or two before he won it, the Nobel is not awarded posthumously so they tend to try and make sure that the old folks get it before they perish (but they are now catching up and the winners are getting younger).  As a trade theorist, Krugman made perhaps the most significant contributions of the second half of the 20th century.  He showed how increasing returns to scale could provide a rationale for trade and helped explain the trade patterns seen in the real world.  The simple example is this: old style trade theory (Ricardo and Heckscher-Ohlin) shows how comparative advantage (through either natural productivity advantage - Ricardo - or through differences in natural endowments - HO) can cause some goods to flow from country A to country B and other goods to flow from county B to country A.  This is all correct and immensely powerful - it still provides the basic rationale for trade, that everyone can benefit through efficient allocation of production.  But these theories fail to explain why we see cars from Germany shipped to the US and US cars shipped to Germany, for example, nor do they explain why so much production occurs in so few countries.  Krugman, by applying insights from industrial organization (or essentially, the study of firm behavior) developed theories that explained these patterns of trade.  Economies of scale and product differentiation when applied to trade go a long way to explain these patterns. Krugman made the first major contributions to this theory and figured out how to do it in a tractable way theoretically.  

What is especially beautiful about his work, and what has echoes in his popular writing, is how simple and elegant his models are - something I strive for in my work.  In the modern era, where a lot of credit is given for elaborate mathematical tricks in models (economics training is highly mathematical these days) it is rare to see such elegance.  And herein lies the essence of Paul Krugman - a man with extraordinary economic insight that is able to translate that insight simply and plainly.  I think this is a prize that is richly deserved and I am delighted to see him win it.  This has nothing to do with Krugman the political commentator and one always wonders how much politics comes into play with the Nobel committee's decisions.  Krugman was going to win the Nobel anyway, but I thought he would win it with others and in another ten years.  On the eve of the US election, is it coincidence that one of the highest profile leftist commentators in America gets the Nobel?  I wonder....